A Stitch in Haste

Call me a hyper-anarcho-libertarian, but I don't think the government has any business whatsoever getting involved in the student loan market.

So this is a welcome minor victory:

Congress is ending a promise to banks that has allowed them to reap billions of dollars in profits from a federal college aid program.

Legislation halting the federal guarantee of a 9.5 percent rate of return to lenders of certain student loans was passed Saturday by the Senate and sent to President Bush. The bill, endorsed by the White House, won approval Thursday in the House.

The 9.5 percent interest rate on many loans will be replaced with an adjustable rate reflecting the market. The guarantee to banks has long been a profit-maker because the government has had to pay them whatever amount of interest students do not, and students now pay under 3.4 percent.
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The bank subsidy cost taxpayers $556 million in 2003 and $634 million through June 2004. Without government action, the cost would quickly escalate into billions of dollars, the Government Accountability Office found.

If you pressed me to name a good that is a far away from a public good as possible, my first answer would be a Snickers bar. My second answer would be a student loan.

Private citizen wants X, private citizen can't afford X, private citizen finances X with a lending institution. What exactly is the logic in the government getting involved in that calculus? Whether "X" a house, a car, a share of stock, a Snickers bar or a college education, the consumption is by a private person and should be privately financed. If the consumer wants it, then let the consumer pay for it.

Of course, the rationale for student loans usually involves either some notion of "fairness" or, worse, some vague promises of "future returns" (i.e., that a government student loan subsidy somehow "pays for itself").

The former justification (i.e., the naked brazen socialist perspective) I can imagine someone advocating. I would never agree with it, but I can see the argument being made. You want to try to invent some silly "right to a college education," go ahead, as long as you fully understand what you're advocating (and if you're not sure whether you fully undertand what you're advocating, then read this and check back later).

But please don't waste my time with any "positive externality" nonsense along the lines of "by subsidizing higher education today, we will have a more productive workforce tomorrow that will have higher paying jobs, which will in turn mean greater tax revenue." Such reasoning has some serious flaws:

1. It's unprovable. You can't run a controlled experiment to show how things would have played out without the subsidy.

2. Even if true, greater tax revenue is only an excuse to raise government spending, wiping out any potential fiscal benefit.

3. The Law of Unintended Consequences: How less reluctant will college trustees be to raise tuition when they know it's being subsidized anyway?

4. Even if there were positive externalities to higher education, then why not subsidize the producer (i.e., the college) rather than the consumer (i.e., the student). Oh wait, we already do that too, quite extensively in fact. Go figure.

The whole subsidized student loan con game is nothing more than the broken window fallacy turned on its head. The government subsidy that sends the (supposed) college-education tax engine into overdrive will have at least as great a negative effect somewhere else in the economy -- you just never see it. Perhaps it will take the form of higher taxes that disrupted someone else's productive engine, or maybe it will manifest as higher interest rates resulting from a higher budget deficit than would otherwise have occurred, with a corresponding decrease in investment and, therefore, in tax revenue.

There is absolutely no reason to suspect that the market for higher education cannot reach equilibrium without a subsidy. And all subsidies cause market disequilibrium (i.e., if you cause a good to be cheaper than it would otherwise be you will get too much of it supplied, to the detriment of other goods and the economy overall). It's true for Snickers bars, and it's true for college education.

Flagship Economic Policy Posts:
Flu versus Bad Vaccine: Let the Public Decide
E.U. to Force Microsoft to Sell a Product It Doesn't Make?
Maybe We'll Be Really Fortunate and Mount St. Helens Will Erupt
Philadelphia Persists in Wi-Fi Nonsense
What Channel Country? What Station Price?
Price Gouging: Touch the Toaster
How Evolution is Like Economics
An Econ 101 Moment

(Cross-linked at Outside the Beltway.)

My Constitutional Law professor once said, "The hardest part of law school is getting in."

Unless, of course, you go to CUNY Law School, where the hardest part is getting out:

After two years of dismal performances on the high-stakes test, CUNY Law School grads ratcheted up the school's passing rate on the 2004 exam to 67 percent — a 12-point increase over 2003.

With one-third of the class flunking the exam, the rate is still about 10 points shy of the state average for all law-school students and 7 points below CUNY Law's 74 percent passing rate in 2000.

But school officials touted the improvement as significant and a reflection of rigorous new policies imposed last year.
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In the 2003-04 year, [more than 10% of] CUNY Law students were either dismissed or placed on academic probation for failing to meet standards.
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CUNY Law came under fire in 2002 when half of its graduates failed the state bar exam -- by far the worst record in the state. The shameful distinction prompted school officials to tighten admissions standards and strengthen grading policies for the 2003-04 year.

Created in 1983, the school is one of the few law schools in the country with a focus on "public service" and nonprofit practice. It has a higher percentage of poor students, minorities and immigrants than other law schools.

First of all, I have no idea what it means for a law school to have "a focus on public service and nonprofit practice." A tort is a tort regardless of whether you work for BigLaw or Legal Aid. Regardless, you can't do much "public service" if you're not admitted to practice in the first place.

CUNY's in-state tuition is $4,365.85 per semester, or $26,115.00 for a traditional three-year course of study (of course, that's not adjusted for inflation). Certainly that's a relatively small fraction of the comparable cost of a private New York City law school education (assuming a CUNY law student could even get in). But what good is low tuition (low, of course, because of taxpayer subsidization) if the education you're receiving is worthless? How is that a "bargain"?

It's one thing to advocate public elementary and secondary education (I personally prefer public financing with strictly private provision), based on positive externality arguments. But that justification for public education becomes strained at the collegiate level and is flat-out untenable at the post-secondary level. How exactly is society better off by subsidizing law schools (i.e., producing extra lawyers)? Even worse, how can subsidizing a substandard law school make any sense whatsoever?

And even if you assume that the government should be subsidizing legal education, why not subsidize students rather than their deficient law school? How many millions of CUNY dollars could be redirected toward establishing scholarships to let poor students go to better law schools? Or why not fund debt forgiveness after the fact for those who do indeed opt for public service or non-profit law?

It's one thing to spend taxpayer dollars on inappropriate things. It's another thing entirely to waste taxpayer dollars on an unproductive, even counterproductive, boondoggle.

Even if CUNY Law School can be "fixed," with seven much better law schools in New York City alone (not counting schools in Long Island, New Jersey and Westchester), the question should probably be, "Why bother?"

Related Posts:
Why Subsidize Student Loans?
Government-Provided Broadband: Um, Why?
Municipal Wi-Fi Update: Pennsylvania May Block Philly Plan

Richard Posner is stealing my material again. ;-)

He writes this evening:

But the "externalities" argument for subsidizing college education depends not only on how many kids would not attend college without the federal subsidy, but also on the cost of the subsidy to the taxpayer. I have no strong sense that the net external benefits are positive. If they are positive, it is very unlikely that they are large, considering the indirectness of this method of subsidizing education.

I wrote back in October:

But please don't waste my time with any "positive externality" nonsense along the lines of "by subsidizing higher education today, we will have a more productive workforce tomorrow that will have higher paying jobs, which will in turn mean greater tax revenue." Such reasoning has some serious flaws...

Posner makes several other very good points, especially on the non-dischargeability of student loans in bankruptcy. Give the whole thing a read.

One additional flaw in the system that Posner overlooks is when good money is thrown at bad schools, such as "diploma mill" colleges (and even law schools) as well as for-profit vocational schools that do not help their graduates find jobs (and occasionally find themselves mired in scandal).

The current federal student loan program -- indeed the entire federal student aid program -- is a contorted amalgam of policies and programs that, in toto, make little sense from any policy or political perspective. They are often ineffective and occasional mutually inconsistent. They often create agency and moral hazard problems.

Again, as I blogged previously:

Private citizen wants X, private citizen can't afford X, private citizen finances X with a lending institution. What exactly is the logic in the government getting involved in that calculus? Whether "X" a house, a car, a share of stock, a Snickers bar or a college education, the consumption is by a private person and should be privately financed. If the consumer wants it, then let the consumer pay for it.

As for Becker's side of the exchange, he writes:

[L]enders cannot take ownership of the human capital they finance since that means taking ownership of the individuals receiving the education, and no modern country allows people or institutions to own other individuals.

Yet further down in the post he contradicts himself by (correctly) pointing out that courts are more than willing, either ab initio (e.g., alimony or child support), or as a consequence of an uncollected judgment, to "take ownership" of one's productive capacity in the form of a wage garnishment. Seizing one's tax refunds or lottery winnings is another option already in place for uncollected debts. Defaulted student loan balances can and should be no different.

Related Posts:
Why Subsidize Student Loans?
Why Subsidize Law School, Especially Bad Law School?
Affirmative Action versus Law School Tuition
Selling Law Classes
Can Women Sue A College to Prevent Admitting Men?

Out of the mouths of babes...

Some 300 students heading into one of the five high schools in the Fremont Union High School district were sent home early and for good Monday.
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The school district is enforcing a policy that limits enrollment to only those students who can prove that they live in the district.

In the past, looser enforcement has allowed parents from as far away as Milpitas, Fremont, and South San Jose to do whatever they could to enroll their kids in the district. Many of them are drawn to the academic excellence of the district's five schools.
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But the school district says it now has a budget crisis and can no longer handle the extra students.
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But some students say there must be another alternative. "I think there should be a way how people not in the district can pay and still go to this school," said Lynbrook High School student Tony Perez.

What radical blind-youth thinking. Better providers should be able to charge more. Those who can afford to pay would pay. Those who couldn’t afford to pay could be subsidized by, maybe, um, vouchers?

What’s with these kids today and their newfangled ideas?

This is how a nightmare begins:

It is with regret that I inform you that during the grading of the February 2005 California Bar Exam, several bar examination answer books to Question number 6 were stolen from a grader's car.

Bottom line, the bar examiners are "imputing" a score for the missing questions via two methods (and taking the higher score). Translation: They're making scores up.

Not to discuss my own bar exam experiences (modesty prevents me) other than to say I passed, but obviously most aspiring lawyers, review courses notwithstanding, go into the bar exam strong on some subjects and weak on others. If, for a particular test-taker, the missing question fell into one of those two extremes, then the "imputed score" might very well be sufficiently inaccurate to misrepresent the test-taker's true score.

Here would have been a much better approach: Unless it was mathematically impossible for the test-taker to have passed regardless of his score on the stolen question (i.e., give them a perfect score on the stolen question), then pass them. But, as a stopgap measure, require the affected test-takers to take free Continuing Education classes in the tested subject or subjects during their first year as a lawyer. This way no one who would have passed anyway receives a failing grade because their "imputed score" was too low, and no one who would have failed but for their knowledge of the topic examined on the missing question is allowed to become a (less-than-competent) lawyer. No Type I errors, no Type II errors, no lawsuits (you just know that there are going to be lawsuits by the affected students who fail).

And does this fiasco remind anyone besides me of the Census Bureau's blatantly unconstitutional proposal to "make numbers up," via "sampling," for hard-to-enumerate segments of the population? The Constitution means what it says and says what it means. And this is what it says:

"Enumeration shall be made within three Years after the first Meeting of the Congress of the United States, and within every subsequent Term of ten Years, in such Manner as they shall by Law direct."

Enumeration means, um, enumeration, not estimation. Just as with the California bar exam fiasco, an expensive correct solution is preferable to an inexpensive incorrect solution.

California should keep that in mind today; the federal government should keep that in mind in 2010.

Hat tip to En Passant.

Good luck to everyone taking the various state incarnations of the bar exam over the next few days, the unifying element of which is the 200-question Multistate Bar Examination on Wednesday. Many will also be taking the essay-oriented Multistate Performance Test tomorrow.

Here's a libertarian hint for you on the MBE: The correct answer is never "Fourteenth Amendment Privileges & Immunities."

Open Thread: When I finished the bar exam I went to Hawaii. Where if anywhere are all you proto-lawyers heading after this week's bar?

POST SCRIPT: For those who are not fans of the late Rodney Dangerfield, the title of this post is a corrupted line from this movie.

New York State's two public higher education systems, the State University of New York and the City University of New York, are both on the verge of bankruptcy:

"We have reached the point of crisis," Barbara Bowen, president of the Professional Staff Congress, the faculty and staff union at the City University of New York, said at a hearing Friday at the CUNY Graduate Center in Midtown Manhattan.
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"Students are paying almost 50 percent of the operating costs," she said. "Professors have not had a raise in four years. Our salaries are not keeping pace. And we can't recruit new faculty."

According to state data, students at CUNY's four-year colleges paid less than $1,500 in tuition and fees in 1990, while the state provided $7,023 per student. In 2003, tuition and fees had risen to $4,300 while the state subsidy per student had fallen to $5,846.

Sorry, but I call "Shenanigans!" on SUNY and CUNY. "Almost fifty percent" of operating costs is not too little, but far too much of a subsidy.

My opinion on education finance, which diverges somewhat from that of many more radical libertarians, remains unchanged. I believe that the positive externalities of having universal elementary and secondary education are, like universal vaccination aginst childhood diseases, so high as to not only justify making them mandatory but also declaring them public goods worthy of public financing (not public provision, but public financing — I am still a radical enough of a libertarian to oppose public schools in favor of private schools funded via vouchers).

On the other hand, those externalities dissipate rapidly further up the educational ladder. The private benefit to the student of a basic college education far outweighs the public benefit to society, and completely swamps it at the graduate and professional level. In short, there should be very little (if any) taxpayer subsidization of post-secondary education and definitely none whatsoever for graduate education.

In any case, even if there are, arguably, some limited public benefits to a college education, clearly they don't outweigh the private benefits to the students themselves. How then is it "oppressive" to expect students to pay at least as much as taxpayers do? SUNY and CUNY students still pay less than 50% of the cost of their education — why exactly are they whining?

And that's just based on tuition levels relative to direct subsidies to the schools. Pell grants, subsidized student loans, tax breaks for education expenses, etc., only make the imbalance worse.

Meanwhile, what are our tax dollars getting us (besides one of the worst law schools in the country)? What are these "oppressed" SUNY and CUNY students learning?

Several students, however, rejected any proposal for higher tuition.
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Taina Borrero, a student government officer at Hunter College, said it was unacceptable to ask students to pay more when there were already "far too many unable to pay at all."

"By raising tuition," she said, "we are forcing out immigrants, the underprivileged, minorities and older students, the very people this institution claims to serve."

Forgive me, but I suspect that even "immigrants, the underprivileged, minorities and older students" can save, borrow or otherwise scrounge up a paltry $4,300 per year for tuition. But at least Ms. Borrero will probably get an "A" in her Propaganda & Histrionics class.

When society benefits, society should pay. When the student benefits, the student should pay.

Class dismissed.

As background: In New York State there are two different types of high school diploma: the basic minimal diploma (called a "local" diploma) and the only somewhat more rigorous "Regents" diploma certified by the State. In order to earn a Regents diploma you had to, among other things, pass "Regents Exams" in various subjects — passing meant and still means 65%.

A Regents diploma is not an "honors" or "AP" program in any sense. It only means that you have demonstrated achievement satisfactory to the State's minimal standards rather than the local school district's "wink, wink" quasi-requirements. In my suburban public high school (twenty-something years ago), almost everybody — and I mean almost everybody — earned a Regents diploma.

So you can understand my shock and awe over this story:

Roughly 18 percent of city students are awarded a Regents diploma within four years of entering high school, including fewer than one in 10 African-Americans and Latinos, compared with 36 percent of white students and 37.5 percent of Asians.

At the same time, the percentage of graduating high-school seniors walking away with the coveted sheepskin declined between 2002 and 2004 even as the overall graduation rate crept upward.

About 57 percent of students statewide qualified for a Regents diploma last year, according to the state Department of Education.

As far as I'm concerned, it is per se child abuse to send a kid to a NYC public school.

Mayor Bloomberg is using these dismal numbers as further evidence that he should control the schools. Whatever. Any reform program that does not include smashing the teachers unions, keeping willing students safe (and unwilling students somewhere else until they become willing), and of course making parents accountable, will end up being for naught.

Entire generations of children have been lost to the grand experiment of egalitarian, standardless, "accommodate everything and everyone," union-dominated, "no child left behind allowed to escape" urban public schools.

Isn't it time — please — to consider real alternatives, like switching from public provision to only public financing of universal elementary and secondary education?

We have the best colleges and universities, while we also have the worst grade schools and high schools.

You don't need a Regents diploma to figure it out.

UPDATE: And it's a good thing that you don't need a Regents diploma to figure it out, because in some schools you simply won't get one --

Nearly one in six city public schools — including some touting "rigorous" curricula — awarded no Regents diplomas last year, a [New York] Post analysis of Department of Education data has found.

Thirty of 184 high schools sent all their seniors on their way with less demanding local diplomas, a review of school report cards posted online showed.

And the rate at which students at most schools earned the more prestigious sheepskin in four years was so low that the 20 schools with the best rates included those where barely half of the grads earned the Regents.

Like I said: It's per se child abuse.

ITEM: That which should be, might not be:

The New York State Board of Regents has imposed a moratorium on new commercial colleges in the state, in the face of explosive growth in their enrollments and increasing reports of problems.

The freeze comes as state education officials, the governor and lawmakers are examining ways to tighten regulations or financing of this fast-growing sector of higher education, which is consuming more than $100 million in state aid.
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The flow of public money to such schools is one reason they are drawing scrutiny. A recurring question is whether some schools are enrolling students who have little hope of graduating simply to capture the financial aid.

MY TAKE: That last paragraph is key -- the only reason there is fraud among these private colleges is because the state is making it so easy by throwing so much taxpayer money around. In any case, consider exactly what the Board of Regents has done -- the current market participants are behaving sub-optimally, so let's keep them but prevent newcomers from setting up shop, which could actually clean up the industry. Brilliant.

These for-profit schools exist for another reason besides bilking the government. Some of them actually provide the education that the public school system is unable to provide.

The answer is for Albany to get its own house in order, not to disrupt an important and legal market. Remember, for-profit education is not illegal -- fraud is illegal. Why throw out the baby with the bathwater?

More thoughts at Becker-Posner.

---

ITEM: That which should not be, might be:

As yet another auto plant prepares to shut is doors, the mayor of Flint, Michigan has come up with a radical -- and possibly illegal -- plan: a city-run assembly plant.
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"We will (build) our own manufacturing plants that the city funds," [Mayor Donald Williamson] said. "We are going to specialize in nothing but truck accessories."
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It's not clear if the city would be allowed to run a for-profit enterprise, and many have questioned the rationality of the plan.

MY TAKE: The question of whether such a plan is legal is a side issue. What strikes me about this asinine proposal is the arrogance that this local hack politician displays toward running a major factory in the Twenty-First Century, as if it were a paper route or a bake sale. It's a new twist on the old Marxist lie -- that literal "capitalists" (i.e., those who actually own and operate capital) are zero-value-added "exploiters" who can be summarily replaced with no impact to the firm itself. To socialists like Williamson, the need for entrepreneurship does not exist, the need for innovation does not exist, the need for market research does not exist, the need for risk-taking does not exist. Just throw the switch, pass Go and collect 200 jobs. Only a politician could display such limitless hubris.

(Via The Perfect Substitute.)

This week's Becker-Posner exchange asks whether the government should increase direct aid to college students.

Sigh.

It's all well and good (and sorta kinda libertarian) to try to bring a cost-benefit analysis to government spending, which both scholars try to do. But it would have been nice if either, especially Posner, had bothered to ask whether giving non-emergency handouts to non-starving college students qualifies as "spending for the general welfare" (i.e., a proper function of government) in the first place. (Posner too briefly asks the question in abstract but not constitutional terms.)

Two additional hasty stitches:

1. As I've mentioned previously, the argument that "elementary and secondary education is a public good because a universally literate populace creates substantial positive externalities" is not unreasonable but also not axiomatic. Regardless, that argument becomes far less tenable at the post-secondary level and is utterly preposterous at the graduate & professional level. The government has no business using taxpayer dollars to help people become rich doctors, lawyers or CFOs. And besides, the externality argument only legitimizes public financing, not public provision, of K-12 education.

2. It is universally understood that colleges, especially competitive schools, are at least partial price discriminators. "Tuition" is simply not the same as "price" and is largely a random, meaningless number. Rather than setting a market-clearing (yet competitive) price, the schools decide first how much a student's family "ought to pay" based on their finances and then try, rigorously or half-heartedly, to assemble a bundle of aid to get the nominal tuition down to the pre-determined "ought to pay" level. I recall vividly being told as an incoming freshman that the two nominal external scholarships I had won would be offset, dollar-for-dollar, by reductions in my need-based grants. "My" scholarship belonged to the university from the beginning.

Now consider a hypothetical regime where Congress raised the level of student aid. Assume a very simplistic model where every student receives an extra $1,000. The result is pre-ordained: every college would simply raise their tuition by $1,000, pocket the federal subsidy and continue implementing their "ought to pay" financial aid regime.

The real education market is not so simple or homogeneous, but the effect will manifest itself nonetheless: government subsidies will simply be offset, in whole or in part, by higher costs. So why bother?

Bottom line: "Subsidizing college students" is largely a myth; such programs subsidize colleges, not students. Perhaps not entirely, but mostly.

A modest alternative proposal would be for the federal government to get out of the student aid business altogether, reducing tax burdens in the process. If college is such a great bargain (and it is -- see Becker's post), then there is nothing cold, cruel or unjust in expecting students to pay for it without help from taxpayers.

Yes, I know: Too modest. Go figure.

"The cynic knows the price of everything and the value of nothing."
--Oscar Wilde

Everyone knows that most traditionally structured colleges and universities engage in price discrimination — charging different students different amounts for the same education. The basis, typically, is simple Marxism: "From each according to his ability."

On the other hand, since college is strictly voluntary, and since colleges compete against each other on fronts other than net cost, the redistributionist nature of college finance is much less pernicious and obscene than, say, the death tax.

Nevertheless, how interesting it is that a new form of collegiate price discrimination — charging different students different amounts for different educations — seems so astonishing as to require a New York Times exposé:

Starting this fall, juniors and seniors pursuing an undergraduate major in the business school at the University of Wisconsin, Madison, will pay $500 more each semester than classmates. The University of Nebraska last year began charging engineering students a $40 premium for each hour of class credit. And Arizona State University this fall will phase in for upperclassmen in the journalism school a $250 per semester charge above the basic $2,411 tuition for in-state students.

Such moves are being driven by the high salaries commanded by professors in certain fields, the expense of specialized equipment and the difficulties of getting state legislatures to approve general tuition increases, university officials say.
...
Even as they embrace such pricing, many officials acknowledge they are queasy about a practice that appears to value one discipline over another or that could result in lower-income students clustering in less expensive fields.

A market-mimicking system where price differentials reflect cost differentials and where supply and demand play at least some role in dictating outcomes?

How utterly ghastly that must seem to the median college administrator.

Meanwhile, here's my question: Apologists for raced-based admission standards in higher education (not to mention the Supreme Court's recent race-based cases) rely on the proposition that an institution of higher learning is not so much about providing an education, but rather about providing an "environment" — and that such an "environment" requires "diversity" to be effective. So, for instance, the purpose of a law school ceases to be "training lawyers" but rather "creating an atmosphere" (as if the law can be inhaled like nasal spray).

But clearly, if the university is not about earning a degree but "absorbing an environment," then there can be no basis for price discrimination by major. Yes, the engineering major may have used up more (expensive) lab resources than the French major, but they were (supposedly) equally exposed to the "diversity" of the campus. Yes the economics major may attend a senior seminar by the (expensive) Nobel Prize winning faculty member while the sociology major gets to listen to an otherwise unemployable adjunct. But they (supposedly) equally partook of the "culture" of the campus. And they should all therefore have the same (nominal) tuition, no?

So which is it: "Education" or "learning"? "Diploma" or "diversity"? "Major" or "memories"?

For each choice, a college can (supposedly) be both. But its tuition bill (and its admission staff's algorithms) cannot.

More thoughts at Conglomerate.