Monday, October 8, 2012

IBR: the trench

I suggested in an earlier post that the Income Based Repayment program is digging a trench under our economic future. Here's why:

Degree holders make up our middle and upper-middle classes. They are the consumers who renovate houses, buy hybrid cars, wait in line for the latest iPad, and pay for their kids' orthodontic work. That demand powers the U.S. economy. When the middle and upper-middle classes have less to spend, the economy suffers.

Our economy is already suffering from a serious shortfall in jobs: Grads in every field are going without the jobs they trained for. That's catastrophic for the individuals, but it's also a serious threat to the economy. People without jobs can't buy the goods and services that create jobs; without new jobs, they won't get hired. It's a vicious economic cycle, one that both economists and policymakers worry about.

Now, though, we have another problem: The escalating cost of higher education, combined with IBR, is intensifying that cycle. Even the grads who find jobs have significantly less of their income to spend. IBR currently takes 15% of a debtor's discretionary income; if current reforms take effect, the percentage will fall to 10%. Grads paying IBR may feel lucky: They, at least, have jobs--and they're able to support a modest lifestyle. They may pack their own lunches rather than eating out; use older model laptops and cell phones; put off thoughts of buying a house; and wear their old suits for a few more years. It's not what they hoped for in college or graduate school, but they're holding on. 

Meanwhile, what are all of those empty restaurant seats and houses, as well as those unsold laptops and dress suits, doing to the economy? A 10% cut to middle-class discretionary spending has serious economic impact. To see how significant that 10% could be, consider the huge furor over extending the Bush tax cuts for middle-class taxpayers. If those cuts expire at the end of this year, tax rates will rise 3% in the middle brackets. People who currently pay 25% will pay 28%; those who are now paying 28% will pay 31%, and those who are paying 33% will pay 36%.

Almost everyone agrees that those increases would cause significant economic damage. When taxpayers send 3% more of their marginal income to the government, they reduce other spending. The resulting decline in consumption would leave lots of goods and services on the shelf. Businesses would close or contract; jobs would disappear; families would spend even less...the whole ugly cycle would accelerate. 

For just this reason, both Republicans and Democrats oppose increasing tax rates for the middle brackets; the only dispute centers on how to treat the top income bracket. But while we're all swooning over 3% decreases in discretionary middle-class spending, we're blithely ignoring a system that will take up to 10% out of middle-class incomes for years to come.

Some money paid through IBR is tax deductible, but the amounts are limited. Most grads will feel some IBR bite on top of their tax bite. The economy will feel that same bite, in the shape of reduced discretionary spending by graduates. The money you send to the Dept of Ed won't buy new furniture or running shoes.

The IBR bite wouldn't matter if graduates were earning significantly more due to their degrees. If college graduates today were earning 10% more than they did ten or fifteen years ago, then they could afford to pay off their loans while still spending as much in the marketplace as earlier grads did. Unfortunately, though, degree holders are not earning significantly more today than they did ten or fifteen years ago. The National Center for Education Statistics, a division of the federal Dept of Education, reports that young adults with a college degree earned a median income of $45,000 in 2010. In 1995, they earned about the same amount ($44,300) in inflation-adjusted, constant 2010 dollars. The numbers for graduates with an MA or higher are even worse: Those incomes declined from $56,700 in 1995 (using constant 2010 dollars) to $54,700 in 2010. 

Nor would the IBR bite matter much if educational loans were limited to a small percentage of the workforce; our economy could continue to prosper based on spending by other middle-class consumers. But a recent study by the Pew Research Center shows that 19% of all US households held student loan debt in 2010. A whopping 40% of under-35 househelds held that debt. And average debt amounts are increasing each year.

All of this paints a grim picture: Degree-holders are earning no more than they did in the past, but they are significantly more likely to hold student loan debt--and to owe more of that debt. Under IBR, graduates will pay off that debt as a percentage of discretionary income every year for the forseeable future. The impact will be close to a 10% increase in the marginal tax rate for each of those debtors. That's got to hurt the economy, impeding creation of the very jobs that these graduates need to pay off their debt. 

The primary flaw doesn't lie in IBR itself; the problem stems from the ready availability of guaranteed loans and from the extravagant rises in the cost of higher education. But IBR is lulling more students into assuming this debt--and allowing educators to tout loans as an affordable way to earn costly degrees.

Affordable today, perhaps, but we're siphoning that money directly from tomorrow's economy. IBR lets us see just how damaging this debt will be to the future: It will affect consumer spending as much as a major tax increase. Let's hold the next Presidential debate on that issue.

94 comments:

  1. Isn't IBR a certificate of unmarriageability?

    ReplyDelete
    Replies
    1. I married for love, not economic viability.

      Delete
    2. Good luck with that.

      I prefer not to make binding legal commitments based on my emotional state.

      If you marry someone who is in financial ruin, you are grabbing someone as they jump off a bridge. It is just as likely that that'll take you with them as opposed to you saving them.

      Delete
    3. Stupidest post ever^. I married for love too, and after 11 years of being with my wife, I would not trade it for anything.

      Delete
    4. The tragedy of aspergers...

      Delete
    5. Forgive me if I don't fall neatly into a hetronormative role.

      Must get married and reproduce for the mother country! The state enshrines marriage in law, you must obey!


      It is true, love does conquer all. FN1


      FN1 Except for Sallie Mae, and the credit rating agencies.

      Delete
    6. I applaud the romantics, but IBR will impact marriage rates. Student debt already contributes to the delay in marriage and to the reduction in the birthrate.

      Delete
    7. And divorce rate.

      Delete
  2. Maybe OT...but

    http://www.chicagotribune.com/business/breaking/chi-official-keep-student-loan-rates-low-20121008,0,3477785.story

    Good to see that Obama's advisors don't seem to share the urgent belief that the current student loan system has created a massive structural problem in this economy that has taken this whole mess beyond "personal responsibility."

    Can we just fire all of our dumbass politicians on both sides? First they screw with consumer protections and then bankruptcy laws, then fail to recognize the full consequences of their newly created glaring problem, followed by some token reforms that may provide a small amount of assistance to future grads while the rest of us just suffer.

    ReplyDelete
    Replies
    1. Say it wimme peeps, YES__WE__CANOctober 9, 2012 at 10:00 AM

      "Can't we just fire all of our politicians?"

      yes we can.

      Delete
  3. Good post DJM. I agree with the premise of the post, ibr or student loans is essentially a tax on the educated. There is a need for an empirical study to analyze the effects of such 'tax.' If it really is true that spending by the educated drives the economy, maybe the issue could be pushed to the forefront of the political debate.

    Although the public is becoming aware of the issue, most people have no pity for the 'Decadent' grad. Boomers 'earned' it, uneducated got their own problems, and politicians and schools just plain don't give a fuck.

    ReplyDelete
  4. Great post, completely on the mark. Consistent with my experience. Graduated M. Arch from an ivy in 1991 - no jobs (post '87 crash). Completed M.S. Planning from same ivy in 1994. (And, btw, tuition went from ($10K to $20K between 1988-1994.) Still no jobs! $68K in student loan debt. Finally found an architect job for $11.50/hr and felt lucky! Crushing monthly SL payments of $850/month (some market rate loans). Married my soul-mate who helped pay off the loans with me. Incredibly lucky that he did not have any loans. We lived in a one-room apartment for 7 years, poured every cent into loan payments. Able to make a down payment on a house after 12 years b/c of urban planning job. And I consider us very fortunate compared to graduates these days. What a horrible world has been created for them. Trench, indeed.


    ReplyDelete
  5. This post is all about consumer demand and macroeconomics; you have placed distributive concerns to the side for a moment in order to talk about how bad this "trench" will be for the overall economy. I think this is a fine approach, but you omit mention of a few things that I see as important.

    First, although escalating student loan balances are a major issue for several reasons, if one is approaching educational costs from a macro perspective, one must also consider the stimulative benefits of the current university model on the macroeconomy. You allude to some of these in your earlier post. They include larger staffs and faculties, more construction and maintenance of buildings, and all the inevitable incidents of these things, namely higher employment. You say law schools spend huge amounts on library and CSO staff and don't even need expensive labs that might justify their tuition levels; I say that sounds like a lot of investing in labor instead of capital and the secondary benefits are likely considerable.

    Even if you assume (as Prof. Campos has argued) that many faculty produce useless scholarship and many staff don't pull their weight, they are still consuming goods and services and paying taxes wherever they live. Whatever the wisdom or fairness of financing their jobs with non-dischargeable student debt, the benefit on the local economy can't be denied. Indeed even midsize universities are an important part the economy where they are located, because they employ large numbers of people.

    So, via DOE loans on the front end and IBR on the back end, the federal government is subsidizing local economies to an enormous degree. (Has anyone made an effort to quantify this?)

    This doesn't suggest the way those dollars are spent can't be improved, but if what you call the student loan "trench" were eliminated tomorrow we'd also lose a huge amount of economic activity. My understanding is that the student loan program currently turns a profit, which seems likely to increase with the rise in interest rates on federal loans (even though it will also be accompanied by a rise in defaults), so the argument that this financing mechanism should be ended because of its structural impact requires a fuller consideration of the relevant evidence.

    Second, and related, you mention that if consumers spend more on education but their incomes are stagnant, they are necessarily spending less on other things, like iPads and sneakers. The argument would have to go a step further to be persuasive as an argument that this has the effect of lowering demand in the economy overall, however. In other words, why should we care - as armchair macroeconomists -whether people spend money on JDs or iPads?

    You'd have to argue that spending money on non-profit, relatively inefficient service providers like universities creates less macroeconomic benefit than spending on consumer products, some very high-margin like sneakers, produced by for-profit companies. In for-profit companies, the benefits of those margins (while they last) accrue to managers and shareholders; in non-profits like universities, you may see inflated salaries and payrolls, but no one (apart from D I football coaches) is getting fabulously wealthy. ($800K for a law dean sounds like a fortune -- but only outside the business world.) Again, this is not an argument that universities are somehow better or that this is a great way to spend (public) money. But it's not obvious to me that it has a net negative effect on long-term consumer demand. It may simply shift it away from certain goods and towards certain services, not only education but also health care.

    In short, interesting theory but more discussion of scope of structural effects of high tuition/high debt model needed.

    ReplyDelete
    Replies
    1. The problem with your analysis is that as a form of stimulus this type of educational spending is remarkably wasteful. The waste is three-fold:

      (a) investment in a "non-good," something that does not on its face create any value. That is to say that somewhere between 1/2 and 2/3 of the activity of law schools (and for that matter journalism, MFA and architecture schools) is without value - it leaves its graduates no better off and potentially worse off.

      (b) Any spending by the law schools (and others) over the 3 years that a full time law student spends in that school must be offset against the loss of the economic contribution of a highly educated typically 22-29 year old being withdrawn from the workforce. In effect in any year you have ~150,000 law students in law school. For some ~90,000 of them law school was and is a pointless exercise and so the US economy loses the total economic contribution of 90,000 relatively well educated and literate workers (as compared to the typical worker even the dumber law student is above average) plus on could argue that of the 14,000 or so law professors, 9,000 are also a waste of space - which takes the loss to 99,000 well educated workers. That is even in the US a lot. Magnify this by the MFAs, journalism graduate students, etc. and the US is taking a huge hit - it is an easy back of the envelope calculation to put that loss at in excess of $4 billion (and $6-12 billion would be closer.)

      (c) You also need to consider a point I make, at this point ad nauseum. The majority of law students are not typical college graduates - many may be naïfs, but most still come from well into the upper half of the ability spectrum for college graduates and for the workforce in general. Although DJM has compared the incomes with those of "young adults with a college degree - earned a median income of $45,000 in 2010" this choice was clearly "par defaut de mieux." Thos mistakenly lured into law schools almost certainly would have earned above the median had they simply headed into the workforce and been filtered in the usual early-career way into a role more suitable to their skills. This amounts to a massive long term loss to the US economy.

      Finally, I have to disagree with you about what is wealthy. I earn a number comparable, and likely more than many law school deans and you could call me wealthy if I did not have to work a 60 hour week to get it and new that this income was guaranteed even into the next quarter, let alone for 2-5 years in advance - and if I did not have to maintain two modest (I mean small) homes in two fabulously expensive cities to do it, or carry a brutal travel schedule, take conference calls at 3am, etc. But the biggest factor is insecurity - to know with a high degree of confidence that one is going to be paid $160,000 to $400,000 in a tenured job (with minimal work demands) for the foreseeable future is fabulous wealth.

      Delete
    2. @9:42 seems to imply that it is OK to pay outsized law professors a lot of money because the money gets recycled into the economy. To me this is like having a German factory make a large piece of industrial machinery worth tens of millions of dollars, loading it onto a barge and dropping it into the North Sea and then presenting the bill for running the factory to the German government and the factory-floor workers, but definitely not the management who get large bonuses. What am I missing?

      Delete
    3. What you're missing is the inherent value of dropping large pieces of machinery into the North Sea. It's hard to put a price on that value (it may in fact be infinite).

      Delete
    4. "In other words, why should we care - as armchair macroeconomists -whether people spend money on JDs or iPads?"

      The JD's special feature is that the money spent on it is borrowed from and guaranteed by the federal government. While the interest in student loans is probably lower than the interest on purchases made with a credit card by most people of an age to attend law school, the interest is still very high compared to most loans for similarly large purchases (e.g., home mortgages and undergraduate loans) and none of the loan is dischargeable in bankruptcy under most circumstances where the debtor is healthy enough to work.

      If I buy a legal education's worth of iPads and it turns out not to have been worth the money, I declare bankruptcy and the trustee sells as many of them as he can. However much my credit card company is short on this deal becomes a loss - not as good as a debt performing as expected, but something that reduces gross income on its tax return. The underemployed or unemployed JD can't declare bankruptcy to rid himself of the debt he incurred, and gains no tax advantages in IBR after the first five years where he is able to write off the interest. Once we stop believing that education is priceless and accept that over-qualification is a real problem for new graduates in today's workplace, we will all be better off.

      Delete
    5. But the bottom of the North Sea is already littered with items of precision German machinery -

      Lützow, Pommern, Frauenlob, Elbing, Rostock, Wiesbaden V48, S35, V27, V4, V29, Mainz, Ariadne, Cöln, etc.

      On those occasions I think management did not that big a bonus

      Delete
    6. The responses of Prof. Campos and some others overlook the macro issues that are the topic of DJM's post and my response, and instead focus on distributive fairness. But these are distinct issues and DJM's post and subsequent responses confuse them.

      This isn't complicated. Prof. Campos mocks the "value of dropping large pieces of machinery into the North Sea," but setting up a manufacturing process that builds & delivers large pieces of machinery to the bottom of the North Sea is likely to (help) stimulate aggregate demand. Maybe this is still not a wise use of money, or certain groups of society are better positioned to absorb the cost than others. But the macroeconomy doesn't care; it gets its demand, its employment, and its tax receipts. On this point, see Krugman, who has noted that if we mobilized all our economic resources to protect against an alien invasion, we'd already be out of this economic crisis. It doesn't matter that the aliens don't come.

      DJM's argument that the 10% of graduates' income that goes to IBR represents a 10% reduction in consumer demand by those graduates is simplistic, for two reasons. First, they have already spent that money on education, so it draws forward the spending from the future to the present, stimulating the current lukewarm economy. Second, they will likely see a huge discount on their outlay if they only pay 10% of their future income to loans. If they are $200K in debt in 2012 dollars and end up repaying only, say, $220K in 2012 dollars over 20 yrs, that's a massive discount -- relative to the real cost w/interest and inflation. I would say the tuition is still too damn high, but the macroeconomy doesn't care; it goes back into the macroeconomy via the employees of the university.

      Another commenter seems incensed about the timing issue -- we're paying for present consumption (in the form of education) with future income, at high interest rates. Set aside for now the question of whether education = consumption and consider - from the aggregate demand perspective from which DJM is writing - the choice between buying one year of law school at $50K versus a Mercedes, both debt-financed. Which is better for the economy?

      One would have to see data, but I think Mercedes is the tougher argument. The law school, for the reasons I noted at 9:32, will spend the money on labor. They will pay assistant deputy deans of X and librarians and groundskeepers and food service personnel and of course professors, who will then spend money on McDonald's and iPads and Mercedeses. Mercedes, on the other hand, would distribute that money to managers and shareholders (either via dividends, buybacks, or simply having more CoH and therefore a higher stock price) or make investments in streamlining their operation -- i.e., they are unlikely to invest marginal dollars in labor. Now, someone has to design and make those robots etc., and shareholders may spend marginal dollars (rich managers probably less so), so this clearly has some beneficial impact, but the point is one should not simply assume that shifting consumption towards services like education (and health care) is a net negative for the economy. This of course leaves aside the fact that Mercedes is foreign, whereas universities are (their PR notwithstanding) almost wholly local in their effect on employment. Again, this assumes your premise that JD education = pure consumption alone and not an investment in the degree-holder's future.

      The point is simple: DJM's post fails to provide reasons to believe that student loans are digging a trench under the macroeconomy. We do have a curious way of financing education and picking priorities in postsecondary education, so let's talk about those issues (the original focus of the blog) or else see evidence of a net drop in demand as opposed to a simple reallocation of it.

      -9:32

      Delete
    7. @7:49, the flaw in your argument is that someone has to pay for the machinery being dumped in the North Sea. Germany did not become the powerhouse of Europe by deep-sixing their GNP off of barges. Or by running law schools, overpaying law professors, and producing law graduates for which there is no demand.

      Delete
    8. Indeed, it only became a powerhouse after it stopped

      Delete
    9. "One would have to see data, but I think Mercedes is the tougher argument. The law school, for the reasons I noted at 9:32, will spend the money on labor."

      Wrong. They will spend some on labor, and some they will pour into their endowments, which are major Wall Street clients.

      Delete
    10. Please see the end of the comments for my thoughts on this.

      Delete
  6. It always fascinates me when I am reading articles that has something to do with the law.
    Car Accident Lawyer Macon

    ReplyDelete
  7. Great post DJM, very interesting for people who have studied business or economics. I hope you respond to Anon@9:32, he/she makes some good points, but I think they can be ultimately rebutted due to the inefficiency of the system/educational industrial complex.

    ReplyDelete
  8. @9:32pm:

    You missed DJM's entire point. It's not that one kind of spending is better than the other. The difference is that buying the JD might finance present spending for universities at the cost of 20 YEARS of spending in the future. In other words, it's not a simple analysis, as you would like to put it of which one is better. It's more of an time analysis: we are funding current spending by using future spending.

    Under your analysis, the more appropriate analogy would be between 2 present forms of spending: say, funding colleges versus other consumer products. But under IBR, we are not siphoning the money spend on consumer products to universities. We are siphoning the money of FUTURE spending (to the tune of 20 years) to spend on colleges today. In short, we are financing the lifestyles of the professors and all the businesses that abound from colleges with funds not taken from somewhere else, but from someplace else: the future. And we will only discover the true impact 20 years from now when it will be far too late to change the course...

    ReplyDelete
    Replies
    1. Spot on.

      And we're not just doing it in education. All that stimulus spending, defense spending, tax cut spending, medicare spending, medicaid spending, war spending, tax loophole spending. We're paying for all of it on the credit card. Current consumption, future payment.

      And that, my friends, is why everyone in my generation HATES baby boomers and will jam it to them in their old age.

      Delete
  9. Excellent analysis, DJM. I just wish more people would read this. They really need to hear this stuff.

    ReplyDelete
    Replies
    1. Nobody actually reads the post. We just come to see the asinine comments.

      Mr. Infinity

      Delete
    2. Speaking of asininity...why don't you go back to writing that pathetic shill blog of yours?

      Oh...that's right.

      Delete
  10. There is no reason why an education should be so expensive that something like IBR was even created in the first place. Using the future to pay for a dysfunctional present is the equivalent of stocks bought on margin as collateral which became worthless during the Depression.

    ReplyDelete
    Replies
    1. Or of our approach to government spending and the taxes to pay for it?

      Delete
  11. Barack Obama is the Golden Star Child of U.S. higher education.

    There is no way he would do anything against the financial or reputational interests of the higher ed industry.

    I doubt Obama understands these problems exist.

    ReplyDelete
    Replies
    1. Actually I sort of agree with you ... and indeed I would say the same is true of most people in the policy system, Democrat or Republican - they are golden children whose colleagues, friends and contacts are equally gilded.

      It is an odd issue - someone like Obama can work hard and encounter the struggling poor and lower middle class - but actually does not interact much if at all with those who graduated from second or third tier law schools or colleges. Their vision flips from the upper rung of the ladder right to the bottom, ignoring the broken rungs just below them.

      Delete
    2. "Actually I sort of agree with you ... and indeed I would say the same is true of most people in the policy system, Democrat or Republican - they are golden children whose colleagues, friends and contacts are equally gilded."

      Do you have the faintest clue as to Obama's childhood and background?

      Delete
    3. Whatever Obama's "childhood and background," he's hanging out with [and promoting policies that favor] the rich bankers now.

      Delete
    4. I can understand Obama. The idea of improving "access" to higher education has always been a central theme of his politics. In current political discourse "access" is divorced from "cost" (I think they are intertwined practically, but that's irrelevant to whether it's consistent with Obama's other positions and progressive ideology generally).

      Romney's position is actually what is more at odds with his public ideology. Here we have a perfect example of government interference in a free market driving prices up- in effect subsidizing an entire industry. Not only that, the major beneficiaries are progressive liberals. He's obviously not concerned about access as a policy goal (just borrow money from your parents!)

      So what does he do? He wants to end IBR, but supports the current student loan regime. That's because his big donors include for profits like Full Sail University.

      The student loan industry is entrenched like no other. With other industries like autos, energy, defense, you at least have major party figures on the other side coming out against subsidies. Here you have most of both parties squarely in the pockets of the industry, albeit for different reasons.

      Delete
  12. "we're blithely ignoring a system that will take up to 10% out of middle-class incomes for years to come."

    its an investment for your future. if you are not willing to invest in your future, i sure as hell dont want to.

    ReplyDelete
    Replies
    1. I think what you fail to realize is that education debt is eating up a quickly increasing percentage of a young professional's take home pay. Of course people should invest in themselves and their futures, but if IBR is utilized, then the taxpayer is on the hook for what the student doesn't pay back. On the flip side, if young professionals don't have IBR and pay 30% or 40% or even 50% of their take home pay on student loans, then they won't be spending money on saving, investing, housing, consumer goods, etc. and those industries will fall prey to the education industry. Investing in the future is good, but if education costs keep climbing so much faster than inflation, then they will cripple all other areas of the economy.

      Delete
    2. It's an investment for the country's future, and it's being done in a silly way. Get the government involved in capping tuition.

      Delete
  13. i dont think you can have a good jobs discussion without discussing the millions of illegal aliens in this country taking jobs from those lawfully in this country.

    while most have low paying jobs, there are some solidly middle class or even upper middle class illegals in this country. i think florida had someone who wanted to be an attorney who was probably going to be licensed.

    people who have no business going to colleg are "forced" to go to college to try to get jobs that are simply not qualified for because the jobs that they are qualified for are taken over by the illegal aliens in this country.

    get rid of the illegals are there will be millions of jobs available for those who are here legally.

    ReplyDelete
    Replies
    1. Are you under the impression, friend who cannot use a shift key, that if undocumented migrant workers and housekeepers are deported that every young member of the bar who graduated from Nova Southeastern (or some such place) will suddenly be able to find a job that can provide a living wage while servicing $200,000 in debt?

      Delete
    2. I'm not 5:18, but I'd observe that if all the undocumented migrant workers and housekeepers were deported, folks who currently EMPLOY those people might be forced to pay a higher wage for that work. Illegals frequently accept lower pay because of the fear of being reported. If employers had to pay more, they'd either not hire [crops rotting in field, but for how long?] or pay more. That might induce some of those who mythically "won't take jobs like that" to do so, and so on up the employment food chain.

      I don't think there are ANY jobs -- other than those few in Big Law -- that will enable the Nova Southeastern grad to service his debt, but it's a start.

      Delete
  14. "Degree holders make up our middle and upper-middle classes. They are the consumers who renovate houses, buy hybrid cars, wait in line for the latest iPad, and pay for their kids' orthodontic work. That demand powers the U.S. economy. When the middle and upper-middle classes have less to spend, the economy suffers"

    well that's not quite true. WE need people to stop spending money and start saving. During the housing bubble people spend all this money because of the phony wealth they thought they had from their house wealth that wasn't real. Demand is unlimited in our economy, what's missing is production and savings.

    ReplyDelete
    Replies
    1. If consumers were to stop spending money in favor of saving it, that would seem to limit their demand.

      Delete
    2. Save in what? Saving money in a money market creates a yield that is lower than the inflation of food prices. Savers are getting punished now.

      Savers will be driven to INVEST into small and micro-cap stocks via Scottrade and Ameritrade and take a spin with Casino capitalism.

      Welcome to the new economic paradigm.

      Funny how the ones that make it will pat themselves on the back like they are geniuses, when they could have just as easily fallen flat on their face like an over-indebted law school grad with no job.

      Delete
    3. You are exactly, 100% wrong. The current recession is caused by a lack of demand. People are not spending money, they are hoarding it. When everyone starts hoarding money, we have a recession/depression.

      Those who believe that the confidence fairy will waive her magic want and bestow riches upon us for causing unnecessary suffering are severely mistaken. One just has to see the effects austerity has had on European economies to appreciate the magnitude of the mistake.

      High Plains Lawyer

      Delete
  15. What you are missing is the "normal" has always been NO economic growth. A growing economy is a rare event. We are returning to "normal."

    ReplyDelete
  16. The whole model of imposing the costs of education entirely upon students is seriously flawed. IBR is just a bandaid fix and really does not address the underlying problems.

    There is little question that debt overhang is a major contributor to our current economic woes. The politicians, Democrat and Republican alike, just keep on throwing more fuel on the fire.

    For example, in 2005, when Congress effectively limited Chapter 7 relief to those making less than the median income, they guaranteed that the middle and upper middle class income earners would not be able to shake their debt. Then to add insult to injury, many of these same people discovered that their homes were underwater.

    We are seeing the same ass backwards thinking with respect to student loan debt. If someone's student loan debt is sufficiently out of control to the point where they need IBR, it is also clear that allowing a Chapter 7 discharge of that debt is actually a preferable solution to the problem.

    The Chapter 7 discharge gives those graduates a fresh start and frees them from a lifelong debt overhang. Freeing those students of that debt is not unjustly enriching them; it is freeing them from a lifelong burden they never will be able to pay off.

    The elimination of debt overhangs is why bankruptcy laws exist. It's why bankruptcy and debt forgiveness date not only from the beginning of our republic, but from the beginning of recorded time as well. (In Biblical times, creditors were to forgive debt every seven years.)

    It's sad that we. as a society, have to relearn these lessons over and over again. A lot of people get hurt in the process.

    High Plains Lawyer

    ReplyDelete
  17. we haven't really had any real growth in this country for decades. WE just been spending borrowed money from outher countries(china, japan and so on). last time we had real growth was after WW2 until about the breakdown of the bretton woods sytem. it's been mostly just spending and borrowing and no savings and production.

    ReplyDelete
    Replies
    1. Where do you people get this stuff?!

      Thomas Malthus was correct with respect to the 40 centuries which preceded him but has proven to be flat ass wrong about the two centuries which followed.

      The United States has experienced dramatic economic growth since its creation. Our standards of living are much higher than they were in 1789, in just about every respect. In particular, the level of economic growth since the end of WWII is unprecedented.

      The problem is that for the past generation, most of the economic growth has been siphoned off by the top 1%, while the income of the middle class has remained stagnant or even declined.

      High Plains Lawyer

      Delete
    2. What, exactly, does 'siphoned off' mean?

      Thought exercise: What is stopping the average factory worker in America from demanding more wages for his services, and thereby 'siphoning' some wealth back to his own checking account?

      Hint: The answer is not 'the 1%'. The answer is 'an entire world of hungry, eager people willing to work harder and longer for less money, in a system where physical distance is increasingly irrelevant, due to the power of communication technology'.

      In essence, the American middle class has had its income 'siphoned' off by hungry people in China, Bangladesh, India, etc. Whether a company pays its C-suite zero dollars or 20 million dollars is immaterial, when compared to the competitive advantage of paying your line workers (and white-collar staff) a tenth (or less) of what you pay Americans.

      The reason top incomes have skyrocketed is directly related: communications connectivity on a global scale greatly increases the ability of people with elite skills to create value. Unfortunately, for everyone else, it puts us and our relatively undifferentiated abilities into direct competition with 6 billion similar people, most of whom consider 'middle class' to mean having some idea where next week's food will come from, not whether one can afford to buy a new Honda Accord.

      The same goes for lawyers. The reason law wages are plummeting is not because we need to find more money to ensure the partners at the prestigious firm of Big, Money, & Influence can draw their millions. It's because there is a huge supply of people willing to do the same work for a pittance in wages.

      Delete
    3. "Elite skills"...LOFL.

      Delete
  18. "Are you under the impression, friend who cannot use a shift key, that if undocumented migrant workers and housekeepers are deported that every young member of the bar who graduated from Nova Southeastern (or some such place) will suddenly be able to find a job that can provide a living wage while servicing $200,000 in debt?"

    one must look outside one's small little box at times to see the big picture. if the housekeeper was deported, the welfare momma could get a job and support the economy rather than be a drain on our society. billions of our dollars are shipped off to support residents of other countries. keep the money here and let it help our economy. maybe joe who doesnt have the brain power to go to most colleges would be able to find an appropriate job for him and not think college and student loans are hios only option.

    an increase in business and the economy in general would cause an increase in the need for legal work. obviously not enough to offset the far too many law school graduates. that issue willgo away if and only if government gets out of the student loan business.

    "undocumented." lol. they are here illegally. have some respect for the laws of the country in which you live.

    ReplyDelete
  19. How to best finance education is a complicated topic that I do not fully understand. Thus, I should probably assert a strong opinion: hmm, I don't understand how family budgeting works, just how government budgeting does. But since the government is like a family, I suggest that you families out there model your personal financing after the government's :)

    ReplyDelete
  20. "The problem is that for the past generation, most of the economic growth has been siphoned off by the top 1%, while the income of the middle class has remained stagnant or even declined."

    I have had about 10 jobs in my life. Every person who hired was a 1% or a fortune 100 company. I for one thank the 1% for their contribution to society.

    ReplyDelete
    Replies
    1. This shows a basic misconception about how hiring works. Rich people don't hire non-rich people as a form of charity. Companies don't hire people because they are nice or because they have extra money lying around. Companies hire because they have customers or clients who DEMAND services or goods that have to be created by new employees. It's customer demand that gets companies to hire new employees. More people want to buy cars, then we better hire more people to build them. If the CEO of Ford hired you to manage a factory, it's because he needed that factory working well to create more cars because people were buying cars - and those people were not the 1%. The CEO didn't hire you because he's a nice guy. If customers (the majority of society) are too poor to afford goods and services, then those CEOs aren't going to be hiring people to provide and create those goods and services.

      Delete
  21. "This shows a basic misconception about how hiring works."

    Its the rich people who generally work hard to be in a positiop to hire or not hire based on demand. but its generally the case that the people who own the businesses are rich and well off.

    i have never been hired by someone in the bottom lets say 95% of income. they generally are not owning a business, whether there is demand or not.

    Therefore, I continue to be greatful towards the 1% who are in a position to hire when there is sufficient demand.

    I dont hate the rich like some folks do. I have always wanted to join the ranks of the 1%.

    ReplyDelete
    Replies
    1. It's understandable to admire the very rich for their success. Certainly. But it is just an indisputable fact that extreme income inequality stifles economic growth.

      If extreme inequality (and one can argue that the very rich deserve every penny they have - but that is a separate issue) actually aided economic growth, then Czarist Russia in 1900 would enjoyed a flourishing economy that was good for everyone, and the United States in 1955 would have been a barren wasteland.

      Delete
    2. Its not about hating on the rich, you simplistic dolt. Its about what is best for all of society and for those who earn the most to pay the most back in taxes. Also, have you heard of regulatory capture? TARP? Citizens United? Robo-signing? Capital gains tax rates? I could go on forever.

      The rich don't give a fuck about you...you're just a tool to a better end for them and they would(and have) hire someone in China or India if they can do the job cheaper. And they would eliminate all minimum wage laws if they could.

      The fuck outta here.

      Delete
  22. Congress actually views SL interest as a future source of revenue. It is included as a line item in future budget projections. Except, with abosolutely no underwriting standards whatsoever, the bozos never took the time to figure out if any of this money will ever be paid back. IBR allows Congress to, in effect, mask bad SL debt because it keeps SL debtors from defaulting. But, at the end of day, a bad debt is a bad debt, and after 20 years or whatever, there is still a massive writeoff the taxpayer has to swallow.

    Not only are we financing the present with future incomes, we are doing it with borrowed money, much of which will never be paid back and will simply be written off in due time. This clearly not sustainable and a financial trainwreck in the making. I don't think we could get a worse policy if we tried.

    ReplyDelete
  23. "The money you send to the Dept of Ed won't buy new furniture or running shoes."

    Yeah, but it will buy Joan King a new blouse at Saks 5th avenue.

    ReplyDelete
  24. I won't vote this election. Boomers can all have a little of what I'm having. They've already got the shit eating grin, so eat up. I'm not going to put in any effort to save you from yourselves.

    ReplyDelete
  25. 8:45 - You are exactly right. While both political parties are culpable, just try having a conservation with a Democratic politician that the student loan programs are one of the most toxic programs to exist and in fact are and will do great damage to middle class people. The response obtained is along the lines of "What, are you against people going to college"? The degree of cognitive dissonance is immense. I wonder what principled progressives must be thinking. It is not easy to accept that a big government program designed to help people obtain an education (never mind whether the education has value) will do enormous economic harm.

    ReplyDelete
  26. Immigrants cause far more damage than IBR, in terms of prison, free health-care, policing, tax fraud, etc.

    ReplyDelete
    Replies
    1. Truth isn't bigotry, my friend.

      Delete
    2. SmallTownBoy shows his true colors! Big day.

      Delete
    3. No. Truth isn't bigotry. But bigotry is.

      Delete
    4. True colors = not brainwashed by the same PC educational racket that is running tha law school scam-oh, you trust themonimmigration but not tuition?? Smart.

      Delete
    5. Why are some people so willing to shut down conversation that they'll throw the "bigot" or "racist" label out whenever they see a comment that doesn't cotton to their worldview?

      Take a look at what STB wrote. Is he right? (No, or at least not by half in my worldview). Did he say that illegal immigrants were sub-human or some such? (No, not that I can tell.)

      So whaddup with "bigot" label every time you see something written you'd rather not discuss?

      Grow TF up.

      Delete
    6. Fuck off, 10:47AM.

      Three of the four things he mentioned were prison, policing and fraud. I don't think calling him a bigot for demonstrating his bigotry is a childish thing to do.

      Delete
    7. Sooo, 11:06, your attempt to argue you're not childish ... .... is to throw a widdle temper tantrum?

      Is s/he incorrect about what s/he said? (I do not know the answer to this question.)

      But I still don't see why, even if correct, this is a demonstration of bigotry. Unless s/he has proof that its worldview is wrong, I mean.

      Delete
    8. As an interpretive matter, it strikes me as unlikely that SmallTownBoy is a she, but thanks for the sensible thoughts, 11:19 & 10:47!

      Delete
  27. immigrants do NOT cause more damage. That's a myth. yes the welfare attraction has to be cut off but imagine if dumped all the illegal immigrants.. Who wwould be doing all the work that they are doing?? No one.. we would be worse off.

    ReplyDelete
    Replies
    1. This is the oldest dumbest myth about illegal immigrants. Somebody would have to do that work and employers would simply have to raise wages until someone wanted to do it and also be able to afford to lice decently in this country. But its cool with you that illegal immigrants live lives of poverty? Must be nice to be a bleeding heart liberal (and this is coming from a hardcore progressive).

      Delete
  28. Yeah it would be a disaster if restauarnt meals cost 10% more and people mowed their own lawns. How could we possibly go on?

    ReplyDelete
    Replies
    1. You are a very, very strange left-winger.

      Delete
    2. Sorry, I've been gone for a while. Yes, you are a very strange left-winger.

      If you view that as a "thank-able" statement, then I am very happy to say "you are welcome".

      By the way - student loans are still not likenable to taxes.

      :-)

      Delete
  29. Deporting all the illegals is an impractical solution to a different problem than what we're discussing here.

    ReplyDelete
    Replies
    1. " impractical solution "


      I hear this chanted as a mantra repetitively.

      Just why, in no loose terms, is it impractical?

      A journey of a thousand miles begins with a single step.


      As for, "different problem than what we're discussing here" - agreed. Guys above got a bit OT, diddneh?

      Delete
    2. There 10M+ illegals in America (according to DHS). The real number is probably higher. How exactly do you plan to deport them all?

      Above poster was implying that if only we get rid of all the illegals, all these jobs will open up and the future will be bright again for the thousands of broke law school graduates.


      Delete
    3. "How do you plan to deport them"

      As mentioned, it is said that a journey of a thousand miles begins with a single step.

      Logistically speaking, though, it's not even close to being the insurmountable obstacle that those who disfavor deportation pretend it to be.

      Delete
  30. Anon @ 9:32, thank you for your thoughtful comments--these are difficult (and serious) issues to sort through. I agree that, for purposes of this post, we can put distributive issues aside. But there are still features of the student loan system that are very worrisome; many of the other commenters have already pointed to them. To me, the key problems lie in the length of the loans, their size, and the fact that we are layering them on top of other forms of debt (both public and private).

    Car loans typically last 3-7 years, and the buyer may trade in the car before the loan period even ends. There is some shifting of future income to the present, but it is much less dramatic than with student loans. The same is true of other forms of consumer credit.

    The sheer size of student loans is new and escalating; I don't think policymakers and economists have accounted for their impact on the future economy. It's absolutely true that these loans have stimulated the economy for the last ten years, but now it's payback time. What happens now? I find it hard to avoid the conclusion that there will be less consumer spending over the next 20 years--and our economy is far from recovered at this point.

    I think we will see the adverse effects even in spending by the university employees you mention. The non-faculty positions on university campuses are now major middle-class occupations. But those are precisely the people with educational loans; it's hard to get a university position without at least a BA.

    For the last twenty years, universities were hiring more of those staff, which in turn created consumers with money to spend. Most of those staff had graduated before the tuition wars, so they didn't carry heavy loans; they were able to spend their middle-class incomes. But the percentage of university staff with student loan debt is rising every year. We're not raising salaries for those non-faculty positions; in fact, universities are creating more contingent, and lower paid jobs given the surfeit of unemployed new grads. Low or stagnant wages plus higher loan debt means that these university staff have much less to feed the economy going forward.

    It comes down to the central point I raised: Would it be a good idea to increase middle-class tax rates by 10% for the next twenty years? Or even 5%? Taxes also feed the economy through government spending (some of which even goes to educational institutions), but economists worry a lot about the accompanying decrease in consumer spending. If that's a concern, then I think student loans and IBR are as well.

    ReplyDelete
    Replies
    1. Dear DJM:

      Thank you for your thoughtful response. I'm still not sure high student debt impedes aggregate demand once the benefits and IBR are factored in.

      Let's back up a moment. There are many ways to finance education. One is to subsidize the cost of providing it and charge low prices so as to increase access and spread the cost across the population, not only the users of the service. This is the public services model and it's what European (and formerly US public) universities follow. It has various and well-known costs and benefits.

      Another way is for schools to charge what the market will bear and for the government to use subsidies to encourage consumption, generally at a higher net price to the consumer. We could exempt universities from taxes, subsidize and guarantee loans to students, exempt interest payments from taxes, or forgive loans. We now do all these things. Notably, this is also a key difference between our health care model and Europe's. Again, the costs and benefits to the intended beneficiaries of the system are reasonably well-known.

      But moving from micro to macro is hard. Our current educational and health care systems are no doubt wasteful and result in fewer people getting the underlying service (because the cost is still very high despite subsidies) and those that do incurring higher costs. However, I am not sure higher costs (in either area but let's stick with education) is going to reduce aggregate demand in the way you suggest. I think that is a very important econ research question that the Fed among others should tackle (though Bernanke himself has warned about student loan debt).

      One place the "trench" argument loses me is the assumption that people will reduce discretionary spending in response to having less discretionary income. They may. Or, they may reduce savings and/or increase work hours, to the extent that that is an option (e.g., in a healthier economy or region or sector), trading time for money. The recent data points I have seen on this are all over the place, in part because we're still in a crisis. It's unclear what happens long-term when a single category of expenses rises; people have options and when working more or saving less is an option they don't necessarily stick to set income/expense patterns.

      Second, we have my earlier point about reallocating demand from consumer products (and other discretionary purchases) to education. I think this would be a similarly fruitful area for empirical economic research: does the economic impact of a dollar spent at a Mercedes dealer exceed that of a dollar spent on tuition? Research on fiscal multipliers suggests government stimulus spending has hugely positive effects, exceeding what comparable amounts of private spending ordinarily accomplish, but I don't think it's clear that government subsidies to education are equal in this respect. They may still be pretty good, however, and better than consumer purchases. We (or at least I) don't really know.

      You also mention that working for a university is not as good deal as it once was. I am hard pressed to think of a sector where this is not the case; during a tight labor market, working conditions (including salaries) improve, and we don't have one now. That doesn't undermine the point that universities as an aggregate are responsible for a huge amount of almost purely domestic economic
      activity, however, including employment.

      We may ultimately have to agree to disagree, but in the meantime I would like to see more research on the important points you raise. It is possible that our current method of financing education is both inefficient and creates lots of jobs. In fact, that is almost certain.

      The question is whether it's a net negative for the economy as a whole, and with IBR spreading grads' true debt obligations along a far wider base - the US taxpayer overall, in a system that essentially socializes debt on the back end - I'm not sure.

      Delete
    2. DJM, you say:

      Taxes also feed the economy through government spending (some of which even goes to educational institutions),

      It's puzzling to me that no one ever looks at the "European" solution. Why not have "government spending" purchase some things [education, health care, day care] so that individual consumers don't have to spend THEIR money on them.?

      At this point, why aren't we looking at a "European" system of higher taxes that pay for many societal benefits [see above] thus freeing a portion of consumers' income for other purchases?

      i, for one, would be happy to pay higher taxes and not have to worry about run-away health care costs, day care and maternity leave benefits, higher education, etc.

      Delete
  31. Professor Campos this is hardly the worst - you and DJM have been compared to the Gestapo and NKVD on Prawfsblog

    "To shift the context about as far as possible from that of present day U.S. law professors, the extreme cases are those in which authorities literally kill the scholars and other educated elites--Poland at the start of WWII, Cambodia under Pol Pot. In other cases, faculty are merely fired, or intimidated into joining or disavowing some ideological affiliation, etc. Eastern Europe experienced much of this in the postwar era; we had a lesser but noteworthy variant in the era of Red Scares. Democracies need among other things vibrant civil societies and independent intellectuals, as dictators recognized. Granted, these are references to officials with particularly extreme sensitivity to "scholarly impact." Still, this, too, suggests that the value of scholarship is more collective and amorphous than individual and measureable."

    http://prawfsblawg.blogs.com/prawfsblawg/2012/10/defending-scholarship-contd.html#comments

    I did actually respond with a pretty outraged and as usual dyslexic post or too - as did "FOARP" - in a display of their motto in action

    "Where Intellectual Honesty Has (Almost Always) Trumped Partisanship -- Albeit in a Kind of Boring Way Until Recently -- Since 2005"

    Prawfsblog deleted the entire line of some 11 critical postings - leaving by the way just the astonishing lickassly:

    "This is a very smart comment. Thank you.

    Posted by: David | Oct 7, 2012 2:22:31 AM"

    ReplyDelete
    Replies
    1. Prawfsblawg is not about intellectual honesty or academic freedom. It's all about conformity.

      Delete
    2. Here, FTFY: "ENFORCED" conformity. They delete posts that are not ideologically suited to their blog. And I never, ever use foul language or personally attack posters. Yet the still routinely delete my comments.

      Delete
  32. Researching and getting referral is a good way to find a
    Attorney Macon

    ReplyDelete

Note: Only a member of this blog may post a comment.