TOPICS IN POLITICAL ECONOMY

THE STUDENT LOAN BROUHAHA: GOOD NEWS AND BAD

The student loan "bubble" has been swelling for years, puffed up by college adminstrators, spendthrift politicians, and  misleading (self-interested?) academic analyses that promise sharply higher incomes later in life for all those with college degrees. 

This is why the current brouhaha ("a noisy and overexcited critical response, display of interest or trail of publicity") over a scheduled increase in loan interest rates from 3.4% to 6.8% is actually helpful in focusing attention on the implications of a well-meaning program gone askew.

If Congress and the President decide to keep the interest rate at 3.4%, that would reduce currently forecast Federal government revenues by roughly $6 billion between 2012-2017, according to the Congressional Budget Office. 

The Bad News. The down side to the brouhaha is that both Republicans and Democrats, with eyes on college-age voters, want to keep the rate at 3.4% (Mitt Romney has endorsed a one year extension). In other words, they want to continue to encourage young people - and their parents - to borrow for college degrees that, on average, are of questionable value. 

In a recent piece entitled "The Imperiled Promise of College," New York Times op-ed columnist Frank Bruni  observed that  "college is a luxury item with newly uncertain returns." He might have added that a measurable factor in making college a "luxury item" has been the availability of cheap student loans, a point which Arthur Hauptman, in the respected blog "Inside Higher Education," expands upon.

The Good News.   The bright side to the brouhaha is that Congress recognizes the lost revenues must be balanced by either tax increases or spending reductions if the budget deficit is not to be increased.  That is progress.

Democrats are solidly lined up behind a tax increase on either oil companies or "the wealthy."  Republicans would make up the lost revenue by defunding a new "preventive healthcare" program that wormed its way into the massive Obamacare legislation.

In other words, the student loan issue frames the question very clearly: do we pay for new legislation by higher taxes or cutting spending in some other program? Put another way, the fundamental issue is, do we wish to increase the role of government in the economy or to constrain it?

It would be commendable this fall if electioneering politicians, when discussing Federal taxes and spending, could go beyond clever sound bites and debate this fundamental issue.  And that they recognized that "good budgeting is the uniform distribution of dis-satisfaction." 

 

 

HIGHER EDUCATION, RICK SANTORUM AND PRESIDENT OBAMA

According to the well-credentialed Rick Santorum (BA, MBA, and LD), when it comes to higher education President Obama (just BA and JD) is a "snob." In what sense could the erst-while candidate be using that term to put down our current President? 

To understand where Santorum is coming from you need to read Obama's 2009 controversial "back-to-school" speech at a Virginia high school. He told the students "no matter what you want to do with your life, I guarantee you that you'll need an education to do it." Little to quarrel with there.

But what occupations did the President cite as goals for the assembled students?  The order in which he mentioned them was writer, doctor, teacher, police officer, nurse, architect, lawyer, and "member of the military."

The "Lowly Occupations." What's missing from that list? John Derbyshire tried to complete it in a recent issue of the Claremont Review of Books:

So much for the mechanics, gardeners, fishermen, glaziers, loggers, athletes, barbers, truckers, cooks, butchers, roofers, miners, crane operators, manicurists, linemen, dancers, cameramen, steel fixers, personal trainers, carpenters, brewers, florists, ranchers, masons, potters . . . to hell with them!  

Derbyshire equates Obama's vision with a Chinese Mandarin proverb: "Ten thousand occupations are lowly; only book-learning is exalted."  In other words, this is the prevailing wisdom "about useful, honest work in an imperial-bureaucratic despotism run by arrogant scholar-officials" - whether in China AD 1000 or the U.S. in 2012.

To be fair to the President, his public position is more nuanced than ex-Senator Santorum implies. As Obama put it in footnote-like aside when talking at the University of Michigan earlier this year,

When I say higher education, I don't just mean four-year colleges and universities; I also mean our community colleges and providing lifelong learning for workers who may need to retrain for jobs when the economy shifts.  

That is an important caveat. But I suspect it is probably a speech-writer's late-in-the-day insert.  The President himself has essentially zero experience in working with his hands or working up a sweat (other than playing basketball) on the production line or stacking hay. He is, essentially, a talented verbalist and orator with very little contact to the world where material things are made, distributed and sold.

As Derbyshire correctly implies, Obama cannot recognize that there are sensible alternatives for many high school graduates other than second-rate higher education mills and the ruinous student loan burden that typically goes with them.  Given his background, how could he understand what a fault-free production run, an on-time delivery, a well-laid brick wall or stack of hay bales mean to a productive and conscientious but college-degreeless worker?

Devaluing the High School Degree.Nor does the President and the higher education lobbying juggernaut concede that the ease with which high school graduates can gain admission to most colleges is devaluing the degrees they award - as well as high school degrees.  As Albert Shanker, late president of the American Federation of Teachers put it,

Whatever colleges pretend, their influence over high school standards and student achievement is decisive.  Kids are just like adults: they will work to get what they want.  If they know they have to work hard, listen in class, and come to school every day with their homework done in order to get into college they'll do that.  If they know they can get by with less and still get into college, that is what they will do. [Quoted in Jackson Toby, "The Lowering of Higher Education in America," 2010.]

In other words, in far too many cases high school graduates get a second-rate education because that's all they need to get into college.

"Snob" is not the right word to characterize President Obama and his position on higher education, however much attention it got Rick Santorum on the evening news and Youtube.  More accurate would have been "well-intentioned and naive." 

Getting it Right. If President Obama (or Rick Santorum) really wanted to effectively promote better educated youth they would be chastising college presidents and trustees for making it too easy to enter their hallowed halls.

JOBS LOOKING FOR WORKERS, CONT.

Yet another current and substantive report on "Factories Struggling to Find Skilled Workers," this time from this past Sunday's Washington Post.

Reporter Peter Whoriskey, writing from Holland, Michigan, notes that while presidential candidates roam the state promising to bring jobs back, " the jobs are already here.. . what's missing are the skilled workers needed to fill them." Michigan manufacturers are looking for machinists, particularly those with the ability to handle numerically-controlled equipment. Welders, tool and die makers, and assembly team leaders with basic programming skills are hard to find.

By one recent survey done for the Manufacturing Institute, there are as many as 600,000 manufacturing jobs going unfilled. The article correctly points out that high schools persist in making entrance into four-year colleges the goal of graduates - despite the fact that skilled operators-programmers make from $18-$28 an hour while the upstairs "white collar" designers make $14-$24.

Maybe, thanks to governors in the 41 states that cut spending on higher education last year, the word is getting out that for many young people four-year college degrees are a waste of time and money - and that there are plenty of jobs out there that don't require a four-year degree.

If the governors' actions send the message to the school boards that set policies for the nation's high schools, that would be a major step towards reforming the higher education Goliath - and meeting the needs of American industry.

For additional facts and analysis, check out my posts in the "Education" category written over the past 18 months, including one earlier this month.

HIGHER EDUCATION: WELCOME TO THE BUBBLE MACHINE

President Obama travelled to the University of Michigan last week to talk up higher education - and threaten its administrators with de facto price controls.

At the same time that he proudly pointed to his Administration's steps to increase the demand for higher education - capping student loan repayment schedules, increasing loans and grants to students, reducing interest rates on loans, and extending the tuition tax credit - he promised to push Congress to steer federal campus-based aid to "colleges that keep tuition affordable, provide good value, and serve their students well."

Clearly, the President didn't take (or didn't pass) Economics 101 when he was in college.  The relentless increase in the cost of higher education has been underwritten in large part by the availability of the very programs that the President wants to expand. The scale and growth rates of these programs is staggering: the Department of Education estimates that between fiscal years 2009 and 2012, post-secondary student aid and tax benefits will have increased by $41 billion to $181 billion or nearly 30%.  

Look at Germany.  As a starting point, the Administration might look closely at Germany's educational system. In Germany, according to the OECD's "Education at a Glance," only 26% of adults have tertiary (e.g. college or higher) degrees, compared to the U.S. with 40%. 

Yet Germany's unemployment rate is running at 6.7% compared to our 8.3% at a time when many U.S. manufacturing industries are desperately seeking qualified workers. (See my "Jobs Looking for Workers" posts over the past six months.)

Clearly, the track record of the Federal government's intervention in higher education is abysmal.  As Charles Murray, the author of "Real Education," put it recently, without that intervention "the last three decades would have seen a much healthier evolution of post-secondary education that focused on concrete job credentials and courses of study not constricted by the traditional model of the four-year residential college."

Pumping Up the Bubbles.  Instead of radically restructuring and downsizing Federal higher education subsidies, which increase the demand for education and the ability of administrators to increase tuition costs, the President wants to use them to force de facto price controls on every institution of higher learning. This is like pumping more hot air into the higher education bubble while simultaneously making it easier for everyone to join the party.

If this looks like the basic politically-driven policy formula which gave us the subprime mortgage crisis - and which is driving the inexorable increase in health care costs -you're right.

REGULATION, THE EPA, AND THE MING DYNASTY

After considering 16,000 years of humanity, Stanford University historian Ian Morris  concludes in Why the West Rules - For Now that the most advanced and influential society is that which is best at "getting things done." 

To quantify Eastern and Western societies' ability to get things done over 16,000 years, Morris (originally trained as an archaeologist) has designed an "index of social development."  It is based on four metrics: per capita consumption of energy, organizational capacity, the ability to process/communicate information, and the ability to wage war.

This thoughtful way of looking at history raises the issue of government regulation and "the ability to get things done."  I was reminded of this when puzzling over why China, inventor of the compass, paper, printing, gunpowder, and an early exploiter of coal and producer of iron, failed to realize its technological potential.  Instead, it discouraged innovation and eventually succumbed to European domination.

Much of the reason for China's failure can probably be found in the work of famed sinologist, Etienne Balazs commenting on the Ming and later dynasties.  As quoted by David Landes in his The Wealth and Poverty of Nations:

Chinese society was highly totalitarian . . . no private initiative, no expression of public life escapes official control . . . there is a monopoly of education, jealously guarded . . .  there are clothing regulations, a regulation of public and private construction . . . the providential State watches minutely over every step of its subjects, from cradle to grave.  It is a regime of endless paperwork and harassment.

The ingenuity and inventiveness of the Chinese . . . would no doubt have enriched China further and probably brought it to the threshold of modern industry, had it not been for this stiffling state control.  It is the State that kills technological progress in China.

Now, consider the trend of regulation emanating out of Washington, DC over the past decade or so, as depicted by a recent graphic in The Wall Street Journal.

 

 

This chart clearly shows that the pipeline of upcoming Federal regulations, each of which will impose a cost on the economy of $100 million or more, has soared over the past five years.  At the same time, Washington University's Center for the Study of American Business estimates that the cost of administering existing regulations will be $57 billion in 2012 while employing over 290,000 people.  Finally, there are the costs of investment-dampening uncertainty when firms are unsure what regulations are likely to be imposed.

Smog and Highway Signs.  Consider the Clean Air Act administered by the Environmental Protection Agency.  The Supreme Court has upheld EPA's contention that it should not consider costs when imposing new regulations. The Agency is presently finalizing rules that will probably shut down a substantial number of coal-fired generating plants in the midwest and southern states before the end of their useful lives.  The estimated all-in industry costs could exceed $80 billion (passed on to customers, of course) according to one research study.

However, when the Obama Administration's proposal to reduce ground-level ozone and the resulting smog was found to cost up to $90 billion annually, the President finally backed off, citing "the importance of reducing regulatory burdens and regulatory uncertainty."  Well, at least $90 billion catches the President's eye.

One other very small victory for regulation skeptics: in August, the Department of Transportation eliminated 46 deadlines for local communities around the country to replace existing highway signs with DOT-mandated standardized replacements. (It kept in place an additional twelve).  

DOT's reasoning?  "Local and state transportation agencies are best-equipped to determine when they need to replace signs and other items in the course of their daily work.” But apparently they can't be trusted to design the eventual replacements.

There clearly is a place for sensible, cost-effective regulation in sectors such as processed food and pharmeceuticals, although frequently law suits for damages may be more effective than regulation in heading off egregious behavior. (Note that British Petroleum has paid out to date $7.5 billion in claims arising from its 2010 Deepwater Horizon accident and oil spill in the Gulf of Mexico.)

Reduce the Burden.  While the regulatory burden may not currently approach that of the late Ming Dynasty, it is time to act.  The White House and Congress should be spending as much time and political capital on "reducing the regulatory burden and regulatory uncertainty"  - as the President puts it - as on spending and taxes.

 

 

 

 

 

 

OCCUPY WALL STREET, HIGHER EDUCATION AND JOSEPH SCHUMPETER

What are the links between the Occupy Wall Street crowd and the massive, overgrown higher educational system in the United States?

Perhaps the most penetrating answer can be found in Joseph Schumpeter's "Capitalism, Socialism, and Democracy," first published in 1942. Herewith several penetrating observations from chapter XIII of that powerful work:

One of the most important features of the later stages of capitalist civilization is the vigorous expansion of the educational apparatus and particularly of the facilities for higher education......

Inasmuch as higher education thus increases the supply of services in professional, quasi-professional and in the end all 'white collar' lines beyond the point determined by cost-return considerations, it may create a particularly important case of sectional unemployment....

It may create unemployability of a particularly disconcerting type . [such a person] becomes psychically unemployable in manual occupations without necessarily acquiring employability in, say, professional work . . . due to either lack of natural ability - perfectly compatible with passing academic tests - or to inadequate teaching.  Both cases will . . . occur more frequently as ever larger numbers are drafted into higher education.

All those who are unemployed or unsatisfactorily employed or unemployable drift into vocations in which standards are least definite or in which aptitudes and acquirements of a different order count.  They swell the host of intellectuals in the strict sense of the term whose numbers swell disproportionately.  They enter it in a thoroughly discontented frame of mind.  Discontent breeds resentment.

For substantiation of how our current situation mirrors, to a surprising extent, Schumpeter's insights, see my previous Topics in Political Economy on "Too Big to Fail: The Academic Establishment" and "Jobs Looking for Workers."

However, I am not ready to accept Schumpter's thesis that capitalism is ultimately doomed by the "inability of the capitalist order to control its intellectual sector effectively." At least, not quite yet. 

 

 

JOBS LOOKING FOR WORKERS, CONT.

Caterpillar, one of the world's largest machinery manufacturers, with 59,000 employees in the U.S. alone, is building five new plants in the United States.  Their biggest problem? Not enough qualified workers.

CEO Doug Oberhelman is not shy about pointing fingers.  In a September CBS TV interview, he stated flatly, "our education system has failed all of us." 

At about the same time, Oberhelman spelled out for a Chicago business newspaper the details, as relayed by Thomas Friedman in the New York Times, as they are affecting Caterpillar:  

"We cannot find hourly production people, and, for that matter, many technical, engineering service technicians, and even welders, and it is hurting our manufacturing base in the United States . . . we have to retrain every person we hire."

Perhaps the most important retraining initiative would be to focus on those 300,000 counselors in high school systems around the country who advise graduating seniors on what their next steps should be. At the moment, collectively, they are doing a terrible job.  Call your high school principal or school board representative.

JOBS LOOKING FOR WORKERS

Although the current economic recovery is well over two years old, it has been plagued by continuing high unemployment rates, particularly among the long-term unemployed.  What are some of the factors at work here?

The continuing extension of eligibility for unemployment benefits. The maximum period to receive benefits is now 99 weeks, up from the normal 26 week limit. President Obama has urged Congress to renew this extension when it expires at the end of the year.

Nearly all studies of the impact of unemployment benefits find that they tend to increase the amount of time individuals are counted as unemployed.  This includes work by Obama's just-nominated candidate for Chairman of the Council of Economic Advisers, Alan Krueger.  (Good luck with your recommendations, Alan.)

One generally-accepted estimate of the program's impact is that it adds about 1/2% to the unemployment rate, currently at 9.1%. But it clearly adds considerably more to the number of long-term unemployed, which we are told is the most important aspect of the problem.  So much for well-grounded public policy from the Obama Administration in this area.

A substantial number of jobs are going unfilled because not enough people have the skills required. The number of unfilled job openings in July, according to the Bureau of Labor Statistics, was 3.1 million, a two million increase from the recession low of July 2009.  Many of these are well-paid blue collar jobs in manufacturing, a sector erroneously presumed to be flat on its back.

Take a look at three recent articles in Pennsylvania newspapers, the Pittsburgh Post Gazette, the Lancaster Intelligence-Journal, and the Meadville Tribune. The stories are nearly identical.

In Meadville, a roundtable of manufacturers told U.S. Department of Education officials that their problem wasn't a lack of capital or customers - it was lack of people with the right skills.  Over 100 highly paid jobs were open in the local job market for people with the right skill set (typically math and basic computer smarts) and work-friendly attitudes.

In the Post-Gazette story, tool and die maker Oberg Industries is looking for 50 machinists, lathe and grinder operators, quality inspectors and toolmakers.  Given their order backlog, they see the need for 70 additional workers over the next two years. 

These firms are willing to teach just-hired workers the more technical aspects of their jobs. But only so long as they "want to learn, are willing to show up for work every day, are drug-free, and are willing to work hard,"  as Rob Smith, owner of Acutec Precision Machining Inc. put it to the Meadville Tribune. How many of the long-term unemployed do you think can meet those tests?

Shrink the Dinosaurs.  These stories also highlight the mismatch between what society is investing in higher education and what is required by employers. Clearly, what is needed are fewer four-year college programs and a greater emphasis on rigorous "technical" education at both the high school and community college levels. The German approach to education comes to mind. 

We don't need heavily-indebted communications majors who can't write, sports marketing graduates who can't find a job and multi-million dollar collegiate athletic programs that can't pay their way.  For further analysis, details and references on this equally large issue, click on the "Education" category of this blog to read my four-part series of posts on "Too Big to Fail: The Academic Establishment."

The politicians' urge to keep extending unemployment benefits emphasizes again that Pogo still has the final word in dealing with poor public policy:  "We have met the enemy and it is us."

 

TOO BIG TO FAIL: THE ACADEMIC ESTABLISHMENT (PART IV)

 “I want us to produce 8 million more college graduates by 2020, because America has to have the highest share of graduates compared to every other nation."   President Obama, University of Texas,  August 9, 2010

"It's no longer true that having a college degree guarantees that you'll get a good job, and it's becoming less true with each passing generation."  Paul Krugman, New York Times, March 7, 2011

"Too many people are going to college."  Charles Murray, "Real Education," 2008

 

America's massive higher education establishment, with four million employees and an operating budget in excess of $330 billion, is on a collision course with reality. 

When Paul Krugman on "the left" and libertarian Charles Murray can come to essentially the same conclusion, the warning flags are flying high.  And when the newly-elected Governor of Pennsylvania's first budget calls for a $600 million reduction in next year's spending on higher education (a 50% cut in state aid) you know the first big wave has arrived.

In three earlier posts, I have documented the success of the higher education establishment in recruiting students, the majority of them unqualified to pass college entry level courses - and saddling them with debt.  Roughly 70% of high school graduates enter college; two-thirds of college graduates borrowed for their education and owe an average of $23,000 as they start looking for a job. I also argued that higher college entrance standards would put pressure on secondary education systems to perform better, benefiting all high school graduates.

Wasted Resources.  But it has taken massive current and prospective budget deficits at the federal and state level to focus attention on the vast amount of wasted resources that parents and taxpayers have been funneling into the higher education sector of the economy.

The best description of this waste, which fuels the ever-higher cost of college, can be found in the recent, widely-reviewed book,"Higher Education?" by liberal academic, Andrew Hacker and a New York Times columnist, Claudia Dreifus.  They decry, among other things, four year vocational programs (such as fashion merchandising and sports management), life tenure for teachers and the resulting publish-or-perish scholarly "compost," and multi-million dollar intercollegiate athletic programs. 

Hacker and Dreifus suggest that the purpose of higher education should be education, not vocational training.  This means college-wide courses in the liberal arts "designed to impart what an educated person should know." A truly revolutionary idea for today's academic administrators to consider.

College for Everyone? But if you think that Hacker and Dreifus are going in the same direction as Charles Murray, you are wrong.  They flatly declare (with no substantiation) that "we believe all Americans are capable of college work, so universal enrollment should be our ultimate goal. But for this to happen, professors will have to make an effort to reach their students."

In other words, in terms of destinations, President Obama and the authors of "Higher Education" are on the same dream boat.  Charles Murray, with considerably more substantive arguments and evidence, would argue that the only way for them to succeed would be to dumb down admission and graduation standards even more than has taken place in recent years.

Summing Up. In 1999, the Department of Education published an extremely helpful and thorough "research synthesis" with the title, "College for All?  Is There Too Much Emphasis on Getting a Four Year College Degree?"  The authors' answer to their question was a qualified "yes." A central conclusion of their survey was that "high school graduates of modest ability or uncertain motivation . . . would be well advised to consider attending 2-year [v. 4-year] colleges." 

Charles Murray believes that "modest ability" should be defined as any 18-year old with an I.Q. of less than 120, or about 80% of that age cohort. Others undoubtedly would argue for a more generous interpretation.

The evidence demonstrating an overgrown, overweight, inward-looking higher education Leviathan is overwhelming.  An increasing number of politicians are no longer scared of taking on the beast, thanks to that evidence - and massive current and prospective government deficits. 

It's too bad the President is still on a dream boat with an out-of-order compass. 

HIGHER EDUCATION, CREDENTIALISM, AND "THE KING'S SPEECH"

It's a fine movie - no question about that. 

"The King's Speech" demonstrates with brilliant acting and great sensitivity how an under-rated, handicapped individual (the second son of King George V) can overcome immense personal challenges and a terrible handicap to provide desperately needed leadership in a time of crisis - World War II.

But the part that really caught my interest - and which has an equally powerful lesson - has to do with the credentials of the man who successfully helped "Bertie" overcome his terrible weakness  - a debilitating stammer - for a royal heir.  The man was an Australian, Lionel Logue, a former actor and elocution instructor, but formally credentialed in nothing.  No "Ph.D." or "Dr." on his calling card.

At one point in the movie, presumably drawing on the spirit of the historical record, the establishment, in the personage of the Archbishop of Canterbury, tries to persuade the newly-promoted King to dismiss Logue and sign up with a properly accredited professional. Bertie refuses.

The Credential Mania. Then as now, the mania for academic or professional certification reflects a mixture of laziness and "play-it-safe" on the part of those who are searching for competent employees or advisers.  The degree or certificate substitutes for diligent research into past performance and credible references. I know one marketing manager who complained bitterly about her firm's human resource function: they kept sending her interviewees with degrees in "communications" - but they couldn't write a coherent paragraph.  

The credential mania also reflects the success of the academic establishment in convincing far too many students that degrees are worth the crippling tuition (and debt) that is needed to obtain them.  The most that can be said in this respect is that the degrees help to get interviews - not long-lasting employment (see above).

My favorite example of the un-credentialed academic was R. P. Blackmur, a highly esteemed literary critic and tenured full Professor of English at Princeton University.  He left school at 14. While he attended a few lectures at Harvard (he never enrolled) he worked his way up in the rarefied world of criticism by writing and editing.  At the time Princeton granted Blackmur tenure, colleagues and bureaucrats were still open to the possibility that great talent did not need "Ph.D." in their vita to be fully recognized. 

I suspect that possibility no longer exists.

The Mania's Consequences.  The mania for certification also drives talented and eventually successful individuals to lie about having a degree.  In 2007, Marilee Jones, the esteemed Dean of Admissions at MIT and nationally-recognized leader in admissions reform, was forced to resign after a 27-year career at that institution.  Her sin:  she had "misrepresented her background" when originally hired.  Similar events occasionally take place in the corporate world.  And woe betide politicians in an election campaign discovered to have lied on their vita.

Then there are the academic degrees awarded to influential individuals despite requirements not being met. The University of West Virginia's business school got in that habit - at least until 2008, when the President, Provost, and Dean of the business school were canned for such activity. 

Credible credentials are useful, but no more so than Moody's and S&P ratings on mortgage-backed securities.  "The King's Speech" demonstrates why they should never replace due diligence and independent thinking when we evaluate expertise or competency.