April 16, 2018
Privatization scheme highlights rifts in Democratic party between donors and educators (Michael Simkovic)
Democrats in Colorado recently voted overwhelmingly to reject public school privatization and deregulation efforts (charter schools). Chalkbeat reports:
"Delegates at the Colorado Democratic state assembly Saturday sent a clear message to the state chapter of Democrats for Education Reform: You don’t have a place in our party.
After booing down the head of the education reform organization, who described herself as a lifelong Democrat, delegates voted overwhelmingly Saturday to call for the organization to no longer use “Democrats” in its name. While it’s unclear how that would be enforced, the vote means a rejection of DFER is now part of the Colorado Democratic Party platform. . . .
The platform amendment reads:
“We oppose making Colorado’s public schools private or run by private corporations or becoming segregated again through lobbying and campaigning efforts of the organization called Democrats for Education Reform and demand that they immediately stop using the party’s name Democrat in their name.”
Vanessa Quintana, a political activist . . . said that before she finally graduated from high school, she had been through two school closures and a major school restructuring and dropped out of school twice. Three of her siblings never graduated, and she blames the instability of repeated school changes.
“When DFER claims they empower and uplift the voices of communities, DFER really means they silence the voices of displaced students like myself by uprooting community through school closure,” she told the delegates. “When Manual shut down my freshman year, it told me education reformers didn’t find me worthy of a school.”
Just two people spoke up for Democrats for Education Reform. . . .
In an interview, Quintana said she sees education reform policies as promoting inequality, and she wants to change a status quo in which reformers are well represented in the party establishment. She feels especially strongly about ending school closure and sees school choice as a way to avoid improving every school.
“Families wouldn’t need a choice if every neighborhood had a quality school,” she said. “There should be no need to choice into a new neighborhood.”
She believes the reform agenda is not compatible with the education platform of the party, which reads, in part, “our state public education laws and policies should provide every student with an equal opportunity to reach their potential.”
This move highlights a major rift within the Democratic Party on education policy. Charter school advocacy, expansion and evaluation has been heavily funded by foundations affiliated with technology companies--most famously the Bill & Melinda Gates Foundation--billionaire philanthropists traditionally viewed as Democratic-leaning such as the Broads, as well as conservative and libertarian billionaire philanthropists such as the Kochs and Waltons. By contrast, teachers’ unions have fought for higher wages, stable employment, smaller class sizes, and better textbooks and equipment for students in public schools, as well as nationwide efforts to ameliorate poverty, which teachers say undermines students’ ability to focus on their studies.
There is a serious empirical dispute over the quality of charter schools. The foundations say that charters, often staffed by young, inexperienced, and low-paid teachers with frequent turnover are the future of education. But peer reviewed empirical studies have not consistently found evidence that charter schools improve student performance, compared to public schools, after properly controlling for student characteristics and expenditures per student. Although some studies get positive results (see here and here ), these studies may have suffered from methodological problems that caused them to underestimate differences in student characteristics or to focus only on the best charter schools rather than a representative sample. Many studies find that charter schools perform worse than public schools. (See here, here, here, here). Experiments with K-12 privatization in Sweden produced similarly unimpressive results decades ago.
April 15, 2018
Edward Kleinbard in the Los Angeles Times: Tax policy is a bore, until they take your Social Security and Medicare away (Michael Simkovic)
Edward Kleinbard (USC; former head of the Joint Committee on Taxation) writes in the Los Angeles Time
"[B]udget deficits — how much spending exceeds revenues — are extremely large and growing at a disturbing rate. The nonpartisan Congressional Budget Office estimates that the 2019 deficit will be just shy of $1 trillion. That is a roughly 50% jump in the deficit from its 2017 level — extraordinary, considering we're in good economic times.
Tax cuts do not pay for themselves — not the Trump tax cuts, nor in any other case in modern U.S. practice. So we face only two possible courses of action: Either we tax ourselves more, or we dismantle the social safety net (in particular, Social Security, Medicare and Medicaid) that protects Americans from destitution or disability. Which is the right direction for our country to pursue?
One political movement has its answer at the ready: Slash the safety net.
Five fellows at the conservative Hoover Institution recently laid bare in a Washington Post opinion piece how the Tax Cut and Jobs Act of 2017 was just the first step in a two-step dance. The full tango goes like this: Note that our deficits are unsustainable. Blame "entitlement spending" (code for Social Security and Medicare) rather than tax cuts. Demand cuts to social spending on the pretext that some imaginary iron laws of reduced tax collections and deficit concerns require it.
This agenda aims to asphyxiate the working class through the dismantling of the social insurance programs on which most Americans rely. But the tax tourniquet is a political creation, not an economic necessity. When compared with wealthy peer economies, the United States today already is the lowest-taxed country as a percentage of GDP. The tax cuts going into effect this year will reduce federal tax collections still further, to levels substantially below the 50-year average of federal tax revenues as a percentage of GDP.
There is no law of economics that says record-low tax revenues are the prerequisite to a thriving economy. What we actually need, like it or not, are more tax revenues to fulfill our promises to support our fellow citizens. To do so does not require any radical ideas or bankrupting the middle class. We can raise several trillion dollars of new revenue over the next decade with some straightforward moves. . . .
Tax policy is a bore, until they come to take your Social Security and Medicare away. Yes, our federal budget deficit trajectory is unsustainable, but the reason is not profligate or unexpected social spending. Tax Day is as good as any other to reflect soberly on the price our country will pay for systematically undertaxing itself."
It should be noted that Larry Summers and other critics of the 2017 tax reforms predicted these large deficits.
April 10, 2018
Jake Brooks in NY Times: Direct Federal Student Lending Should Provide Insurance to Students and Public Investment in Education (Michael Simkovic)
John Brooks of Georgetown's excellent Op Ed is available here.
Brooks calls to task some of the questionable and alarmist narratives that have been coming out of nominally liberal think tanks (which are funded by foundations linked to the private student loan industry and purveyors of ed-tech of dubious value), noting that Direct Lending, IBR and debt forgiveness can benefit both students and taxpayers. He also notes the dangers of the new PROSPER act and graciously linked to Friday's post about how small the direct budgetary impact of student loans is when viewed in context.
Brooks notes that some Democrats have been advancing a traditionally Republican privatization agenda. Jeff Sachs has similarly taken Obama and Clinton to task for underinvestment in basic and essential public services and infrastructure, noting that by the numbers they invest only marginally more than Republicans. Brooks argues that because of IBR, Obama deserves more credit, and that this important legacy of his presidency should be preserved.
April 06, 2018
Many alarmist narratives suggest that federal student loans are going to lead to a fiscal crisis for the federal government unless loan limits are capped, interest rates are increased, and debt forgiveness is curtailed. These hyperbolic claims are implausible. Higher education is a tiny fraction of the federal government’s spending and of the U.S. economy (around 3 percent of each). Moreover, education spending is a boon to the economy--boosting employment, earnings, growth and tax revenues.
The federal government spends 4 trillion per year and growing—mostly on the military, healthcare, and social security. That’s $200 trillion dollars in net present value, discounted at 2% in perpetuity. The whole U.S. economy is worth roughly 5 times that much. Household net worth is close to $100 trillion. The federal student loan portfolio is only about $1.3 trillion. Student loans may look big on the federal government’s balance sheet, but the federal government’s balance sheet asset are small to begin with relative to the size of the government and the size of the economy.
Even with Income Based Repayment (IBR) with partial loan forgiveness, borrowers pay some interest and principle, so the loss rates on these programs are nowhere near 100%. Several analyses by the GOA and DOE peg the net subsidy rate on these programs as negative by a few billion (i.e., the programs are slightly profitable for the government), with the possibility of eventually becoming positive by a few billion per year (i.e., the programs could become slightly subsidized). These studies do not take into account the fiscal benefits of higher tax revenues, they only look at the net present value (NPV) of interest and principal payments. The estimated annual subsidy rates are around 0.3% or negative 0.3% or less of the size of the portfolio.
Different assumptions could produce different results. But you would need some pretty extreme assumptions to get to the point where losses on student loans could move the needle. Nations that are no more productive than the United States—and where the returns to higher education are lower—have fully funded higher education with public dollars (i.e., grants and direct institutional subsidies, not student loans) for decades while maintaining a lower debt to GDP ratio than the United States. A grant is the equivalent of a loan with a 100 percent loss rate, since no funds will be repaid except in the form of higher tax revenue.
The direct budgetary impact of federal student loans as a pure lending program—that is, the net present value of all funds dispersed and all fees, interest, and principal collected—is tiny. Viewed in context, whether the student loan program is slightly profitable or slightly subsidized, its direct costs are approximately zero.
But the indirect budgetary and economic benefits of student loans are huge. Federal student loans help finance higher quality and more economically valuable higher education and boost the size of the educated work force. Better education increases earnings, reduces unemployment, and facilitates economic growth and innovation. Around 30 to 40 cents of every extra dollar earned because of higher education goes into the U.S treasury’s coffers through income and payroll taxes, which account for the overwhelming majority of federal revenue.
The real crisis in higher education is that the government is underinvesting in it.
February 10, 2018
Private firms often withhold information or contest scientific knowledge when public revelation could lead to costly regulations or liability. This concealment leads to negative externalities and public harm.
But what if private firms’ superior knowledge and self-interest could be harnessed to reveal information about risks and accelerate the implementation of safety regulations?
In Limited Liability and the Known Unknown, I argue that firms that desire limited liability for their investors should be forced to pay what they believe limited liability is worth. This would have several salutary effects. Firms’ choice between unlimited liability and higher taxes would reveal important information about internal risk assessments, reduce public-private information asymmetries, and accelerate the application of scientific knowledge to personal and public health.
Limited liability is a double-edged sword. On the one hand, limited liability may help overcome investors' risk aversion and facilitate capital formation and economic growth. On the other hand, limited liability is widely believed to contribute to excessive risk taking and externalization of losses to the public. The externalization problem can be mitigated imperfectly through existing mechanisms such as regulation, mandatory insurance, and minimum capital requirements. These mechanisms could be more effective if information asymmetries between industry and policymakers could be reduced. Private businesses will typically have better information about industry-specific risks than policymakers.
A charge for limited liability entities-resembling a corporate income tax but calibrated to risk levels-could have two salutary effects. First, a well-calibrated limited liability tax could help compensate the public fisc for risks and reduce externalization. Second, a limited liability tax could force private industry actors to reveal information to policy-makers and regulators, thereby dynamically improving the public response to externalization risk.
Charging firms for limited liability will lead private firms to sort themselves by riskiness and reveal information to policymakers. Policymakers will then be able to focus their attention on the industries that have collectively self-identified as high risk and develop more finely tailored regulatory responses. Because the benefits of making the proper election are fully internalized by individual firms, whereas the costs of future regulation or limited liability tax changes will be borne collectively by industries, firms will be un-likely to strategically mislead policymakers in their elections. By helping to reveal private information and focus regulators' attention, a limited liability tax could accelerate the pace at which policymakers learn and therefore the pace at which regulations improve.
February 07, 2018
House Republicans propose to open floodgates to federal funding of low-quality for-profit, online degrees (Michael Simkovic)
House Republicans recently proposed to increase federal funding for the worst performing parts of higher education and reduce federal funding for the best performing parts.
For-profit ("proprietary") brick-and-mortar and online educational programs tend to have low rates of student completion, relatively poor employment outcomes, and relatively high student loan default rates compared to private non-profit and public institutions. For-profits' typically poor outcomes may be at least in part because for-profit programs typically spend far more on sales and marketing than traditional non-profit programs. This leaves fewer resources available for instruction and support services for students, or research that can help build an institutional reputation and connections with employers. Paying profits out to investors also drains cash and limits how much can be spent on instruction in any given year.* Short-term programs at for-profits are the only category of higher educational institution that have been shown by peer reviewed research to increase their prices without increasing educational quality upon gaining eligibility for federal aid.
Default rates of for-profit programs used to be even worse in relative terms, before rules were implemented to deny eligibility for federal student loans to the worst performing for-profit institutions.
A new House bill sponsored exclusively by Republicans, H.R. 4508,** threatens to open the floodgates to federal funding for for-profit and online education of dubious quality. According to the CBO, the bill would:
"Amend or repeal restrictions on institutional eligibility for federal student aid for certain types of schools, the largest of which would repeal the definition of distance education and eliminate the cap on the percentage of revenues that proprietary schools can receive from the Department of Education. . . .
Distance Education. H.R. 4508 would repeal the current-law requirement that online programs provide students with regular, substantive interaction with faculty. CBO expects that if programs do not need to meet that criterion they could more easily expand and scale up, resulting in higher enrollment. . . .
Short-Term Programs. Current law requires programs to offer at least 600 clock hours of instruction for students to be eligible for Pell grants. To be eligible for student loans, a program must offer at least 300 hours and have a student completion and placement rate of at least 70 percent. . . . H.R. 4508 would extend aid eligibility to students in short-term programs [and] there would no longer be any requirements about placement rates. . . .
Gainful Employment. In October 2014, the Department of Education published final rules related to gainful employment, setting benchmarks related to student income and federal loan debt that had to be met by programs at proprietary institutions...H.R. 4508 would repeal . . . gainful employment [rules]."
Indeed, it will be much easier to expand enrollment without the need to spend any money providing students "regular, substantive interaction with faculty," who can answer student questions, connect them with employers, or teach them.
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.