March 12, 2019
White House proposes to spend approximately nothing on early childhood education to minimize taxes for top 0.1 percent (Michael Simkovic)
NPR reports that the Trump administration has proposed a meager one-time increase in funding for childcare / early career eduction equal to approximately 0.0045 percent of GDP ($1 billion out of $22 trillion estimated 2020 GDP) or about 0.001 percent of household networth. Total federal spending would increase to $5.4 billion, or 0.0225 percent of GDP.
In contrast, Senator Elizabeth Warren has proposed to spend approximately $70 billion per year on childcare and early childhood education--13 times as much as President Trump. Warren's plan would be financed with approximately one third of the revenue generated by an annual ultra-high net-worth wealth tax of 2 percent on personal fortunes above $50 million, and 3 percent above $1 billion. It would therefore cost 99.9 percent of households nothing in increased tax burdens.
The White House explained that its less generous proposal was motivated by a desire to avoid spending "unsustainable amounts of taxpayer dollars" and instead come up with a plan that would be (politically) "viable."
March 10, 2019
QJE: Investments in education continue to provide economic benefits two and half centuries later (Michael Simkovic)
A recent article in the Quarterly Journal of Economics (the leading journal in economics) finds evidence that early investments in education in the 1600s through mid 1700s continued to provide economic benefits in the form of persistently higher eduction levels and 10% higher wages and centuries later.
The study examined the economic performance of communities based on their proximity to Jesuit missions established and subsequently closed hundreds of years ago. The Jesuits emphasized literacy and job training. The missions were established in locations that were not particularly desirable in terms of population density, soil fertility, climate, or access to transportation and trade, because Franciscans who arrived earlier claimed the best locations for their missions. The Jesuits were expelled from the Spanish Empire in 1767, at which point Jesuit missions shut down.
The closer communities were to Jesuit mission, the higher subsequent education levels and earnings, and the quicker communities adopted new technologies. These benefits persisted for centuries. The benefits are similar across national boundaries and do not appear to be due to institutional or legal differences.
Proximity to Franciscan missions, which emphasized healthcare and anti-poverty efforts rather than education, did not provide similar benefits.
Felipe Valencia Caicedo; The Mission: Human Capital Transmission, Economic Persistence, and Culture in South America, The Quarterly Journal of Economics, Volume 134, Issue 1, 1 February 2019, Pages 507–556, https://doi-org.libproxy1.usc.edu/10.1093/qje/qjy024
This article examines the long-term consequences of a historical human capital intervention. The Jesuit order founded religious missions in 1609 among the Guaraní, in modern-day Argentina, Brazil, and Paraguay. Before their expulsion in 1767, missionaries instructed indigenous inhabitants in reading, writing, and various crafts. Using archival records, as well as data at the individual and municipal level, I show that in areas of former Jesuit presence—within the Guaraní area—educational attainment was higher and remains so (by 10%–15%) 250 years later. These educational differences have also translated into incomes that are 10% higher today. The identification of the positive effect of the Guaraní Jesuit missions emerges after comparing them with abandoned Jesuit missions and neighboring Franciscan Guaraní missions. The enduring effects observed are consistent with transmission mechanisms of structural transformation, occupational specialization, and technology adoption in agriculture.
The Washington Post has provided a good summary.
March 08, 2019
How Big Tobacco’s star advocate became an education expert for the New York Times and Forbes (Michael Simkovic)
Richard Vedder, a leading opponent of excise taxes on cigarettes, takes a dim view of most of higher education. Vedder depicts colleges and universities as overpriced, wasteful, and deserving budget cuts. Vedder argues that academic freedom and research impede teaching marketable skills.
The reality is that public investments in higher education more than pay for themselves. More spending is linked to more innovation and better labor market outcomes. Educational quality and access have improved over time. The economy would likely grow faster if governments invested more in education. More people would find jobs, they would earn more money, and governments’ long-term fiscal position would likely improve.
Vedder would be easy to dismiss if not for his backing from industries that spend heavily on advertising and lobbying—like tobacco, for-profit education, and private student lending. Vedder has become a regular contributor to the New York Times, Forbes, and other publications with wide circulation, and frequently testifies before Congress.
Despite his general antipathy to education, Vedder forcefully defends for-profit education. Vedder likes that for-profit institutions have little interest in “promoting research, saving the earth [or] achieving progressive objectives.” Perhaps harried adjuncts are less likely than tenured research faculty to assess whether taxing cigarettes saves lives.
Public health spillovers aside, for-profit education is typically not great for students or taxpayers.
For-profit institutions spend far more of their revenue on sales and marketing and far less on instruction. For-profits account for a disproportionate share of federal student loan defaults and federal subsidies. Although for-profits typically serve weaker students, after accounting for student characteristics, for profits typically provide less value for the money than non-profit and public competitors. For-profits are the only type of educational institution which have been shown to increase tuition after gaining access to federal student loans, without increasing quality. Many for-profits have been linked to consumer fraud.
March 07, 2019
Inside Higher Education reports that along with an executive order that would politicize federal funding for higher education and scientific research, President Trump may soon unveil a "risk sharing" plan to tax higher education institutions that accept federal student loans. As I noted previously, when Senator (and former Democratic Presidential candidate) Hillary Clinton proposed a similar plan, such proposals are little more than a covert way of raising taxes on educational institutions and pressuring colleges into pushing students into borrowing using higher cost private student loans.
We do not expect home builders or auto-manufacturers to pay when home buyers or car buyers default on their loans--even government backed mortgages--and there is no good reason to impose similar penalties on colleges and universities, especially given how much of the financial benefit of education flows to the federal government as higher tax revenues and lower disability and unemployment benefits costs rather than as student loan repayments.
Under symmetric risk sharing, including upside as well as downside, the federal government would be paying universities more, not less.
March 02, 2019
President Trump uses scuffle at Berkeley as pretext to pressure universities into promoting views he endorses (Michael Simkovic)
A recruiter for a far-right group that maintains a "Professor Watchlist" was recently punched in the face while using slogans about "hate crime hoaxes" to recruit (or perhaps to intentionally provoke an incident) at the University of California Berkeley.
The FBI and Department of Education have both found that serious (at times deadly) hate crimes against racial, ethnic and religious minorities on campus have increased since President Trump took office and a group of conservative billionaires began funding efforts to depict universities as hostile to racially charged "free speech."
The New York Times has reported that neither the recruiter for the conservative organization nor the alleged perpetrator are students or employees of the University of California.
In spite of the minimal connection to the University--which responded professionally, condemned the attack, and worked with the police to arrest a suspect--President Trump and other conservative activists have expressed intent to use the incident as a pretext to threaten universities with cuts to federal funding unless universities do more to promote conservative views on campus.
UPDATE 3/4/2019: An advocacy group that works to protect academic freedom from efforts to politicize universities has prepared an online form to help those who wish to email their Senators to ask them to block President Trump's Executive Order.
UPDATE 3/6/2019: The AAUP opposes the executive order and has prepared an open letter that interested parties can sign here.
UPDATE 3/7/2019: The President of the University of Chicago, Robert Zimmmer, the former dean of Yale law school, Robert Post, and Professors Geoffrey R. Stone, Catherine J. Ross, and Noah Feldman have all spoken out against the proposed executive order. Teri Kanefield has published an interesting analysis of the proposal at CNN, linking it to Global Warming Denial and White Supremacy.
A Washington Post Editorial warns that the proposal violates conservative values, undermines conservatives' credibility and, if enacted, would create a bureaucracy that could be turned against religious institutions when Democrats retake the White House. And editorial in the conservative Washington Examiner makes a similar point about the relationship between academic freedom and religious freedom from government interference.
FIRE, a conservative advocacy organization which defends controversial speakers, is waiting for more details before expressing an official view on the proposal. However, individuals affiliated with FIRE have endorsed it.
Frederick Hess of the American Enterprise Institute, writing in Forbes, is strongly in favor of the proposal, arguing that federal funding for scientific research through the Department of Defense, the National Institutes of Health (NIH), the National Science Foundation should be subjected to ideological litmus tests as a form of "quality control." AEI does not explain the connection between the quality of university research teams working on better treatments for cancer or technologies to keep U.S. military personnel and civilians safe and the extent to which undergraduate student groups on campus choose to provide a platform for Milo Yiannopoulos or Ann Coulter's views on sex. Nor does he express any of conservatives' usual skepticism of top down government control.
In an essay defending Trump's proposed executive order in Inside Higher Education, Hess misunderstands a survey by FIRE of "self-censorship" by students on campus, which found that 54% of students say they sometimes pause before speaking every thought that occurs to them. The leading reasons students "self-censor," according to the survey, are because they believe they might be wrong and are concerned about their peers judging them. Students were not concerned about any formal sanction from the university for deviating from an approved ideology, but rather were worried that if they appeared foolish in public, they might lose social status with their peers. Some students also point to tact, empathy, and basic norms of decency as reasons to choose their words wisely. The same survey found that "Almost all students (92%) agree that it is important to be part of a campus community where they are exposed to the ideas and opinions of other students" and that "(87%) feel comfortable sharing ideas and opinions in their college classrooms." This is not strong evidence of problems on campus. Hess also incongruously cites the AAUP, which (as noted above and below) unequivocally opposes federal regulation such as Trump's proposed executive order that would strip universities of autonomy.
Adam Kissel, formerly at the Koch Foundation, FIRE, and the the Department of Education, is only slightly less enthusiastic in his support for Trump's proposed executive order. Writing in the National Review, Kissel argues that although in an ideal world the federal government would spend nothing funding scientific research, conservatives would be justified politicizing federal research funding as retaliation for liberal efforts to deny federal research funding to principal investigators who engage in sexual harassment, inadequate due process for those accused of sexual harassment on campus, overly burdensome internal review boards that are established to ensure that scientific research does not unethically harm human test subjects, and campus speech codes meant to prevent harassment and emotional abuse. Kissel argues that conservative control of universities should be enforced through courts rather than an administrative agency to ensure that conservative advocacy groups continue to have influence even if Democrats take control of the White House.
February 28, 2019
With more than three dozen law schools now accepting the GRE for admissions purposes, this question is no doubt on the agenda at many schools across the nation. Nearly four times as many students take the GRE each year as take the LSAT. Are these two pools of students comparable in terms of academic achievements and intellectual ability? I would guess the GRE group is, on average, stronger. Remember the pool of GRE-takers includes those aspiring to PhDs in philosophy, economics, physics, chemistry, electrical engineering, linguistics, and mathematics. The GRE includes both verbal and quantitative sections; one suspects that the average LSAT-taker is not going to do as well on the latter as the average student aspiring for a PhD in any STEM field. From what little I know, I would guess the GRE verbal section is the better predictor of law school performance than the quantitative section, and that a 98th percentile GRE verbal score is better than a 98th percentile LSAT score.
But I may be completely wrong!
As it happens, the Educational Testing Service has offered a conversion tool here. The tool seems to confirm that ETS views the GRE as a bit harder than the LSAT (and it clearly gives more weight to the verbal score than the quantitative, although that matters too). I'd be glad to hear from readers with more knowledge about these questions; please e-mail me, and I'll do a follow-up post in a week or two depending on what I learn.
February 26, 2019
The latest plan to make federal student loans less appealing: cut repayment period from 25 years to 10, draft employers as debt collectors (Michael Simkovic)
Private student lenders have been trying for at least a decade to stifle competition from public student lending programs. Their advocates have come up with a myriad of reasons to raise the price of federal loan programs, reduce their availability, and make terms less generous, even though these public loan programs are profitable for the federal government and provide massive positive externalities to the economy.
The latest salvo in this decades long struggle comes from Lamar Alexander (R-Tenn).
Senator Alexander proposes to force federal student loan borrowers to repay their loans in 10 years instead of the 25 years that are currently permitted under extended and graduated repayment plans. Senator Alexander refers to this as "simplification."
People typically finish their educations in their 20s. Highly educated people live longer than their less educated peers, are healthier, and usually keep working until their late 60s or early 70s.
Professional degree holder's earnings do not peak until their 50s. It makes little sense to excessively burden them with loan payments in their early years when earnings are typically lower and many other expenses may be higher.
The benefits of education, in the form of higher wages per hour and increased work hours, are typically spread over decades. Financing degrees so that the positive cash flows match the negative cash flows (i.e., loan repayments are made over the course of a career to correspond to earnings premiums) enables students to invest in higher quality degrees with a higher total payoff over the long run, but that might take longer to produce high earnings. Consider the case of medical students who will work low paid residencies, internships and fellowships prior to securing highly paid work, or law students who will work clerkships prior to pursuing more lucrative work.
In the name of "accountability", Alexander would deny institutions access to federal student loans if their students take too long to repay their loans. This risks encouraging short termism and underinvestment in education, selective admission of wealthy students with less need to borrow, and could pressure institutions to steer some students toward private loans.
The federal government should be expanding funding for education until the marginal benefit--including not only student loan repayments, but higher wages, higher employment rates, higher tax revenues, and more innovation and economic growth--drops to equal marginal cost. We are far from that point, and searching for ways to reduce public funding for education is likely to be counter-productive.
Alexander would also garnish borrowers wages automatically, making their employers responsible for deducting student loan payments from their paychecks.
Usually garnishment is only used for debtors in default after other collection efforts fail.
I teach bankruptcy and creditors rights. Employers do not like dealing with wage garnishment, so much so that federal and state laws are needed to prevent employers from summarily terminating employees whose wages have been garnished (there are exceptions permitting termination if the number of garnishments reaches a certain threshold, sometimes only two).
There's a serious risk that Alexander's wage garnishment proposal would burden employers enough that they would be more reluctant to hire workers with federal student loans than comparably well-educated and well qualified workers who are debt free or have private loans.
Alexander's proposal is supported by a conservative think tank, Third Way, which has close ties to private lenders. (Like New America, Third Way describes itself as center left, but those familiar with its policy advocacy and funding sources maintain that it is in fact conservative).
Senator Alexander has previously worked to advance the interests of private student lenders over those of students, opposing a bill that would have enabled borrowers to refinance private student loans by borrowing from less expensive public lending programs.
February 21, 2019
A French court recently ordered Swiss Bank UBS to pay a penalty of 4.5 billion Euros (equal to about $5.1 billion U.S. Dollars) for allegedly facilitating tax evasion. The U.S. fined UBS only $780 million for similar charges in 2009 (the equivalent of $890 million in today's dollars).
To put this into context, France's GDP is about 13.4 percent of U.S. GDP, and France has proportionately fewer ultra-high net worth individuals (only 6.5 percent as many billionaires, who on average are less wealthy than billionaires in the U.S.). Thus, scaled by number of billionaires, France fined UBS more than 100 times as much as the U.S. fined UBS for facilitating tax evasion (scaled by GDP, nearly 50 times as much).
The U.S. fined Credit Suisse around $2.5 billion in 2014, which makes France's UBS penalty still proportionately around 33 times harsher than the recent U.S.-Credit Suisse settlement.
France, Italy, Spain, the UK, Sweden,Greece, Ireland, Bulgaria, Israel, Jordan and the Netherlands are facing popular protests over regressive tax policies that protestors say excessively favor the rich over the middle and working class. Protests in France were set off by repeal of wealth taxes and other regressive tax policies, social spending cuts, and loosening labor protections.
UPDATE 2/25: This article was corrected to reflect that fact that the U.S. fined UBS $780 million in 2009, not $78 million as was reported in the Financial Times story linked above. Additional context about a Credit Suisse settlement was provided. Thanks to Pierre-Hugues Verdier (UVA) for pointing out the error.
February 19, 2019
Some of my thoughts on the ultra-high net worth wealth tax debate, and its implications for innovation and economic growth, are available here. For thoughts on the adminstrability and constitutionality of ultra high net worth taxes, see here.