Friday, February 27, 2009

The Bad, The Ugly, and the Disastrous

By Richard Vedder

After my rant a couple of days ago about President Obama's address to the nation, and after giving a slightly milder but still somewhat corrosive comment to the Associated Press yesterday, I vowed late yesterday afternoon to swear off, at least for a few days, Obama-bashing and criticism of the Administration's higher education policies. But then came the budget, which cries for analysis.

Actually, analysis is difficult to give since most of the budget details will not come for a couple of months. I cannot fault the President for that --forming a budget takes months, and the Administration has not been in power for long. But there is enough in it for me to agree with Terry Hartle that, if enacted, this would be the most sweeping change in higher education policy in decades --maybe since the Higher Education Act was passed in 1965.

The President wants to put private lenders out of business, not surprising for the most liberal president in American history who is clearly a socialist trying to nationalize significant parts of the economy, as the partial takeover of Citigroup today symbolizes (a banker told me yesterday that all his banker friends that took TARP money want to give it back). Obama wants to expand the Perkins program to more people. He wants to make Pell Grants an entitlement not subject to annual congressional review --part of a broader effort to increase presidential power, I suspect. He wants to make permanent a college tax credit that is far more generous than the one it replaces, even giving money to those who do not pay taxes in some cases. He wants to spend, spend, spend, with no indication of the dangerous implications of financing trillion dollar deficits over multiple years, clearly a very likely prospect. The notion that we can finance deficit reduction by removing troops from Iraq and especially by taxing the rich is sheer fantasy, as FDR found out with respect to rich-bashing in the 1930s. Never in modern history have we seen a president who so visibly hates successful people more, and wants to confiscate their wealth to help those who are less successful and productive. Doing that is feasible (as Joseph Stalin, Adolph Hitler and Pol Pot demonstrated), but it comes with serious and always adverse consequences. Trying to divide up the pie more evenly almost always leads it to shrink.

What makes me so depressed about all of this is that I recently read my colleague Andy Gillen's marvelous analysis of federal student assistance programs, which we are going to publish soon. Andy argues --and I agree--that the Pell Grant is the most defensible of all programs, since it does help lower income persons attend college without greatly augmenting the academic arms race. But the Gillen analysis also shows both theoretically and empirically that government assistance programs for others than the truly poor is counterproductive, because it leads universities to successfully capture much of new student aid through tuition increases. Under some scenarios, the net cost of college stays roughly the same for some, rises significantly for others, but falls for virtually no one. The cost to society as a whole unambiguously rises. That inevitably will happened here, I predict, unless stopped by price controls and all the problems that they create --shortages, quality decline, underhanded ways of raising prices (charging for the use of campus restrooms, for example).

There is an argument for the government stopping the subsidy of private lending. Indeed, CCAP has long wanted the Feds to get out of the student lending business. But there is no compelling argument to REPLACE such lending with more direct federal loans -- to try to create a Soviet-style monopoly in the student lending business. Next the president will propose making it a felony for a private citizen to lend money to a college kid, perhaps subject to severe penalties, such as being locked up in a hotel room with Nancy Pelosi for a week.

From the narrow perspective of the colleges, it may appear that they are big winners. Vast increases are proposed in research grants, aid to students wanting to go to college, and even, indirectly, institutional subsidies indirectly via stimulus money for state and local governments. But I suspect this will be fully overcome by the negative macroeconomic consequences of the President's policies. Financing massive deficits will ultimately lead to higher interest rates and/or inflation. The 1970s was the bad period for higher education, as real tuition fees fell as inflation rose faster than college's ability to react. The President's capitalist-bashing policies are depressing an already suffering stock market, and real endowments are plunging, and with that, private gifts. The elite private schools are particularly imperiled.

Other than that, everything is fine.


Paul Johnson said...

Well, it’s Friday and the Dow is down about 118 and change. Yep, Che Bama’s spending is really lifting the markets. What an idiot.

Leaders of state colleges and universities have taken out full-page ads in the nation’s newspapers, billed as an “open letter” to the new Obama administration asking for a government bailout . Specifically, they are asking for no less than 5% of all money appropriated for economic recovery.

More than 40 higher-education leaders from across the country asked Congress to commit 5 percent of any economic stimulus program to the nation’s colleges and universities.

The educators, including University of Virginia President John Casteen III and Chancellor William E. Kirwan of the University System of Maryland, published an open letter in newspapers warning that state budget cuts have harmed the public educational enterprise that is at the heart of the nation’s long-term security.

“For the first time in our history, the cohort of Americans ages 25 to 34 is less well educated than the older cohorts that preceded it,” it says. “We cannot accept such dangerous signs that our future prosperity and security will be weaker than our past.”

Let your mind boggle for awhile. As is so typical of a certain kind of administrator, the request is not for anything specific but for a percentage cut of everything! And the argument for doing so is their own failure for Christ’s sake!

Why are Americans aged 25 to 34 less well-educated than previous generations? Because the education currently being dealt out is so poor! These college presidents have gutted their own curricula, allowed academic classes to be turned into leftist re-education camps, and allowed academic standards of every kind to be thrown out the window.

At Patrick Henry College, they do not even take government money. But, swimming against the stream, they are giving our students a superb education. They have a 75-credit true core curriculum, rich in the great books and the great ideas, academically rigorous and educationally stimulating. Their students learn to read, write, think, discuss, and create. They are no ivory tower. They give our students opportunities to practice their vocation in an apprenticeship program that offers on-the-job experience. The companies and, yes, government agencies that get PHC students as interns praise their preparation, analytical ability, work ethic, and personality qualities. And standardized tests are showing that our students are out-performing their peers in regular schools in every category!

PHC too needs money, of course, especially since they refuse the government trough and since they want to keep their tuition low and affordable. They have to make it up from private donors. They have some wonderful supporters, but raising the money they need is always a challenge. They need to build up an endowment to support our work permanently. I cannot see why people of means, especially those who are worried about the bad things happening in higher education, do not just throw money at us! (Or drop it out of airplanes, helicopters, and drones)

And let us look at the populist notion of salary caps. If Higher Education is to receive TAXPAYER money, should the government (or Duma) cap college president salaries? Or better yet, should they cap the athletic director’s salaries? How about the coach’s salaries?

Paul Johnson said...

And A Bailout For Higher Education?
Posted by Charlotte Allen

One thing to be said for the $42.5 billion or so in supposed stimulus dollars that publicly funded institutions of higher learning are trying to squeeze out of the incoming Obama administration's economic package is that the amount isn't too much larger than Harvard's $28 billion endowment. Oh, and it's also not too much larger than the $34 billion that U.S. automakers were promised by the Bush administration in their own trip to Washington with hands extended. Since billions and billions of dollars are to the rhetoric of transition spokesmen and members of Congress what billions and billions of stars were to the rhetoric of the astronomer Carl Sagan, it's not surprising that colleges and universities want a little piece of the $1,200,000,000.00 spendulus.

The other thing to be said is that the language used by college presidents and trustees is nothing short of astounding as they try to make a case that their institutions are goldmines of economic productivity rather than ultra-large line items in state expenditure budgets. A plea to Congress and the Obama administration to direct 5 percent of all stimulus funds directly to public colleges and universities, published last week in the form of an "open letter" occupying two full pages in the New York Times and Washington Post, paid for by the Carnegie Corp. of New York, and signed by 31 presidents and chancellors of state university systems, along with five higher-education bureaucrats, was grandiosely titled the Higher Education Investment Act, even though no such "act" either exists or is currently pending as a bill in Congress. The "act" contains some statements astonishing in their grandiosity as the academic CEOs self-servingly argue that a federal handout to their institutions today would be an "investment" in the America of tomorrow:

Here's a sample of the top academics' over-the-top assertions:

"Our nation is losing ground on a number of fronts critical to our future prosperity and national security. The United States has fallen from first place among nations to tenth in the percentage of our population with higher education degrees. Without a vision for education transformation, we will continue to slide. For the first time in our history the cohort of Americans ages 25 to 34 is less well educated than the older cohorts that preceded it. We cannot accept such dangerous signs that our future prosperity and security will be weaker than our past."

What the college CEOs (their institutions include the enormous California and New York state systems) mean by "education transformation" is campus construction projects, preferably buildings that can go up in a hurry, before officials in their states decide the federal cash might be more usefully spent elsewhere: "The dollars should not be subject to appropriation by state legislatures," the college presidents declare. And not only should there be no state oversight of those billions in construction spending, they aver, but they they'd rather not have any federal oversight, either: "No project-by-project approval in Washington, D.C., would be necessary; no new federal bureaucracy need be created." Who knew that our nation's top college administrators were libertarians?

What apparently lies behind the proposed campus building frenzy at federal taxpayers' expense is budget-tightening at the state level, a natural corollary to reduced state tax revenues in these tight economic times. The college presidents seem to feel a need to make an end-run around the state-level budget cuts and seem to be hoping that their proposed new labs and classrooms will look sort of like the new roads and other infrastructure that are the centerpiece of the Obama proposal. And just to be environmentally correct, the college CEOs adds that the planned new buildings would be 'green" as well as state-of-the-art.

The Carnegie-sponsored ad is one of a number of recent efforts by higher-education groups to grab some of the more than $1 trillion in stimulus and bailout money of various kinds that Congress and presidential administrations seem eager to hand out. The Association of American Universities has asked for $1.8 billion to enable more hiring of science and engineering faculty at research universities. The American Council on Education and other groups representing colleges and their faculty and students sent a letter to Congress last week that also begged for cash for capital projects as well as increases in student cash grants and loans as well as longer grace periods for repayment. The rub seems to lie in demonstrating that any of the billions thrown at campuses would actually stimulate the economy that is, increase U.S. economic productivity---in any but a highly metaphorical sense. The Carnegie ad states that colleges would increase their "capacity to produce the people, ideas, tools, solutions, and knowledge infrastructure our economy needs to regain its momentum and to set a new trajectory."

Well, maybe. Yet, as Richard Vedder, president of the Center for College Affordability and Productivity pointed out, most college campuses gravely underutilize the physical plants they have right now, with classrooms empty most of time. Furthermore, Vedder wrote on the center's website, increasing square footage raises the cost of attending college, and many colleges have "squandered billions in recent years" constructing luxurious classroom buildings and dorms that look like upscale apartment houses.

Another critic, George Leef of the Pope Center for Higher Education Policy, pointed out that fewer young people might be choosing to complete college these days not because the government doesn't spend enough on education, but because the dropouts perceive that the cost isn't worth it. Due to erosion of academic standards at every educational level from kindergarten through college senior year (thanks to institutions' desperation to increase retention rates), "students can spend their four or five [college] years, accumulate enough credits to graduate, and yet learn little or nothing of value." Once these marginal students graduate, Leef said in a letter to the Wall Street Journal, they often "end up in mundane jobs that call for no academic preparation."

Furthermore, even the higher-education spokesmen themselves seem divided over how exactly they perceive that diverting boatloads of federal stimulus cash to college campuses, especially when for construction projects, will reinvigorate America's faltering economy. In the view of the Carnegie letter's signers, better buildings means better-educated young people, who will in turn get better jobs, etc., etc. But according to Terry W. Hartle, senior vice president of the American Council on Education, the chief benefit of better buildings (and more scholarship money) will be to keep young people in school and out of unemployment offices."We want to encourage people to stay out of an overcrowded labor market," Hartle told the Allentown, Pa., Morning Call.

Gee, billions and billions for warehousing 20-year-olds. That's how we're supposed to stimulate our way back to prosperity?

Yes We Can!!

Anonymous said...

If you are going to have a government-backed student loan program, yes, there are extremely compelling reasons for it to be direct lending rather than guaranteed lending. Before the Federal Credit Reform Act of 1990, direct lending was one of those "egg head" ideas strongly supported by conservative intellectuals, such as Friedman and Gingrich, to replace the LBJ-era guaranteed student loan program. As was the case with many formerly "conservative" ideas, Clinton's savvy triangulation approach sadly convinced many DL supporters to turn into supporters of a permanent bailout program, known as guaranteed student lending.

At countless points during the history of the program, costly "tweaks" were enacted due to pressure groups such as guarantors, states (secondary marketers), and the different types of banking operations which were involved. Direct lending has no supporters, no constituency, so this would not seem to be a problem. As a matter of fact, the pressure groups chipped away at direct lending's features for 15 years, weighting it down with so many artificial disadvantages that it is amazing it survived at all.

Guaranteed lending, not direct lending, is the socialist program. Direct loan is run by contractors; other federal programs, such as defense, run almost completely by contractors, seem to have the full support of the same groups which hypocritically oppose direct lending.

Guaranteed lending's mind-bending opacity has been a boon for federal officials who want to avoid accountability. The program is impossible to administer and oversee, because there is no way of finding out what is going on within all the different levels of operation and administration. We will never know the full plethora of fraud, waste and abuse that occurred during the 45 years.

One of the non-sinister reasons for the constant Washington tinkering was that people on Capitol Hill are simply not good at . . . well, they are not good at much of anything ... but one thing they are really not good at is picking the guaranteed interest rate for lenders ahead of time. This flaw in the program -- a legislated "market interest rate" guaranteed to loan holders -- has led to attempts to build a program that depends on a market mechanism -- rather than Congressional fiat -- to set the guaranteed lender yield, the loan guarantee level, or both. Not surprisingly, the program's lenders and guarantors, who could never compete in a free market, fought such proposals tooth-and-nail. The last thing they wanted was to introduce a small iota of competition into the process. They would whip the schools in to a frenzy of worry about having different lenders each year, or some such drivel.

While such a program would be superior economically to guaranteed or direct lending, it never had a chance. Once again, the lenders and guarantors in the program never missed an opportunity to miss an opportunity. Given the choice between the two remaining options (guaranteed and direct), direct lending wins hands down.