Crony College Capitalism

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In several earlier articles in this journal, I began examining the theory and practice of crony capitalism — that peculiar form of statism that ostensibly embraces free enterprise, while arranging for government to control the major economic enterprises by means of its favored supporters (its “cronies”). I suggested that this form of statism is common in failed socialist states, such as Russia, and neo-socialist ones, such as the United States.

Much attention has been paid, by me and others, to the crony car and crony green energy capitalism so artfully practiced by the current administration. But there are many other flavors of crony capitalism. In a recent piece, for example, I touched on what you might call the Obama regime’s crony drug capitalism. Now let’s turn to a flavor that isn’t often noticed. It is what we might term “crony college capitalism.”

Besides studying Saul Alinsky, President Obama has apparently studied Antonio Gramsci, the Italian Marxist theorist who urged his fellow Marxists to go into education, the better to turn regular schools into training grounds for future radicals. Since its earliest days, the Obama regime has been concerned with extending its power in the realm of college education, giving economic rewards to college teachers and students, who are overwhelmingly Obama supporters.

The working class was once a mainstay of the Democratic Party coalition. The new Democratic Party will consist of statist-inclined college educated groups.

Indeed, a recent piece in the New York Times suggests that Obama’s reelection campaign strategy now explicitly recognizes that it has to give up the white working class, except the tiny 7% that is unionized, hence able to contribute largely to the campaign. The working class was once a mainstay of the Democratic Party coalition. The new Democratic Party will consist of statist-inclined college educated groups such as professors, teachers, school and college administrators, therapists, lawyers, librarians, social workers, artists and designers, and their numerous dependents, along with key ethnic minorities.

You can see this calculation at play in Obama’s recent decision to kill the Keystone XL pipeline. The decision cost tens of thousands of blue-collar jobs, but it mightily pleased the environmental lobby, disproportionately college educated folks of statist mindset.

The tactics the Regime is using to corrupt higher education policy for its own benefit are the same it has used elsewhere: identify cronies, expand the size and scope of federal subsidies to them, and expand the size and scope of regulation to attack the cronies’ competitors. More succinctly, the Regime’s crony capitalist game in higher education is — as it is everywhere else — one of rewarding supporters and attacking their (and hence its) enemies.

Start with the rewards for the cronies. One of the Regime’s major “educational” initiatives was its socialization of the student loan industry, which happened just two years ago. A troika of key Regime players — Obama, Rep. George Miller (D-CA), and Sen. Tom Harkin (D-IA) — ended private funding of government-backed student loans (the most common student loans), under the theory that the private lenders (read: banks) were greedy, i.e., only after profits, and not truly interested in helping students achieve a decent education. Government, of course, is run by people incapable of greed, and motivated entirely by their concern for others.

The scheme included the usual outrageous accounting trick. Sympathetic congressmen claimed that by nationalizing student loans, they would “save” $87 billion over 11 years. In the same way, nationalizing GM and Chrysler has “saved” billions, and Obamacare will “save” even more. At the time, the CBO had dutifully scored the savings at $87 billion, but the Director of the CBO, Douglas Elmendorf, had signaled Congress (in a letter to Senator Judd Gregg) that the scoring did not reflect the risk that defaults could be higher than projected. But the Regime pushed its phantom “savings” with a straight face. It even used them to write down part of the costs of Obamacare and justify an expansion of educational Pell Grants (about which more below).

You can see this calculation at play in Obama’s recent decision to kill the Keystone XL pipeline, a decision that cost tens of thousands of blue-collar jobs.

A posteriori experience from the student loan nationalization confirms what a priori economic reasoning would naturally suggest: the government generally runs things less efficiently than the private sector does. The Department of Education now reports that the default rate on student loans has surged by about one-fourth, from 7% in 2008 to 8.8% in 2009. Worse, because of another government accounting trick, these figures are deceptively low. The government loan program has options that allow some students to pay less that they really owe (these options are euphemistically called “income contingent” and “income based” repayment plans).

Besides rewarding its likely supporters with student loans, the Regime moved to expand the Pell Grant program — to double its funding, in fact. And it is resisting the efforts by the Republicans in the House of Representatives to rein in the program by requiring that recipients have a high school diploma or GED(!).

As a consequence of these policies, and the fact that in deciding who gets student loans the government doesn’t bother looking at the students’ assets or credit histories, the aggregate amount of college student debt has risen dramatically — up by 25% over the past three years, a time, please note, during which Americans generally reduced their personal debt load by 9%. Student debt now exceeds total consumer credit card debt. It now tops $1 trillion.

Of course, the Regime has revealed a solution for the problem it helped so much to create. It proposes to roll forward a law that helps college students mitigate and even get out of their student loan debts. Under current law, students must make monthly payments of 15% of discretionary income, with the balance of their loans forgiven after 25 years. (“Forgiven” means, of course, that the taxpayer eats the remaining cost of a college degree that mainly benefits the degree holder personally.) A law passed by Congress in 2010 and scheduled to take effect in 2014 will drop payments to 10%, with the balance of the loan forgiven after 20 years. Obama now wants this to take effect starting next year — which just happens to be his re-election year.

This is all on top of an existing program that allows students who enter “public service” (read: students who go to work for government or other nonprofit agencies — both areas in which employees tend overwhelmingly to vote Democrat) to have their loans forgiven after only 10 years. All of these “forgiveness” programs are projected to cost the treasury $575 million a year — quite unforgiving for the taxpayer.

Moreover, Obama is now proposing that students be able to combine their older (pre-Regime-takeover), federally-backed private loans together with the new government loans under a new lower interest as well as under the new rules.

All this is obviously aimed at buying the votes of all college students, but especially appealing to the ones whose degrees — say, in social studies, humanities, ethnic studies, women’s studies, and so on — make it likely they won’t earn high enough salaries to pay off the loans in 20 years.

Of course, complete student loan debt forgiveness is a prominent demand of the Occupy Wall Street protesters (those foot-soldiers of the welfare state so conspicuously embraced by the Regime), and a sizable proportion of students generally. One “We the People” petition on the White House website calling for total student loan forgiveness already has more than 32,000 signatures, and a similar petition on “SignOn.org” has garnered 640,000 signatures. You can bet Obama is after those votes.

Government, of course, is run by people incapable of greed, and motivated entirely by their concern for others.

How has the higher education business reacted to the increased amount of money it can now extract from students — because the higher education business can now extract more from government? The reaction has been predictable, from the economic point of view. Colleges have dramatically increased their tuition and fees. The costs of higher education have risen even faster than the costs of health care, which is widely viewed — even by the Regime — as out of control. Lavish funding for students has college administration and staff — another of the Regime’s core constituencies.

A recent report shows that just year, in-state tuition and fees for four-year public universities jumped by 8.3% on average, to a new high of $8,244. Private colleges saw tuition and fees jump by 4.5% on average to a new high of $28,500. (The state universities, at least, had to contend with a cutback of state support.)

The notion that increased federal funding of higher education has fueled its explosive growth in costs is the focus of a fine report by Neal McCluskey and Vance Fried, put out by the Cato Institute. The authors point out that profits at colleges — public and private, for-profit and non-profit — have escalated during the past three decades. They calculate the current costs in two different ways. They first is the “buildup" method, in which the researcher adds up all the input costs — professors’ compensation, administrators’ compensation, utility costs, etc. The second is the “internal accounting” method, which uses the actual accounting numbers furnished by colleges (numbers that few states make available, if you are talking about public colleges).

The authors find that both methods yield roughly the same result, about $8,000 a year at an average residential college.

Tuition figures are readily available. Using 2008 figures, tuition for a full-time student averages about $13,500 at a private 4-year college. This is a profit of $5,500 per student — or about a 40% margin. Add in charitable donations into the college endowment targeted for teaching, and the profit margin is even higher.

Moreover, they estimate that the margins at public universities are roughly the same, when you factor in the state subsidies (paid by the taxpayers) along with the tuition (paid by the students and their parents).

The high profit margins are the result of colleges jacking up their charges over the past 30 years. McCluskey and Fried note that even in constant dollars (i.e., correcting for inflation), average tuition and fees have gone up 300% during that time.

In what other industry do you see this sort of price inflation? On the contrary, in private industry, (real) price reduction is the norm. Prices of computers — even prices for laser eye surgery — have dropped dramatically over the years. But in the massively subsidized college business, which has seen its direct government subsidies — as well as the subsidies given to students — rise dramatically, price gouging has become the norm. The authors note that federal aid to students has gone up by an astounding 400% over the last three decades.

As the ever-prescient Glenn Reynolds recently put it, “When the government subsidizes something, producers respond by raising prices to soak up as much of the subsidy as they can. Colleges are no exception.”

Why is it not obvious to the average taxpayer that college costs are exploding precisely because of the generosity of that selfsame taxpayer? I confess that I find this psychological mystery even more interesting than the economic issues I have been addressing.

Certainly, part of the problem is the rational ignorance spoken about in public choice theory: ordinary citizens are being screwed by greedy rentseekers, but those citizens remain uninterested, because of the asymmetry of self-interest involved. Each one of them loses only a relatively small amount of assets, while the rentseekers in the higher-ed business stand to make out like bandits. Even now, after the massive increase in federal and state funding of our increasingly dysfunctional K-12 public schools system, and its colossal and consequent failure (as evinced on international tests), the public is reluctant to institute deep changes, such as universal school choice.

The default rate on student loans has surged by about one-fourth, from 7% in 2008 to 8.8% in 2009. Worse, these figures are deceptively low.

Besides the normal rational ignorance of citizens, however, I suspect another reason. People who are usually critically aware have their senses dulled by the very concept of “nonprofit” institutions. I notice this phenomenon in my business ethics classes. It seems almost analytically true to the average student (and by extension, the average person) that in a nonprofit business, there should be no “principal-agent” problem. That is, since the people who created the institution are not in it for profit — unlike the despicable money-grubbers in private industry — their employees must also be devoted solely to delivering the service that the principals intended, instead of ministering to their own self-interests.

In the case of public and nonprofit private colleges, the service to be rendered is primarily student education (and to a lesser degree, research for the benefit of the people generally). The principals are the founders (in the case of private colleges), the taxpayers (in the case of public colleges), the donors, and the students (and parents) who pay tuition. The principals expect the agents — the college professors, administrators, and staffs — to work to achieve the service goals of the principals.

But the principal-agent problem (which is the problem of getting self-interested agents to do what is intended by the principals) is no less acute when the principals are presumed to be altruistic (as are the taxpayers and donors) than when the principals are themselves clearly self-interested (as are the owners of a for-profit business).

What the agents of the nonprofits typically do is just what the agents of profit-seeking enterprises do — continuously seek to expand their compensation, while diminishing their workload. They try for smaller classes, higher salaries, better retirement packages, more grants, fancier equipment, plusher offices, more research assistants, more student aides, more secretaries, more assistant deans, more time off, more holidays, more sabbaticals, more time attending professional conferences, and easier tenure requirements.

I have noted elsewhere one manifestation of this phenomenon: the explosion of the number of college administrators. Not only has the number of administrators at nonprofit colleges gone up, their pay has, too. For instance, in a major piece in the Chronicle of Higher Education points out that 36 nonprofit colleges had compensation packages well over $1 million in 2009. In its survey of 519 private nonprofit colleges, the Chronicle found that the median total compensation was $385,000.

This delusion that nonprofits are immune from greed helps explain the flip side of crony college capitalism, the Regime’s war against for-profit colleges, institutions that the Regime’s supporters in the academy universally despise.

The Regime has conducted a long, deliberate struggle with these colleges (especially chains such as Westwood College and National University). When the Regime controlled Congress, the attack took the form of “hearings” into the biggest chains. The “hearings” were essentially show-trials, exposing the for-profit colleges for being, well, profit-seeking. The people in charge obviously thought — or pretended to think — that the colleges were inferior, and sought out cases of consumers who claimed to have been harmed by being students there. These testifiers told sad tales of running up large loans getting worthless degrees.

In the massively subsidized college business, which has seen its direct government subsidies rise dramatically, price gouging has become the norm.

This sham show was just polemical tactics. The congressmen on the attack never once called students from public and nonprofit private colleges to testify about the student debts that they had run up while pursuing degrees that never got them jobs. I mean, it’s not as if we couldn’t find students who had accumulated big debts at, say, a California state university (where the presidents sometimes earn salaries in the $400,000 range) to acquire degrees in various unemployable subjects — women’s studies, say, or sociology. The Regime could have found plenty of such “victims,” of this I can assure you.

But a crony capitalist jihad — like any other jihad — is always directed at one group on behalf of another group, to wit, the cronies who inspire and sometimes fund the jihadists.

In crony college capitalism, these are primarily unions, especially teachers’ unions (and allied guilds, such as the American Association of University Professors). These cronies despise for-profit colleges, not merely on philosophic grounds, but because their faculties are non-unionized. To put this simply: they fear the growth of these enterprises in the way that Teamsters fear the expansion of Wal-Mart. For example, the AAUP has strongly attacked for-profit colleges, and called for dramatically increasing regulation of them.

The cronies don't care whether there is any greater pattern of "abuse" at for-profit colleges than at supposedly eleemosynary ones. If they wanted to find that out, they could do detailed observational studies that ruled out confounding variables (by correcting for ethnicity, income-level, and asset bases of parents, SAT scores, and high-school GPA), and see whether similar graduates from for-profit colleges fared any worse on the job market than graduates of nonprofits.

Also in the attack on for-profit colleges are trial lawyers. One notorious example is Florida attorney Chris Hoyer, who is suing Westwood College now, and looking at suing at least seven other for-profit colleges. Hoyer is a donor to the Regime, of course.

Naturally, however, the Regime’s Department of Education has plans to strengthen regulations governing for-profit colleges — yet another way of aggrandizing the federal government, at the expense of yet another part of the economy.

We can put an ironic cap on this discussion by noting a recent report out of the House of Representatives. It points out that over the past decade, while tuition has increased 4.5% at nonprofit private schools, and a whopping 8% at public colleges, it has gone up only 3.2% at for-profit colleges. This competitive edge would be reason enough for the Regime's desire to protect its cronies.

For the record, I think the government-backed student loan program should simply be ended. It is encouraging students to take on debt for degrees that have a dubious payoff, and creating thereby a massive moral hazard: a constituency of people who want to burn the taxpayer by not paying back the loans in full. Moreover, these government loans help inflate college costs pointlessly for all students.

Instead, let all college loans be between private lenders and individuals, with no tax dollars at risk, and with self-interested lenders using their judgment in lending money, knowing that if they loan to incompetent students or for unusable degrees, they may find that the students can’t pay and will discharge the debt in bankruptcy.




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Comments

Jon Harrison

Get rid of the college loan programs, and you'll go a long way towards ending the price spiral in higher education. When everyone is told they must go to college, and when virtually everyone can get a government-guaranteed loan that gives them the means to do so, colleges can charge whatever they want. They have a completely captive customer base. Thanks to government, higher education has become a trust that exercises absolute control over pricing. Thankfully, Harvard and a few other places waive tuition for students who come from low-income families. But what's needed is a return to a free market in education. Then we will find a balance between family incomes and the cost of college. Today we are in a bubble, due in large part to government meddling.

Agree on the pipeline decision, which was remarkable in the context of Democratic politics. However, the author (as usual) descends to hyperbole when discussing Obama (hinting that B.O. is inspired by Marxism, referring to the administration as the "Regime," etc.). Barack Obama is a mediocre president who has struggled, largely without success, to master the immense problems he inherited (problems that were caused by both Democrats and Republicans, I hasten to add). He is a conventional liberal with a thin resume who became president because his competition was an old, out-of-touch man burdened by the follies and excesses of the previous administration. To paint him as some figure of evil is foolish. Like the Republican contenders for the 2012 nomination (Ron Paul partly excepted) he is a little man (no offense meant, Ms. Bachmann) in a world far too sick to be healed by the politics of today.

Brian

Why does Mr. Jason totally ignore the crony capitalism that exists within US military spending? It is much, much more costly to the US taxpayer than education spending.

Could it be, because this spending is endorsed and defended tooth-and-nail by Republicans?

Brandon

Maybe you should read the title of the article, Brian. This article is about education. Does that answer your thoughtful question?

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