The New Fight over Access to Higher Education

The New Fight over Access to Higher Education

September 28, 2010

As President Obama focuses this week on education, it seems an appropriate time to examine recent criticisms of the fastest-growing segment of American higher education, the private for-profit colleges, universities and institutes.  From 1995 to 2008, the student bodies of private for-profit institutions increased from 240,000 to 1.8 million, a jump of 750 percent.  With my Sonecon colleague, Dr. Nam Pham, I recently conducted a broad study of how much support government provides to the three major types of institutions – private for-profit, public, and private not-for-profit – and the results.   We found that most of the current criticisms of private-for-profit higher education are misplaced.  They receive much less taxpayer support, per-student, provide greater access for students from low-income and minority backgrounds, and often produce better results.

For idea-based economies like our own or those of Western Europe and Japan, a workforce increasingly dominated by those with advanced skills and education is a critical factor in global competition.  And for individuals, access to higher education is the most important ticket to long-term prosperity.  Americans with bachelor degrees today, for example, earn 83 percent more than high school graduates.  Such stark differences have spurred the recent, rapid increases in the numbers of young Americans pursuing higher education.   Over the last two decades, the number of students attending post-secondary institutions soared from 14.3 million to 19.6 million, and the even more rapid expansion of private for-profit institutions accommodated nearly 30 percent of the increase.

This turbo-charged expansion of private for-profit higher education hasn’t been serendipitous.   The share of post-secondary students attending private for-profits rose from less than 2 percent to nearly 10 percent, because they established certain real advantages.  To begin, they could finance their expansion through capital markets, a more secure channel than appealing to governments and alumni, as public and private not-for-profit institutions have to do.   As young upstarts, many private for-profit institutions also have been more eager and willing to adopt new, cost-effective technologies, especially online learning to scale up their enterprises.   Moreover, new rules from the Department of Education in 1994 required strict accreditation of any institution accepting students with federal loans and grants, and many private for-profits responded by upgrading their facilities, faculties and course offerings.  Perhaps most important, private for-profit institutions moved to meet the economically-driven, burgeoning demand for higher education by emphasizing career-track courses to prepare students for jobs in particular fields rather than a more traditional liberal arts education.

Private for-profit colleges and universities have especially drawn those who historically have had the least access to more traditional institutions, enrolling disproportionate numbers of students from low-income and minority families.  Looking across all four-year institutions, for example, we find that lower-income students make up nearly two-thirds of those attending private for-profit colleges and universities, compared to just over one-third of those at public and private not-for-profit institutions.   Further, minorities comprise more than half of the student bodies at private for-profits, compared to one-third at private not-for-profit and public institutions.   This focus on those with traditionally little access to higher education has been quite successful:  The graduation rates for four-year institutions with predominantly lower-income students are 55 percent for private for-profits, compared to 39 percent for private not-for-profits and 31 percent for such public institutions.   Similarly, across four-year institutions with predominantly minority student bodies, graduation rates are 47 percent at the private for-profits, compared to 40 percent at their private not-for-profit counterparts and 33 percent for public institutions.

The real fight here, however, is not over results but over access to government support, with many critics charging that the private for-profits absorb taxpayer assistance.  It’s no coincidence that that these criticisms have escalated recently, as tight government budgets squeeze many public institutions and a weak economy put new pressure on the endowments and gift-giving for private not-for-profits.  Once again, National Center for Education Statistics refutes the critics.   All three types of institutions get both direct support through government appropriations, grants and contracts, as well as indirect support through government student loans and grants.   And across all four year institutions, private for-profits and their students receive an average of $2,394, per-student, in all forms of government support, compared to $7,065 per-student for the private not-for-profits and $15,540 per-student for public institutions.  The same pattern holds across all two-year institutions, though with smaller gaps.

The biggest differences involve the direct support through government appropriations, grants and contracts.  Focusing again on four-year colleges and universities, the data say that private for-profits actually pay more in taxes than they receive in such direct support.  By contrast, four-year private not-for-profit colleges and universities receive an average of $4,765 per-student in direct support, and public institutions collect $13,240 per-student.

Government is more even-handed in its indirect support through student loans and grants.  Students attending four-year private for-profits receive an average of $2,416 in loans and grants from all levels of government, compared to $2,300 per-student for those attending four-year public or private not-for-profit institutions.  Students at private for-profits, on average, do receive larger federal grants and loans than other students – and significantly smaller loans and grants from state and local governments.  These differences reflect the historic mission of federal student loan and grant programs to help low-income students, who predominate at many private for-profits.  It’s also true that students from private for-profits are more likely to default on these loans.  That’s also not unexpected, since students from low-income families have fewer family resources to help pay them off, especially at first.

No one can blame traditional private and public institutions from trying to claim as much support as possible from government.  Yet, on a strict per-student basis, private for-profit institutions already receive only a small share of what other institutions get from the taxpayers.  And in less than a single generation, the private for-profits have created a new pathway to economic opportunity for millions of people with traditionally limited access to American higher education.   At a time when what we know determines both what we earn and how effectively we can compete in global markets, the United States can ill afford to shortchange the fastest-growing segment of American higher education.

The Illogic of the Current Economic Debate

September 21, 2010

In early June of 1992, I sat in the living room of the Governor’s mansion in Little Rock with Bill and Hillary Clinton and a half dozen other advisors, hashing out the economic program he was preparing to take to the country.  Clinton had just won the California primary and sealed the presidential nomination, but he was running third in the polls behind President Bush and Ross Perot.  That afternoon was the only time I ever heard Bill Clinton doubt himself.  Referring to Perot and his movement, he said quietly, “Sometimes no matter what you do, a big wave just washes it all away.”  President Obama and congressional Democrats face a comparable challenge today from the Republicans and their Tea Party allies, who together threaten to wash over the Democrats’ plans and hopes for themselves and the country.  The critical question for Democrats is how they should respond. 

Bill Clinton offers the best example in modern times of how doing what’s right, especially on the economy, can produce very large political rewards.  First, there’s the rule that political scientists have taken from decades of economic data and election results:  Reality trumps marketing.  So, that June day 18 years ago, I reminded the Clintons that average incomes were lower than when Bush had taken office in 1988, and no president in the 20th century won reelection under those conditions.  The second rule was all Bill Clinton’s, and it presaged the economic successes of his presidency:  He said he would stick with the economic plans developed for him, based on a serious reading of what was wrong with the economy and what modern economics could teach us to do about it.

Today, our real economic conditions have a political double edge.  The economy is in much better shape than when President Obama took office, but these remain deeply frustrating and even desperate times for millions of Americans.  The political reality is that the frustration has overwhelmed any sense of progress on the economy.  The pundits can argue over how Republicans managed to pull off their political jujitsu, in somehow shifting the debate from their own culpability for the worst financial crisis and recession in our lifetimes to the legitimacy of the steps the administration has taken to bring back the economy.  By this Orwellian illogic, people’s economic problems today are somehow tied to an orthodox stimulus program to bolster sinking demand and the TARP rescue of the financial system, approaches supported at the time by virtually every conservative as well as liberal economist. 

In the tradition of “Ignorance is Strength” and “Freedom is Slavery,” the Tea Party-purified opposition also now calls for permanent stimulus through tax cuts while ignoring the repayment of most TARP rescue funds.  And their only concession to their own loudly-stated concerns about deficits are far-fetched proposals to cut deeply into the safety net created to protect people from the worst effects of a bad economy, including unemployment benefits, Social Security, Medicare, Medicaid, and the recently-enacted health insurance guarantees. 

For everyone not running for office this year or employed by those who are, the pressing question is how this sorry debate will affect how most Americans fare over the next two years.  Political opposition in democracies is often irresponsible, but those who govern don’t have that luxury.  Like Clinton in 1992 and throughout his presidency, they have to resist the temptation to respond with distortions of their own.  Instead, the administration has to stick with policies that could successfully nudge the economy to a better place for most Americans — and then get credit for it in the next election. 

That’s a very hard strategy to pull off.  Reigniting job creation, for example, is clearly a critical part of any serious effort to drive economic recovery.  The opposition points to small businesses as the source of most new jobs, and claims that raising the top marginal tax rate would disproportionately harm those same businesses.  It’s more Orwellian marketing.  They define “small businesses” not by their size, but as any enterprise organized for tax purposes to pass its earnings through to its owners.  That does take in nearly all small LLCs, LLPs and subchapter-S companies.  But it also covers every partnership and private-equity-owned enterprise, from Bechtel and parts of the Koch brothers’ empire, to the accounting giant PriceWaterhouseCooper and many of the holdings of the Carlyle Group. 

What most Americans care about here is not whether a business is large or small, or how it’s organized for tax purposes, but whether it really creates jobs.  Yet, the GOP rebranding of their high-end tax cuts as job creators has driven the Democrats to respond with  their own package of new tax breaks for so-called “small businesses,” alas triggered not by the new jobs they create but by investments they would undertake on their own anyway, as soon as the economy strengthens. 

There are serious ideas developed by real economists about how to stimulate new jobs.  For example, we could suspend an employer’s payroll taxes on new hires for two years, and so directly reduce the cost to create new jobs.  Or we could offer American multinationals a temporary tax break on the foreign earnings they now hold overseas, in exchange for increasing their domestic workforces by 5 or 10 percent.  But serious ideas are always more complicated than political slogans.  So, a payroll tax holiday for new hires would also require a real plan to make up the lost revenues, and a jobs policy geared to multinationals would force progressives to retire their outdated views about how the foreign operations of U.S.  companies affect American jobs. 

The Tea Party wave being amplified now by most Republicans could well drown out genuine public consideration of new steps for the economy.  But what would Democrats lose by trying?  Even if they end up losing 35 to 45 seats in the House and seven to nine in the Senate, President Obama and the country still need a serious plan to restore people’s incomes.  Without it, the President in 2012 could find himself in the same position as George Herbert Walker Bush in 1992.

Why We Learned So Little from the Collapse of Lehman Brothers

September 16, 2010

On the second anniversary this week of Lehman Brothers’ spectacular collapse, it’s instructive — okay, frustrating and dispiriting — to see what policymakers learned from it.  Based on what unfolded then and the trillions of dollars lost, you would expect that even conservatives could now acknowledge that unregulated financial markets are not always the optimal arrangement.  Yet, that’s not how it’s worked out.  By now, everyone also should recognize that when markets crack-up, government is the only game in town that can contain the damage and head off a repetition.  Yet, as a rule, conservative Washington still doesn’t.  And by now, when virtually everyone should appreciate the dangers of over-leveraging, policymakers across the political spectrum still don’t get it.

 All of this leaves the U.S. and global economies exposed to another financial crisis and the truly terrible economic costs that would follow it. 

This has become a period when simple-minded political ideology regularly trumps real economics.  After a long succession of gruesome financial meltdowns over 20 years — Japan, Sweden, East Asia, Spain, and now America and Europe — the leading ideology still offers knee-jerk reverence for markets largely unfettered by public standards or rules.  Those now poised to take over at least one house of Congress wouldn’t support even the tame financial regulation approved earlier this year.  That’s despite the fact that the new law forgoes setting common standards, rules or other meaningful regulation of most trading in large blocks of asset-backed derivatives.  Those are the precise transactions which proved to be so dangerous for Bear Stearns (RIP), Lehman Brothers (RIP), Merrill Lynch (RIP), AIG and the rest of us.  Just as it was before Lehman and the rest imploded, most investors and regulators still won’t know which banks are carrying out those large trades, what those trades consist of, and how heavily they borrowed to carry them out.

The still-reigning ideology also won’t tolerate regulation to stop flash trading, which allows a handful of giant institutions to see incoming orders a few milliseconds before ordinary investors, and has repeatedly triggered huge, sudden share price declines.  It also won’t countenance regulation of so-called “dark pools” or private deals between firms to move large blocks of securities without anybody else knowing about it.  As the world learned painfully two years ago, markets that aren’t transparent become vulnerable to devastating panics when an outside shock hits them.  We haven’t even been willing to direct the big banks (and the hedge funds that masquerade as them) to divest themselves of the same risky assets that crushed Lehman two years ago.    

We’re not doing much better with international regulation.  This week’s news from Basel was a new agreement among the major countries to “triple” the capital reserves that banks hold against future losses.  But market insiders know that these standards, along with parallel ones in our own financial reforms, won’t hold off another crisis.  As the always-rigorous Martin Wolf of the Financial Times put it, “tripling almost nothing does not give one much.”  The punch line here is that the lame new standards don’t even take full effect until 2019.  It is little wonder that bank shares rallied when the “tough” new standards were announced.

So at last until the next global meltdown, risky derivative and dark pool transactions, as well as continuing rounds of flash trading, will continue to depend on outsized leverage and unfold beyond the purview of most investors and regulators.

Here’s a final irony:  The only reason that investors let banks get away with such low capital reserves, high leverage and risky transactions is that the banks and everyone else knows that if the worst happens, governments will bail them out.  At the same time, the same financial institutions and their ideological fellow-travelers in Washington won’t stand for new rules that would actually reduce the likelihood of another eventual bailout. That’s as good an example as any of socializing risk for private gain, and a convincing demonstration that Washington and Wall Street learned little from the economy’s near-death experience two years ago this week.

Time for a Midcourse Correction in Economic Policy

September 8, 2010

The economic proposals unveiled this week by the Administration suggest that the President’s determination to target his policies for the long-term has led the White House to misread the economy today.  Allowing firms to deduct their capital investments in the year they occur instead of slowly depreciating those costs, and expanding the R&D tax credit and making it permanent are measures that can help sustain growth once it returns, but they won’t lift the economy’s current faltering pace.  To do that, they need a midcourse correction aimed directly at the economic distortions which brought down the economy and produced today’s abnormally slow and halting recovery.  It’s time for presidential leadership and big initiatives, starting with the housing market.

 Since 2009, when the White House famously forecast that strong growth would return this year and unemployment would top out at 8 percent, their program has relied on models and analyses that see the current period as part of a normal business cycle.  If only that were so, because then the massive fiscal and monetary stimulus of the last 18 months would, indeed, have produced the robust V-shaped recovery they expected.  But that isn’t the economic hand we’ve been dealt.  Much like the sorry story of post-bubble Japan in the 1990s, the structural distortions in housing and finance which brought on our crisis remain largely unaffected by stimulus.  While all that stimulus stopped our slide towards a depression, it was neither sufficiently large nor long-lasting to offset the structural problems. 

So, the banking system, still saddled with hundreds of billions of dollars in shaky mortgage-backed assets  and fighting additional drag from falling values in commercial real estate and European debt, remains too weak and wary to resume normal lending to most businesses.  The problems with housing have even more far-reaching effects for the recovery.  With high unemployment dragging on — as it typically does following a financial crisis — housing foreclosures are stuck at three times normal levels, pulling down the value of most Americans’ homes.  This continuing decline in housing values not only has left 23 percent of households with mortgages under water.  It also continues to eat away at the net wealth of everyone who owns their own homes, producing a “negative wealth effect” that leaves most Americans, much like the banks, too financially weak and wary to resume normal spending.

Even if a second round of stimulus were possible politically, it wouldn’t cure these structural problems with any greater success than the first round.  Until the administration and Congress tackle the forces holding down consumption spending and business lending — or wait another half-decade for this dismal cycle to run its course — the American economy will remain weak and unemployment high. 

 A real opportunity here lies in a new approach to keep Americans in their homes and so help stabilize housing values.  Subsidies for banks to rewrite troubled mortgages haven’t worked, because the approach glosses over the weakness of the banks and the way they conduct business.  Even if these institutions were in better shape, very few bankers are willing to extend new credit to people who couldn’t keep up with their mortgages.  Only a government can assume such risks. 

The best approach for this would be a new two-part program aimed at housing and unemployment.  The first part is a loan program, modeled on student loans, to help Americans with troubled mortgages.  Those families could apply for five-to-ten year government loans to stave off foreclosures, with the repayment schedules linked to people’s incomes recovering.  With many fewer foreclosures, housing values could stabilize and staunch the negative wealth effect now holding down consumption.  The second part of the new program would reduce the cost to businesses of creating new jobs, by expanding and extending the administration’s modest cuts in an employer’s payroll taxes for new hires, the approach that CBO calls the most effective way to jumpstart job creation.  Every new job will enable another family to earn the income needed to help keep up with their mortgage, further stabilizing housing values and so ultimately supporting consumption.

If the economy were poised to take off, the Administration’s proposals for another $50 billion in infrastructure spending and $200 billion in tax breaks for small businesses might help.  Unhappily, that’s not the case.  But the President has time to seize the opportunity to make a mid-course correction, and put in place the foundation for a strong recovery in, say, 2012.