May 18, 2018
I recently wrote about the evolution of economics--and law & economics--from fields that focused on assumptions and priors to fields that emphasizes data, causal inference, and scientific objectivity. Many law professors and aspiring academics share my enthusiasm for Albert Einstein's vision of universities as “Temples of Science”, but are unsure of how to acquire or sharpen the technical skills that will make them effective empiricists.
Bernard Black at Northwestern runs extremely helpful and practical summer workshops that I highly recommend. The quality of Professor Black's workshops easily justifies the cost. (There are free law & economics workshops--and some that will even pay you a stipend to attend--but from what I have seen, these tend to present non-empirical methods and political view points).
Details about Professor Black's workshop are available below the break.
May 14, 2018
- Universities face serious threats to academic freedom from outside pressure groups
- Some Donors have made demands that can undermine university provision of unbiased, high-quality research
- Accommodating ethically questionable Donor demands can undermine public confidence not only in individual researchers, but in entire institutions and even in the broader academic enterprise
- Stronger, more secure, and more stable funding for universities—without strings attached—would help insulate universities from undue pressure by outside groups
- Universities should work together to secure their financial and intellectual independence, articulate clear ethical standards, and enforce those standards
I recently documented efforts by a well-organized network of libertarian and conservative academics, advocacy groups, and media organizations to foster resentment toward universities and then gain control over them, under the pretense of supporting free speech. These efforts continue a decades-long assault on higher education, and have been remarkably effective at tarnishing universities’ reputations. This has paved the way for legislation that further undermines universities’ intellectual and financial independence.
A complementary threat to academic integrity comes from powerful outsiders exploiting universities’ financial needs to leverage relatively small donations into enduring influence over faculty, curriculum and student life. Such money-for-influence arrangements could alter what research gets produced, and by whom.
Outside funding can increase research output and impact in media and policy circles. It can fund great research that might not have been produced otherwise. But funding under inappropriate terms risks undermining the central and unique role that universities play in society as providers of high quality, reliable, and unbiased information. This could quickly destroy the goodwill and trust that universities painstakingly cultivated over decades (in some cases, for centuries).
This issue has come to a head recently with press coverage of some financial relationships and recently disclosed contracts between conservative and libertarian donors (including foundations and re-granting organizations funded by the prominent Koch family) and George Mason University. Much of the controversy relates to a libertarian / free-market embedded think tank at George Mason, The Mercatus Center, which provides supplemental compensation and resources to GMU’s economics faculty and some law faculty members, as well as opportunities to produce commissioned research on timely policy issues. Through Mercatus, the university has received tens of millions of dollars in donations.
GMU faculty members’ chances of obtaining funding and resources apparently did not depend exclusively on an unbiased assessment of their intellectual rigor and academic contributions, but rather appear to have depended at least in part on the political implications of their research. In contravention of academic ethical norms, donors had substantial influence over which faculty members would receive compensation supplements known as “chairs” or “professorships.” Donors maintained control through representation on selection committees, evaluation committees, rights to recommend removal of chair holders, gift rescission rights, and key-man clauses for senior executives, including the dean of the law school.
“The objective of the Professorship is to advance the . . . acceptance and practice of . . . free market processes and principles [as] promot[ing] individual freedom, opportunity, and prosperity . . . The occupant of the Professorship (“Professor”) shall . . . be qualified and committed to the forgoing principles.”
Rudy Fichtenbaum, president of the American Association of University Professors said “When you start getting into a study of free enterprise then you’re really, I think, stepping into a territory where you’re promoting a political agenda.” Donors may specify a topic of study or type of expertise for a holder of a chair; but they should not specify the chair-holder’s politics.
Critics say Mercatus’s ideologically based funding tips the playing field at GMU in favor of the production of economically right-wing scholarship and the retention of economically right-wing scholars and instructors. Neither Mercatus nor GMU appear to have imposed any limits on the fraction of a faculty member’s total annual compensation that could come from non-state sources such as Mercatus. This is unusual—many funders and universities worry that too much outside funding creates the appearance of impropriety. At least one prominent member of the GMU faculty with a Mercatus affiliation derived over 40 percent of his compensation in 2016 from “non-state” sources, according to public records.
Without supplemental compensation from Mercatus, GMU faculty compensation appears to be uncompetitive with comparable institutions. Thus, working at GMU may not have made sense financially for economists or law professors who were unlikely to obtain Mercatus compensation supplements—i.e., those whose scholarship might support increases in taxes, an expansion of public investment or social insurance, or more stringent regulations of business. At least one moderate economics faculty member says that she “carefully chose [her] research so it wouldn’t be objectionable” to her more conservative colleagues.
April 24, 2018
In today's New York Times, Professor Krugman writes about the war on education. Krugman's generally smart post overlooks an important part of the story. Many wealthy Democratic Donors also want low taxes and are therefore also hostile toward teachers unions and increases in public funding for education. Republicans are not the only ones's responsible for the current state of K-12 education, in which high preforming college graduates are fleeing teaching for better opportunities. Krugman writes:
"State and local governments . . . are basically school districts with police departments. Education accounts for more than half the state and local work force; protective services like police and fire departments account for much of the rest.
. . . [W]hen hard-line conservatives take over a state. . . they almost invariably push through big tax cuts. Usually these tax cuts are sold with the promise that lower taxes will provide a huge boost to the state economy. . . . This promise is, however, never — and I mean never — fulfilled; the right’s continuing belief in the magical payoff from tax cuts represents the triumph of ideology over overwhelming negative evidence.
What tax cuts do, instead, is sharply reduce revenue, wreaking havoc with state finances. For a great majority of states are required by law to balance their budgets. This means that when tax receipts plunge, the conservatives running many states can’t do what Trump and his allies in Congress are doing at the federal level — simply let the budget deficit balloon. Instead, they have to cut spending.
And given the centrality of education to state and local budgets, that puts schoolteachers in the cross hairs.
How, after all, can governments save money on education? They can reduce the number of teachers, but that means larger class sizes, which will outrage parents. They can and have cut programs for students with special needs, but cruelty aside, that can only save a bit of money at the margin. The same is true of cost-saving measures like neglecting school maintenance and scrimping on school supplies to the point that many teachers end up supplementing inadequate school budgets out of their own pockets.
So what conservative state governments have mainly done is squeeze teachers themselves.
Now, teaching kids was never a way to get rich. However, being a schoolteacher used to put you solidly in the middle class, with a decent income and benefits. In much of the country, however, that is no longer true.
At the national level, earnings of public-school teachers have fallen behind inflation since the mid-1990s, and have fallen even more behind the earnings of comparable workers. At this point, teachers earn 23 percent less than other college graduates. But this national average is a bit deceptive: Teacher pay is actually up in some big states like New York and California, but it’s way down in a number of right-leaning states.
Meanwhile, teachers’ benefits are also getting worse. In particular, teachers are having to pay a rising share of their health insurance premiums, a severe burden when their real earnings are declining at the same time.
So we’re left with a nation in which teachers, the people we count on to prepare our children for the future, are starting to feel like members of the working poor, unable to make ends meet unless they take second jobs. And they can’t take it anymore.
. . . [E]xtreme right-wing ideologues . . . really believed that they could usher in a low-tax, small-government, libertarian utopia.
Predictably, they couldn’t. For a while they were able to evade some of the consequences of their failure by pushing the costs off onto public sector employees, especially schoolteachers. But that strategy has reached its limits. Now what?
Well, some Republicans have actually proved willing to learn from experience, reverse tax cuts and restore education funding. But all too many are . . . lashing out, in increasingly unhinged ways, at the victims of their policies."
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.