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.
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.
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).
January 04, 2017
A partner in a prominent San-Francisco-Bay-area venture capital firm recently told me, “The tech sector is eating the world. The menu is full of inefficient legacy industries.”
The thesis of USC Professor Gillian Hadfield’s new book, Rules for a Flat World, is that the legal profession should be near the top of the menu. Hadfield argues that law is overly complicated, expensive and inefficient. This is because lawyers have monopolized the practice of law, locking out more efficient, technologically empowered, venture-capital backed competitors. These competitors—software engineers backed by venture capital money, perhaps in cooperation with lawyers and paralegals—could hopefully improve quality, reduce costs, and generally run circles around overly conservative law firms and inefficiently subscale solo practitioners.
This book will engage venture capitalists and entrepreneurs, established legal technology companies, individuals interested in regulation of the legal profession, and more broadly, those who study privatization and deregulation.
She raises important questions about which regulations of the legal profession protect consumers or serve other legitimate public policy goals and which might be merely protectionist. She targets prohibitions on practice of law within a corporation and prohibitions on profit-sharing with non-lawyers. Without such regulations, it would be easier for non-lawyers to invest in and make high level decisions for legal services providers. Non-lawyers might place more trust in technology than lawyers and might be more open to new business models.
Hadfield’s analysis focuses on the aspects of law that are an economic service (she describes it as “economic infrastructure”). Hadfield is primarily focused on commercial and corporate law. Hadfield notes that while criminal law may be more salient in popular culture, since the time of Hammurabi, most law has been about money, property rights, risk allocation, and supporting business activity.
Hadfield argues that if companies such as Westlaw, Lexis and Legal Zoom could hire lawyers to provide customer support directly to end-users, these companies could improve the appeal of their offerings and more easily compete with small and solo-practitioners. Moreover, these companies would have economies of scale and efficiencies that solo practitioners cannot readily match. Because of these efficiencies and expansion of the legal market to under-served populations, lawyers working for incorporated legal services providers would not necessarily earn less than solo practitioners currently earn, although lawyer-employees would have substantially less autonomy than lawyer-owners.
February 09, 2016
The latest unscientific fad among law school watchers is comparing job openings projections for lawyers from the Bureau of Labor Statistics* with the number of students expected to graduate from law school. Frank McIntyre and I tested this method of predicting earnings premiums--the financial benefits of a law degree--using all of the available historical projections from the BLS going back decades. This method of prediction does not perform any better than random chance.** Labor economists--including those working at the BLS--have explicitly stated that BLS projections should not be used to try to value particular courses of study. Instead, higher education should be valued based on earnings premiums.
Bloggers who report changes in BLS projections and compare projected job openings to the number of students entering law school might as well advise prospective law students to make important life decisions by flipping a coin.
Many law graduates won't practice law. Many engineering graduates won't become engineers. Many students in every field end up working jobs that are not directly related to what they studied. They still typically benefit financially from their degrees by using them in other occupations where additional education boosts earnings and likelihood of employment.
And if one's goal really is to practice law even if practicing law is not more lucrative than other opportunities opened by a law degree, then studying law may not be a guarantee, but it still dramatically improves the odds.
* BLS job opening projections--which are essentially worthless as predictors for higher education--should not be confused with BLS occupational employment statistics, which provide useful data about earnings and employment in many occupations, including for lawyers.
** There isn’t even strong evidence that changes in the ratio between BLS projected lawyer job openings and law class size predict changes in the percent of law graduates who will practice law, although the estimates are too noisy to be definitive. Historically, the ratio of BLS projected openings to law graduates (or first year enrollments 3 years prior) has systematically under-predicted by a wide margin the proportion of law graduates practicing law shortly after graduation, although it is clear that a large minority of law graduates do not practice law.
February 9, 2016 in Guest Blogger: Michael Simkovic, Law in Cyberspace, Legal Profession, Ludicrous Hyperbole Watch, Of Academic Interest, Professional Advice, Science, Student Advice, Web/Tech, Weblogs | Permalink
December 02, 2015
Developer of Law School Admission Test (LSAT) Disputes Advocacy Group's Bar Exam Claims (Michael Simkovic)
The Law School Admission Council (LSAC)--the non-profit organization which develops and administers the Law School Admission Test (LSAT)--recently issued a press release disputing claims by the advocacy group "Law School Transparency" about the relationship between LSAT scores and bar passage rates. "Law School Transparency," headed by Kyle McEntee, prominently cited the LSAC National Longitudinal Bar Passage Study (1998) as a key source for "Law School Transparency's" claims that many law schools are admitting students who are unlikely to pass the bar exam based largely on their LSAT scores. McEntee's group's claims of bar passage risk were widely disseminated by the national press.
However, according to LSAC, the Longitudinal Bar Passage Study does not provide much support for "Law School Transparency's" claims. Moreover, "Law School Transparency's" focus on first time bar passage rates is potentially misleading:
"The LSAC [National Longitudinal Bar Passage] study did state that 'from the perspective of entry to the profession, the eventual pass rate is a far more important outcome than first-time pass rate.' This statement is as true today as it was 25 years ago. As noted by LST, the LSAC study participants who scored below the (then) average LSAT score had an eventual bar passage rate of over 90 percent.
Kyle McEntee and David Frakt responded to some of LSAC's critiques--partly on substance by pointing out disclaimers in the full version of "Law School Transparency's" claims, partly by smearing the technical experts at LSAC as shills for law school--but notably did not explain why "Law School Transparency" chose to focus on first time bar passage rates rather than seemingly more important--and much higher--eventual bar passage rates.
Eventual bar passage rates were the focus of the National Longitudinal Bar Passage Study. The LSAC study's executive summary highlights eventual bar passage rates and detailed data is presented on page 32 and 33. Even among graduates of the lowest "cluster" of law schools, around 80 percent eventually passed the bar exam.
According to LSAC:
"The LSAC National Longitudinal Bar Passage Study was undertaken primarily in response to rumors and anecdotal reports suggesting that bar passage rates were so low among examinees of color that potential applicants were questioning the wisdom of investing the time and resources necessary to obtain a legal education."
"Law School Transparency" has revived similar concerns, but without a specific focus on racial minorities.*
There may be legitimate concerns about long term eventual bar passage rates for some law students. However, "Law School Transparency's" back-of-the-envelope effort, focused on short term outcomes, does not provide much insight into long-term questions. The most rigorous study of this issue to date--the LSAC National Longitudinal Bar Passage Study--concluded that "A demographic profile that could distinguish first-time passing examinees from eventual-passing or never-passing examinees did not emerge from these data. . . . Although students of color entered law school with academic credentials, as measured by UGPA and LSAT scores, that were significantly lower than those of white students, their eventual bar passage rates justified admission practices that look beyond those measures."Unfortunately, some newspapers reported "Law School Transparency's" bar passage risk claims in ways that suggested the claims were blessed by LSAC, or even originated from LSAC. For example, one prominent newspaper's editorial board wrote that "In 2013, the median LSAT score of students admitted to [one law school] was in the bottom quarter of all test-takers nationwide. According to the test’s administrators, students with scores this low are unlikely to ever pass the bar exam."
November 12, 2015
In the Los Angeles Review of Books, Frank Pasquale reviews "The End of College" by Kevin Carey of the New America Foundation:
"Tax-cutting, budget-slashing politicos are always eager to hear that education could be much, much cheaper. . . . “disrupting education” mobilizes investors and excites startups. Kevin Carey’s The End of College is the latest book to seize the imagination of disrupters. It touts massive changes for post-secondary education. . . .
[Carey] believes things need to change drastically in higher ed, and that they will change. But bridging the gap between “is” and “ought” is a formidable task — one Carey tries to solve by muckraking indictments of universities on the one hand and encomia to tech firms on the other. . . . In The End of College, Silicon Valley thought leaders are as pragmatic, nimble, and public-spirited as university administrators are doctrinaire, ossified, and avaricious. . . . They’ve devised methods of teaching and evaluating students that solve (or will soon solve — Carey vacillates here) all the old problems of distance education.
Online learning at the University of Everywhere could eventually improve outcomes — or degenerate into an uncanny hybrid of Black Mirror and Minority Report. Big data surveillance will track the work students do, ostensibly in order to customize learning. . . . Want to prove you aren’t faking exams? Just let cameras record your every move and keystroke — perhaps your eye movements and facial expressions, too. . . . Certainly we can trust Silicon Valley to respect our privacy and do nothing untoward with the data! . . .
Silicon Valley has even lured universities into giving away lectures for free. The colleges think they’re establishing good karma with the public, but disrupters hope for a more chaotic endgame: students deciding to watch free courses, then proving their credentials to certifiers who give out “badges” to signify competence in a skill set. . . . It could be a very profitable business. As students pay less for actual instruction by experts, they have more money to spend on badges. . . .
Carey implies that faculty opposition to MOOCs is simply a matter of self-interest. His concerns about greed, so prominent when he discusses universities, fade away when he rhapsodizes about ed tech’s “disruptive innovators.” . . . One of Carey’s heroes . . . had a no-bid contract to MOOCify San Jose State University math instruction, only to see the partnership pause after “no more than 51 percent of Udacity students passed any of the three courses” (while “74 percent or more of the students in traditional classes passed”). . . .
Traditional college education endures — and even those who dismiss it rarely, if ever, try to dissuade their own children from attending a university. If colleges were really so terrible at preparing the workforce, the college earnings premium would have disappeared long ago. . . . [E]mployers are unlikely to subscribe to Carey’s [alternatives to college].
So why bother reading Carey? Because, like Donald Trump blustering his way to the top of the Republican field by popping off shocking sentences, Carey’s rhetoric has political heft. To the extent it gains traction among education policy staffers (and the student loan companies that love to hire them), it changes the debate. The End of College is a master class in translating an elite project of privatization and austerity into bite-sized populist insults, even as it sings the praises of powerful corporations.
Carey claims he wants dramatically better educational opportunities for all. But that goal will require more public support . . . Many millionaires and billionaires want to see their taxes go down . . . Before touting D.C. researchers’ “findings” and “big idea books,” the media and indeed all of us should look closely at exactly what interests are funding the think tanks behind them."
August 07, 2015
Higher education provides massive benefits to the public fisc. These benefits come in the form of additional payroll and income tax revenue, less dependence on social welfare, and student lending profits.* Based on tax revenue alone, the government’s “cut” of the higher education earnings premium is typically far larger than tuition collected by the college that provides the education.
While there’s a lot of talk about the government subsidizing education, it’s actually the other way around. The public return on investment in higher education helps sustain the government’s expenditures in other areas that are unlikely to provide much of a financial return, like military spending (roughly 25 percent of the federal budget, including veterans' benefits). Even taking into account public subsidies to higher education, the federal government already taxes higher education far more heavily than many other investments.
Two Senators, Jeanne Shaheen and Orrin Hatch, want to tax higher education even more, although they euphemistically call their new tax “risk sharing.” Under their proposal, the federal government would shift some of the downside risk of education investment—delays in loan repayment by some student borrowers**—to colleges, but would not share the upside.***
Risk typically comes with rewards. If the government would like to “share the risk” of education investment with institutions of higher learning—like a corporation offering restricted shares to its employees—then along with student loan losses, why not offer colleges a proportionate share of the student loan profits and marginal increases in tax revenue ?
Real risk sharing—on both the upside and downside—would mean a massive increase in public investment in education, not additional taxes on this already overly-taxed sector of the economy.
* Because of progressive income taxes and payroll taxes, the federal government keeps approximately 40 cents of every extra dollar earned because the workforce is more educated. Federal student loan programs are profitable under conventional methods of accounting because the repayments the government receives exceed financing and administrative costs. Some have claimed that federal student loans are not profitable by arguing that if the government charges less than private lenders would charge, the government is still “losing” money it could be making. This calculus typically ignores the effects of lower pricing on boosting enrollment, increasing the volume of lending, and increasing tax revenue. This argument is the essence of controversial “fair-value accounting” claims, although the argument is typically framed in terms of cost of capital considerations.
** These charges for delayed repayment are not necessarily compensation for losses, but rather an estimate based on non-repayment of loans in the first few years after studies end. This estimate could enable the government to double-dip, charging institutions for delayed repayment in early years while recovering accrued interest, principal and collections costs from student borrowers in later years when their incomes are higher and their employment is more stable.
*** Some indeterminate fraction of this tax revenue would be returned to colleges that serve low-income students through DOE grants. However, those same institutions are the ones who are most likely to have students who struggle to repay their loans-and will therefore be the ones to pay the tax. The grants awarded could be substantially lower than the taxes collected. The bill is likely to be a drain on resources available for education, especially net of transactions and compliance cost.
August 05, 2015
College costs more than it used to. It's also worth a lot more than it used to be worth. The increase in value of a college education exceeds the increase in the cost of a college education by a very wide margin.
How much has the cost of college actually increased? It may be less than you think.
According to the Department of Education and the National Center for Education Statistics, at 4 year institutions, average college tuition is up about $1,900 in real (inflation-adjusted) terms in the five years from 2008-09 ($21,996) to 2012-13 ($23,872). This is an average increase of less than $500 per year. The real increase during this 5-year period has been higher at public colleges ($2,100) than at private non-profit and for-profit colleges ($1,400).
That's before taking into account scholarships and grants.
After subtracting scholarship and grants, according to the College Board, real net tuition and fees at 4 year private non-profit institutions have actually gone down. Real net tuition and fees increased at 4-year public institutions over the last 6 years by about $1,000, or about $170 per year.
So how much would the value of higher education need to increase to justify this increase in cost? The increases at public institutions come to around $5,000 more for a bachelor's degree.*
That extra $5,000 will pay for itself if 4-year colleges spend the extra money in a way that boosts their former students' real annual earnings relative to high school graduates by $220.** When we take into account increases in college completion rates over time and longer life expectancy, the required increase in annual earnings could be even lower.
So yes, improvements in the quality of education can easily pay for increases in the costs of education. If the rising earnings premiums and increase in completion rates within race over the last three decades are caused by increased college expenditures, tens of thousands of dollars in increased expenditures per bachelor's degree have more than paid for themselves so far, and by a very wide margin.***
The labor economics literature generally suggests that the marginal rate of return to higher education is high, whether the "margin" is defined as upgrading individual education from high school to 4 years, from 2 years to a bachelor's, or from a bachelor's to an advanced degree. Within a given level of education and category of institution, those with more resources can generally do more to boost their students' earnings. A high marginal rate of return to education means we should invest more in higher education if we want the economy to grow faster, and invest less in things with lower marginal rates of return. (See here).
Investing more in education without increasing taxes means that tuition will likely increase. When we consider the benefits education provides, more investment in education is a good thing. When we consider our political system's allergic reaction to tax increases, increasing tuition may be the only realistic way to get there.
* Multiplying $1,000 by 5 years (assuming it takes 5 years to complete a bachelor's degree), we get an increase of $5,000 at public 4-year institutions (and a decline in cost at private institutions). For an individual, the aggregate increase in real net-tuition during 5 years of college might be less. The idea of the estimate is to compare the aggregate cost of college for individuals who completed college 5 years apart.
** This assumes a 40 year career and nominal (real) discount rate of 6 (3) percent. The $220 figure is before taxes and represents the aggregate social benefit to the government as tax collector and to the graduate, who will earn higher wages. If the entire cost is placed on the student, assuming 35 percent tax rates on the earnings premium, real annual earnings premiums would need to increase by $340 to make the student better off after taxes.
*** The differences in earnings in the column charts are raw differences by level of education rather than estimates of causal differences. However, the change in the raw differences over time may provide a good proxy for the change in the causal earnings premium over time.
July 31, 2015
One of the key claims of critics of legal education in general, and of ABA-approved law schools in particular, is that accreditation requirements drive up the costs of legal education without improving quality. If only we could deregulate law schools and unleash the creative power of free market competition and the awesome technological potential of online learning, legal education would become cheaper without any loss of quality. Or so the story goes.
Fortunately, deregulated law schools exist alongside regulated law schools, so we can get a sense of what deregulation might look like. And while unaccredited California law schools are less expensive than their accredited counterparts, their completion rates and bar passage rates are much lower than those for even the lowest ranked ABA approved law schools, as revealed by a recent Los Angeles Times investigation.
This is likely due at least in part to the incoming academic credentials and life circumstances of the students who enroll in unaccredited schools, and not simply due to differences in quality of education. But there is no law preventing unaccredited law schools from competing with accredited law schools for the best students who want to stay in California, a large and prosperous state where many lawyers will spend their entire careers. If accreditation is really an inefficient waste of time and resources, the unaccredited schools should have substantial advantages in the competition for students, and those students should have advantages in the competition for jobs.
At first glance, deregulation hardly looks like the panacea its advocates have made it out to be. ABA accreditation also looks pretty plausibly like standard consumer protection--a paternalistic attempt to eliminate low quality, low cost, and high-risk options--rather than a self-serving scheme to inflate prices.
There are usually tradeoffs between cost and quality. It's not surprising that as goes the world, so goes legal education.