Wednesday, March 20, 2019
Last night I was invited to appear on Tucker Carlson’s show on Fox News. For the last two nights, Mr. Carlson has been inveighing against higher education and federal student loans. Mr. Carlson has been promoting a private-student-lender supported plan to tax higher education institutions that accept federal student loans. Similar plans to tax educational institutions were previously backed by both Senator Hillary Clinton and President Trump, with the support of several Wall Street connected think tanks.
Mr. Carlson and I spoke via a remote uplink from a Fox News affiliate in Los Angeles (Fox News’ headquarters is in midtown Manhattan, near Rockefeller Plaza). The video appears here or here. (There was a bit of a delay in the audio relay, so we sometimes speak at the same time).
Although my time was severely limited, and Mr. Carlson frequently spoke over me, I did manage to make a few key points:
- Higher education boosts earnings and employment by more than the education costs, to the benefit of both students and governments (see also here and here).
- The increase in earnings and employment is largely caused by the education.
- (see also here, here and here for a review of the extensive empirical literature, including identical twin studies, instrumental variables studies, field experiments, quasi-experimental designs, OLS regression studies, fixed effects studies, and basically studies using every technique of causal inference know to professional labor economists)
- We are about as sure that education increases earnings as we can be sure of anything in social science—the evidence is solid
- The federal government benefits more from higher education than universities do.
- The increase in payroll and income tax revenue to the government from education is greater than the cost of tuition
- Education also reduces costs to the government such as unemployment and disability insurance
- With symmetrical risk sharing (of both upside and downside) universities would be paid more by the government for providing education, not less.
- If the government invested more in education, the economy would grow faster and we would have more innovation, less unemployment, and a lower debt to GDP ratio.
- Student loan debt is actually too small relative to other assets and as a share of the economy to cause big problems--$1.5 trillion in student loan debt outstanding versus $104 trillion in household net worth; $200 trillion in present value of future government spending, and $1,000 trillion in present value of future US GDP.
- Federal student loans generally perform well. Federal student loan 3-year cohort default rates are only around 6 to 7 percent at 4-year-and-above non-profit and public institutions. These default figures include students who start at such institutions but do not complete their degrees. Recovery rates on defaulted loans are close to 80 percent. (Defaults and problematic practices tend to be concentrated at for-profit universities, which Republicans have recently moved to deregulate).
- Education boosts net worth in the long run, even after accounting for debt. People who are more highly educated not only have higher incomes, they also have higher savings rates and higher net worth. Among households headed by someone age 40 or older, those with professional degrees have median net-worth of $700,000 compared to only $100,000 for those with a high school diploma. More highly educated heads of household also have significantly less debt relative to their assets.
- We are underinvesting in education. Increases in the costs of education pay for themselves in higher quality.
- University administrators are not overpaid.
- There’s a market for executive talent in which universities must compete.
- Many private industries pay managers more than universities and have a higher concentration of managers than universities
- Universities pay their top executive leaders less than private sector companies pay senior executives (at the top, around $5 million at universities versus around $150 million at publicly traded corporations). Pay is lower for top executives in academe even after accounting for institution size.
- For example, Fox News, with only around $2.7 billion in revenue, recently paid its chief executive $21 million dollars in total compensation. NYU, the largest private, non-religiously affiliated university in the United States recently paid its president $1.5 million. NYU has $10 billion in operating revenue. Scaled by revenue, NYU pays its chief executive only 2 percent as much as Fox News pays its chief executive (i.e., Fox News pays its chief executive 50 times as much per dollar of revenue as NYU pays its chief executive).
- NYU's business--which includes hospitals, biomedical research, and scientific and engineering labs--is far more complicated and far more socially valuable than Fox News' entertainment business. Fox News has never saved anyone's life. NYU Medical Centers and other university based medical facilities have. Fox News has never trained anyone to become a doctor, lawyer, or engineer. NYU and other universities have.
For more information, see:
- Michael Simkovic, The Knowledge Tax, 82 U. Chi. L. Rev. 1981 (2015).
- Michael Simkovic, Risk-Based Student Loans, 70 Wash. & Lee L. Rev. 527 (2013).
- Frank McIntyre & Michael Simkovic, Timing Law School, 14 J. Empirical Legal Stud. 258–300 (2017).
- Michael Simkovic & Frank McIntyre, The Economic Value of a Law Degree, 43 J. Legal Stud. 249–289 (2014).
- Michael Simkovic & Frank McIntyre, Populist Outrage, Reckless Empirics: A Review of Failing Law Schools, 108 Nw. U.L. Rev. Online 176–280 (2014).
- Michael Simkovic, A Value-Added Perspective on Higher Education, U.C. Irvine L. Rev. (2016).
With the benefit of more time, I could have pointed out a few more things and corrected some more inaccuracies, described in greater detail below:
Education supports the housing market
While highly educated people may delay buying a home until later in life, when they do buy a home, they typically buy substantially more expensive and nicer homes. According to the Census Bureau’s ACS, among those age 25-35 in 2010-2014, average home values ranged from $130K for those with a high school diploma to $240K for those with a bachelor’s degree and $340K for those with a professional degree.
Thanks to education, which boosts earnings by more than it costs, educated workers can more easily afford better housing than their less educated peers.
This benefit redounds to homeowners more broadly. Only around one third of the population has a bachelor’s degree or above, but more than half of households are homeowners.
New housing can be built, but in many areas of the country where highly educated workers congregate (New York, Boston, San Francisco, Los Angeles, etc.), restrictive zoning laws that limit new development give existing real estate owners substantial market power. As younger, more highly educated, and harder working workers compete with each other for limited housing stock, housing values go up.
This increase in home values enables existing homeowners (who might be less educated given trends toward increasing educational attainment) the opportunity to sell at a higher price to fund a more comfortable retirement in a more tranquil area, further from centers of economic activity.
Education makes Social Security more generous and helps keep Medicare solvent
Programs like Social Security and Medicare are currently funded exclusively through taxes on wages, but not through taxes on income from financial or physical capital. Investment in education therefore helps fund Social Security and Medicare in ways that other kinds of investments do not.
Social security is indexed to wages, which have increased more than inflation. A big part of the reason average real wages are rising is because of increasing educational attainment. Thus, as the population becomes more educated and productive and average wages increase, social security becomes more generous and benefits to everyone increase at a pace faster than inflation.
This illustrates a broader point—education is good for everyone, not just the educated. Education produces positive externalities, and the benefits of education can be—and are in fact—shared through taxation and spending.
People who are more highly educated are more likely to be married
Educated workers make financial sacrifices to work in higher education
Education typically boosts earnings, but academics typically earn far less than individuals with comparable skills and training who work in the private sector. There is evidence that universities struggle to attract and retain faculty with skills that are highly valued in the private sector. Computer scientists and economists are leaving even the most prestigious universities for technology firms. Universities tend to be relatively shorthanded in high-demand fields like computer science, some engineering specialties, accounting, and economics.
Many law schools already have far more full-time tenure track faculty in public law than private law, even though the career opportunities for their students are far better in the private sector. The former dean of Stanford Law School left the academy to practice law. Tenured tax professors have left tenured positions for much higher pay at accounting or law firms.
Billionaires are rich; Universities, considerably less so
Most universities are not rich. Household net worth in the United States is over $100 trillion. The endowment of all of the colleges and universities in the United States—which support hundreds of thousands of employees in the service of millions of students and other stakeholders—is between $500 billion and $1 trillion—i.e., less than 1 percent of household net-worth.
Wealthy individuals single-handedly own more investible assets than entire universities. The total net-worth of the Forbes 400—the 400 richest individual people—is $2.7 trillion, roughly four times the aggregate combined endowments of the thousands of colleges and universities in the United States. Bill Gates and his family foundation control more wealth than the endowments of Harvard, Yale, and Princeton combined. One of Mr. Gates’ residences is worth 15 times the typical endowment of colleges or universities.
Because of their great wealth and the opportunities it provides to influence tax law and engage in tax planning, billionaires pay lower effective tax rates than upper middle class educated professionals such as scientists, engineers, doctors and lawyers. Indeed, the very rich are so rich that the U.S. could generate hundreds of billions of dollars of additional tax revenue per year without raising taxes on 99.9 percent of the population, could use this revenue to provide middle class tax relief and make public investments that would accelerate the rate of economic growth and innovation, and would still leave the top 0.1 percent by wealth much better off financially after taxes than everyone else.
When another recent guest on Tucker Carlson's ostensibly populist program questioned Mr. Carlson's reluctance to discuss taxing the wealthy, Mr. Carlson became verbally abusive. Carlson told the guest, a popular history writer who has lectured at Davos, "I want to say to you, why don’t you go f-ck yourself, you tiny brain." Fox News declined to air the segment, but the tape was leaked to Rolling Stone.
Most college degrees are in practical fields, and even “impractical” majors often provide some economic benefits
Most fields of study at universities are scientific, technical, business or economics, or career oriented. According to data from the U.S. Census Bureau’s ACS, degrees in such practical fields comprise roughly 70 to 75 percent of recent bachelor’s degrees (i.e., degrees of those under age 30).
Mr. Carlson raised the red herring of “women’s studies” to support his claim that there’s a lot of waste in higher education. Women’s studies is such a small field of study that bachelor’s degrees in women’s studies are not even reported as a separate category by the Census Bureau, but are instead (to the best of my knowledge) lumped in with “1501: Area, Ethnic, and Civilization Studies.” This category accounts for only 0.44% of bachelor’s degrees.
Although humanities and social sciences degrees (other than economics) boost earnings less than STEM or economics degrees, humanities and social science degrees still boost earnings compared to a terminal high school diploma. Humanities and social sciences degrees can also pave the way for graduate degrees that provide large boosts to earnings. People who cannot successfully complete a STEM degree in a reasonable amount of time may be able to complete a humanities degree more quickly.
Student loan default rates today are less than half what they were in the late 1980s and early 1990s, and are again trending down
See here. In the 1990s, the DOE reported 2-year CDRs, which are always lower than the 3-year CDRs which it reports now, so the decline in defaults is even more dramatic. Three-year CDRs have been trending down since 2010/2011 at the peak of the recession (see also here). See here to put undergraduate debt in context.
Public investments in education can be broader than federal student loans
Student loans are one of many ways of investing in education. Publicly funded grants, reduced student loan interest rates, debt forgiveness and other approaches could also be profitable investments for the benefit of taxpayers, similar to the benefits of the GI Bill. These policies could both help society and help students.
The bottom line is, we as a society should be investing more in education at all levels, not defunding one educational program to pay for another.
 The plan is being marketed as promoting university “accountability” for borrower defaults. But in our specialized economy, it is the job of lenders to absorb and spread risks associated with lending, and the job of other institutions to provide goods and services. We do not expect homebuilders to pay when home buyers default on their mortgages, nor do auto-manufacturers pay when a car buyer defaults on his or her car. The government can easily absorb student loan defaults while still turning a profit on its loans (see also here), especially when we factor in increased tax revenues and other associated public benefits of education.
The proposal to charge universities for defaults on federal loans is little more than a tax on educational institutions that would hurt taxpayers and students, and only stand to benefit private student lenders.
 John Barnshaw & Samuel Dunietz, Busting the Myths: The Annual Report on the Economic Status of the Profession, 2014-15 (2015), https://www.aaup.org/reports-publications/2014-15salarysurvey (last visited Jun 14, 2018) (“professors make less on average than those in nonacademic professional settings.”); Keith A. Bender & John S. Heywood, Job Satisfaction of the Highly Educated: The Role of Gender, Academic Tenure, and Earnings, 53 Scottish Journal of Political Economy 253–279, 258 (“Overall, academics have an average salary of $59,881, while nonacademics earn $80,070 on average. Across disciplines this ranges from lows of almost $54,000 for academic social scientists to highs of over $100,000 for management scientists and health scientists in the nonacademic sector.”); William G. Tierney, Faculty Productivity: Facts, Fictions and Issues 129 (1999) (“Compared to an index of salaries in professionalized fields outside higher education [health professions, law, engineering, and nonacademic scientists], faculty salaries have lost substantial ground since the late 1970s.”).
 Board of Governors of the Federal Reserve System (US), Households and Nonprofit Organizations; Net Worth, Level [TNWBSHNO], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/TNWBSHNO, June 14, 2018.
 U.S. Department of Education, National Center for Education Statistics, 2015 Digest of Education Statistics, Table 333.90.
 Luisa Kroll, Forbes 400 2017: Meet The Richest People In America, Forbes, 2017, https://www.forbes.com/sites/luisakroll/2017/10/17/forbes-400-2017-americas-richest-people-bill-gates-jeff-bezos-mark-zuckerberg-donald-trump/ (last visited Jun 14, 2018).
 There are close to 5,000 post-secondary institutions in the United States, most with very small endowments. The median endowment was $7.9 million and the mean was $10 million according to a 2014 report. American Council on Education, Understanding-Endowments (2014), http://www.acenet.edu/news-room/Documents/Understanding-Endowments-White-Paper.pdf. Mr. Gates’s lakefront compound, “Xanadu 2.0,“ was reportedly worth around $124 million in 2014. More recent estimates place the mansion’s value between $150 and $200 million.