November 29, 2017
Republican Education Bill Would Boost Profits for Private Student Lenders and Raise Financing Costs for Students (Michael Simkovic)
House Republicans recently voted along party lines in favor of a tax bill that specifically targeted higher education institutions and students for tax hikes, while providing large tax cuts for corporations and wealthy individuals. The Wall Street Journal reports that House Republicans are proposing an additional higher education bill that would make the terms of federal student loans less flexible and less generous and limit federal student loan availability. Specifically, the bill would eliminate Public Service Loan Forgiveness and reduce the availability of flexible repayment plans for all borrowers. It would also cap maximum borrowing from the federal government at a lower level.
These measures, if enacted, would be a boon to private student lenders like Sallie Mae, who would be able to both increase their prices and increase their market share as federal student loans become less competitive and less available. Consequently, expected financing costs for students will likely increase, to the detriment of both students and educational institutions.
According to a study by the Government Accountability Office and the Department of Education, loans to graduate and professional students are the most profitable in the government's portfolio--even after income based repayment and debt forgiveness. Capping loans to these attractive borrowers may reduce the overall profitability of federal student lending, and pave the way for arguments for more cuts to federal lending in the future.
The bill reportedly will also reduce regulation of for-profit college sales and marketing, and provide greater funding for 2-year degrees and apprenticeship programs. Labor economists who have studied 2-year degrees and apprenticeship programs typically find that these programs provide relatively low benefits (in terms of increased earnings and employment) compared to 4-year college degrees and graduate degrees, even after accounting for differences in the costs of these programs and differences in student populations. Thus, increasing funding for apprenticeships while reducing funding for 4-year degrees and advanced degrees is likely to impede economic growth.
These educational priorities, may however, provide Republicans with political advantages. Political scientists and pollsters have found that as education levels increase--after controlling for income, race, sex, and age--individuals become more likely to identify as Democrats and less likely to identify as Republicans. The association is particularly pronounced among scientists and others with graduate degrees.
November 17, 2017
Following up on my previous post, Republican Tax Hikes Target Education,
[U]nder the House’s tax bill, our waivers will be taxed. This means that M.I.T. graduate students would be responsible for paying taxes on an $80,000 annual salary, when we actually earn $33,000 a year. That’s an increase of our tax burden by at least $10,000 annually.
It would make meeting living expenses nearly impossible, barring all but the wealthiest students from pursuing a Ph.D. The students who will be hit hardest — many of whom will almost certainly have to leave academia entirely — are those from communities that are already underrepresented in higher education. . . .
The law would also decimate American competitiveness. . . .
Graduate students are part of the hidden work force that drives some of the most important scientific and sociological advancements in the country. The American public benefits from it. Every dollar of basic research funded by the National Institutes of Health, for example, leads to a $1.70 output from biotechnology industries. The N.I.H. reports that the average American life span has increased by 30 years, in part, because of a better understanding of human health. I’d say that’s a pretty good return on investment for United States taxpayers."
September 18, 2017
"Individuals who complete law school typically receive a large boost to their earnings compared to what they would likely have earned with a terminal bachelor’s degree. (Simkovic & McIntyre, 2014) The law earnings premium has exceeded the cost of law school by a wide margin, even toward the bottom of the earnings distribution, and even for graduates who enter the labor force during a recession or with an unusually large cohort of fellow law graduates. (McIntyre & Simkovic, 2017)
But is the value of a law degree predictably different depending on one’s race or ethnicity? Estimates by race or ethnicity could help prospective law students and law schools better predict variability in the potential financial benefits of law school, and could help inform outreach, admissions, academic support, and financial aid policies.
This article investigates differences in the law earnings premium by race and ethnicity. Compared to bachelor’s degree holders, a higher proportion of law graduates are white.
Studies of the returns to education at the college level or below have come to different conclusions about differences in benefits by race. Several studies have found lower earnings among black and Hispanic law graduates compared to non-Hispanic whites. The reasons for these differences are not fully understood and are hotly debated. . . .
Whatever the cause, among those with law degrees, there are differences in average earnings between different race or ethnic groups. However, the same pattern is present among bachelor’s degree holders. [Prior to this study it was] unknown whether there are similar differences in earnings premiums (i.e., the boost to earnings from the law degree), measured either on a percentage or dollar basis. . . .
[T]he National Longitudinal Bar Passage Study found that long-term bar passage rates were substantially lower for minorities than for whites. Thus a study of all law degree holders including those who did not pass a bar examination [such as this one using Census data] may find larger racial gaps in earnings [than previous studies that look only at bar-passers].
We find evidence that white graduates have a somewhat higher percentage boost in earnings compared to minorities, but when translated into dollar terms the law earnings premium is substantially higher for white graduates than for minorities. At the median and including law graduates who are not practicing law, the annual boost to earnings from a law degree is approximately $41,000 for whites, $34,000 for Asians, $33,000 for blacks, and $28,000 for Hispanics. The law earnings premium is also higher for whites than for minorities at the 75th percentile, the 25th percentile and the mean, and for samples that are exclusively male or female. . . .
September 09, 2017
New American Foundation fires a prominent researcher who criticized one of its largest donors (Michael Simkovic)
The powerful Washington D.C. think tank New America Foundation, which has ties to the technology, finance, and aerospace industries, recently fired a researcher within days after the researcher praised the European Union for fining Google for antitrust violations. Google and its CEO are among the largest donors to New America Foundation, as well as other think tanks. The head of New America Foundation claims the firing was for a lack of collegiality, but declined to discuss specifics.
The firing echoes similar incidents at other think tanks, including the American Enterprise Institute and Brookings Institute, where researchers have been fired shortly after offending other important donors or political patrons.
As the Economist magazine explains:
[Think tanks suffer from] a fundamental flaw. Unlike other institutions designed to promote free inquiry, such as universities or some publications, think-tanks do not enjoy large endowments, researcher tenure or subscription revenue to insulate thinkers from paymasters. And thinking costs a lot.
The New America Foundation has played a prominent role in efforts to privatize student loans by making the terms of federal student loans less attractive and making the loans less widely available.
August 25, 2017
Todd Henderson (Chicago): Lawyers make better CEOs in industries with high litigation risk (and worse CEOs elsewhere) (Michael Simkovic)
Professor Henderson finds that: "CEOs with legal expertise are effective at managing litigation risk by, in part, setting more risk-averse firm policies. Second, these actions enhance value only when firms operate in an environment with high litigation risk or high compliance requirements. Otherwise, these actions could actually hurt the firm."
August 21, 2017
Vanderbilt Tax Professor Herwig Schlunk wants the federal government to tax university endowments, preferably out of existence. He writes: “In the best of all possible worlds, the federal government could and probably should . . . confiscate[e] all private university endowments . . .”
Toward that end, Schlunk recycles arguments that were discredited years ago.
Professor Schlunk is famous for asserting that law school is a bad investment. Schlunk’s bold claim—based on back of the envelope calculations and highly unscientific website surveys—was popularized by the Wall Street Journal and echoed by sympathetic media outlets. Peer reviewed research by labor economist Frank McIntyre and me—using high quality nationally representative government data and well-established econometric techniques—subsequently demonstrated that Schlunk was mistaken. (See here and here).
This post critiques Schlunk’s recent work on endowments for misuse of discount rates, overlooking the importance of educational quality, mismeasuring student earnings and higher education expenditures, selectively targeting higher education, supporting policies that undermine economic growth, and overlooking stark differences between popular votes and political power.
Misuse of discount rates
To arrive at his headline-grabbing law school result, Schlunk relied on some spectacularly unrealistic assumptions. As Frank McIntyre and I explained four years ago:
“Professor Schlunk’s analysis assumes astronomical discount rates, low earnings growth rates, and zero inflation for thirty-five years. None of these assumptions are empirically or theoretically justifiable.
Most studies [of higher education] by economists have generally used a discount rate between 2.5% and 3%. . . . Compared with the 3% discount rates applied in labor market studies by economists and suggested by the real (net-inflation) costs of financing a law degree . . . Professor Schlunk applies real discount rates of between 8% and 27%.
If Professor Schlunk had used comparable assumptions about discount rates to evaluate the value of a college degree compared to a high school diploma, he would have reached the conclusion that few should go to college. Indeed, given a 30% nominal discount rate, whether it makes financial sense to complete high school might be debatable.”
Undeterred, Professor Schlunk once again relies on unrealistically high discount rates and overlooks differences in completion rates, this time to argue that private non-profit universities provide little value when compared to leanly funded, politically vulnerable public universities. Based on this analysis, he concludes that the federal government should tax universities more heavily than it already does. Higher discount rates mean that future cash flows have a lower present value. Thus the value of a lifetime of higher earnings from higher quality education is diminished by choosing a higher discount rate.
Schlunk’s justification for using such high discount rates is that higher education “puts me in mind of income streams I confronted when advising investors in the private equity sector [where] discount rates of as high as 30% were generally applied.”
For the record, peer reviewed research generally finds that private equity returns net of fees are close to or less than those that can be found in the stock market—not remotely close to the 30 percent returns assumed by Schlunk. (In addition, discount rates are supposed to reflect the weighted average cost of capital, NOT the (higher) returns to equity). If P.E. investors were applying high discount rates to cash flow projections, this likely means that investors believed that P.E. cash flow projections were over-optimistic.
Overlooking college completion rates
In his latest critique of higher education, Schlunk also overlooks large differences in completion rates. Four-year completion rates for bachelor’s degrees are almost twice as high at private non-profit universities as at their more leanly funded public counterparts. If one accepts Schlunk’s assumptions of extremely high discount rates, even a modest delay in completion would have a dramatic impact on value.
Overlooking effects of increased educational expenditures and educational quality
Peer reviewed studies that control for differences in student characteristics consistently find that higher expenditures per student lead to significant increases in student earnings and likely contribute to higher completion rates. (For brief reviews of the literature, see The Knowledge Tax and Populist Outrage, Reckless Empirics; See also here).
Professor Schlunk overlooks these studies.
Mis-measuring student earnings and educational expenditures
Schlunk overestimates the difference in expenditures and resources at elite public and private universities, which leads him to over-estimate the earnings premiums necessary for more resource-intensive private education to be worthwhile. Schlunk assumes incorrectly that all students at elite flagship state universities pay low in-state tuition, when many students at these institutions pay much higher out-of-state or international student tuition. He overlooks the extent to which expenditures per student at elite public universities exceed in-state tuition because of state subsidies and cross-subsidies from out-of-state students. He overlooks the extent to which differences in financial aid affect net-tuition—and therefore educational resources and expenditures—at different universities.
The elite public universities that Schlunk presents as controls that he sees as similar to private universities, but without endowments, actually have larger endowments than many private universities.
July 31, 2017
Focus group of California lawyers defends tight restrictions on entry into the legal profession (Michael Simkovic)
California is an extreme outlier in the extent to which it restricts entry into the legal profession compared to other U.S. jurisdictions. Two examples of this include an unusually high minimum cut score on the bar exam and a refusal without exception to permit experienced licensed attorneys from other jurisdictions to be admitted without re-examination.
California lawyers are relatively highly paid, and relatively few in number considering the size of the workforce in California. Restrictions on entry into the profession may help maintain this status quo. There are serious questions about whether this protects consumers, or is economic protectionism. Economic protectionism could benefit California lawyers, but it would likely also harm consumers of legal services by making legal services less available, more expensive and perhaps lower in quality because of reduced competition. Protectionism would also reduce economic opportunity for those denied the option of practicing law in California, much as immigration restrictions deny economic opportunity to those excluded from high-income countries.
The Supreme Court of California, concerned about the anti-trust implications of a licensed profession establishing criteria for entry, instructed the California State Bar to prepare recommendations on revising the California bar cut score.
Stephen Diamond reports that the California State Bar recommended that its bar examination should either stay the same or be made even harder.
The California Bar arrived at this conclusion by asking a panel of California lawyers how hard the bar exam should be. To be more specific, panelists read essays, categorized them into good, medium and bad piles, and, with the assistance of a psychologist who specializes in standardized testing, used this categorization to back-out an extremely high recommended bar passage score.
Finding that people with high multiple choice scores also tend to write better essays is about as surprising as finding that cars that Consumer Reports rates highly are also often highly rated by J.D. Power. It's also about as relevant to the policy decision facing the California Supreme Court about minimum competence to practice law.
The relevant question for restricting entry into the legal profession is not whether good (and presumably expensive) lawyers are better than mediocre (and presumably more affordable) lawyers. Rather, the relevant question is when consumers should be able to decide for themselves whether to spend more for higher quality services or to save money and accept services of lower quality. Most people will agree that a new Lexus is likely a better, more reliable and safer car than a similar-sized used Toyota. But this difference in quality does not mean that the government should banish used Toyotas from the roads and permit to drive only those who are willing and able to buy a new Lexus.
Is there evidence that a bar examinee who would be permitted to practice law in Washington D.C. or New York or Boston or Chicago, but not in California, would routinely make such a mess of clients' affairs that California clients should not even have the option to hire such a lawyer?
Is there evidence that consumers of legal services cannot tell the difference between a good lawyer and a dangerously bad one?
If these problems exist, could they be addressed by simply requiring lawyers to disclose information to prospective clients that would enable those clients to judge lawyer quality for themselves?
The California Bar has not yet seriously addressed these questions in arriving at its recommendations.
The California Bar also reported that other states have sometimes recommended increases or decreases to their own bar examination cut score. But these states are almost all starting with much lower bar cut scores than California's baseline. It appears that few if any other states recommended bar examination cut scores as high as California's.
June 23, 2017
Least educated county on Oregon's Pacific Coast shuts its last public library rather than increase taxes by $6 per month per household (Michael Simkovic)
Douglas County in rural Oregon recently shut its last public library rather than increase property taxes by around $6 per month per household. Less than 16 percent of the population of Douglas County has a bachelor's degree or above, making it the third least educated county on the Pacific Coast of the United States and the least educated coastal county in Oregon.
Across the Pacific, cities like Singapore, Hong Kong and Shanghai have built globally competitive workforces by investing heavily in education and infrastructure and embracing global trade. In the United States, excessive anti-tax movements have contributed to disinvestment and have slowed U.S. economic growth.
Update: Michelle Anderson (Stanford) and David Schleicher (Yale) debate policy responses to local economic decline and migration of educated populations away from depressed areas. Hat tip Paul Diller. (Willamette).
June 21, 2017
Representative Judy Chu (D-CA) (Pasadena) recently introduced H.R. 2526, the Protecting Our Students by Terminating Graduate Rates that Add to Debt (POST GRAD) Act. The bill would restore the in-school interest subsidy for graduate and professional students who borrow federal Direct Stafford Loans.
Federal in-school subsidies were terminated by The Budget Control Act in 2011, which ended the debt ceiling crisis of 2011. During the debt ceiling crisis of 2011, Congressional Republicans successfully maneuvered for large cuts to federal spending (other than military spending and pension and health benefits for retirees) by threatening to force the federal government to default on its sovereign debt unless then President Obama agreed to large spending cuts.
The POST GRAD Act would reduce the disparity between funding policy for graduate education and undergraduate education by reinstating graduate students’ eligibility for federal subsidized student loans, although graduate student borrowers, who have lower default rates, would continue to pay a higher interest rate after they complete their studies.
Christopher P. Chapman, CEO of the AccessLex Institute, estimated that the bill would save the typical law student $4,000 if passed.
If the interest rate subsidy encourages more investment in graduate education, it could more than pay for itself with higher future tax revenue.
UPDATE: The New America Foundation, which has close ties to the private student loan industry, has condemned proposals to reduce federal student loan interest rates. NAF claims that the immediate benefits of higher education financing only benefit a "small majority" of households and therefore are bad policy. New America argues that an increased military presence in Syria, Iraq and surrounding countries would be a better use of taxpayer dollars.
UPDATE 2, 6/30/2017: The New York Law Journal covers efforts to reduce student loan interest rates for graduate students.
January 19, 2017
Established datasets, proxies, and customized data collection: The case of international LLMs (Michael Simkovic)
How should researchers make tradeoffs between the costs of data collection, the speed of the analysis, the precision of the measurements, reproducibility by other researchers, and broader context about the meaning of the data: how we might compare one group or one course of action to another, how we might understand historical trends, and the like?
Must we always measure the precise group of interest, with zero tolerance for over-inclusion or under-inclusion? Or might one or a series of proxy groups be sufficient, or even preferable for some purposes? What if the proxies have substantial overlap with the groups of interest and biases introduced by use of proxy groups are reasonably well understood? How close must the proxy group be to the group of interest?
These are important questions raised by a group of legal profession researchers which includes several of the principal investigators of the widely used After the JD dataset.
Professors Carole Silver, Ethan Michelson, Robert Nelson, Nancy Reichman, Rebecca Sandefur, and Joyce Sterling (hereinafter, Silver et al.) recently wrote a three-part response (Parts 1, 2, and 3) to my two-part blog post from December about International LLM students who remain in the United States (Part 1) and International LLM students who return to their home countries (Part 2). The bulk of Silver et al.’s critique appears in Part 2 of their post, and focuses mainly on Part 1 of my LLM post.
My post, which I described as “a very preliminarily, quick analysis intended primarily to satisfy my own curiosity” used U.S. Census data from the American Community Survey and two proxy groups for international LLM (“Masters of Law”) graduates to make inferences about the financial benefits of LLM degrees to international students who remain in the U.S. Silver et al. agree with several of the limitations of this analysis that I noted in paragraphs 5 through 8 of Part 1 of my post. They also note that historically, many LLMs have returned to their home countries and argue that the benefits of LLM programs to returning students may be greater than the benefits to those who remain in the United States. (While I am skeptical of this last claim—especially if we focus exclusively on pecuniary benefits—it seems likely that both groups benefit).
Silver et al. have also helpfully made several additional points about limitations in my proxy approach and ways in which proxies could over-count or under-count foreign LLMs. The most important of these limitations can be addressed with a few modifications to the LLM proxy group approach. Those interested in the technical details are encouraged to read footnote 1 below.
Returning to broader questions about the use of proxy groups, my view is that proxy groups can be helpful and potentially necessary for certain kinds of analysis.
Suppose that we wish to know the temperature in New York’s Central Park before we take a stroll, but we only have temperature readings for LaGuardia and Newark airport. While neither of those proxies will tell us the precise temperature in Central Park, they will usually be sufficiently close that we can ascertain with a reasonable degree of certainty whether we should bring our winter coats, wear sweaters, or proceed with short sleeves. Indeed, readings from Boston or Philadelphia will probably suffice, particularly if we’re aware of the direction and magnitude of typical temperature differences relative to Central Park.
Should we refuse to venture out until we can obtain a temperature reading from Central Park itself?