Friday, March 9, 2012

Krugman, College, and the Higher Education Bubble

Paul Krugman claims (implausibly) that he was the first (or one of the first) economists to point out that the hot housing market really was a financial bubble. Of course, Krugman two years earlier had claimed that Alan Greenspan would have to create a housing bubble in order to revive the economy. (Krugman claims that he was just being tongue-in-cheek, and I will let readers decide for themselves.)

In 2004, Mark Thornton wrote:
Signs of a "new era" in housing are everywhere. Housing construction is taking place at record rates. New records for real estate prices are being set across the country, especially on the east and west coasts. Booming home prices and record low interest rates are allowing homeowners to refinance their mortgages, "extract equity" to increase their spending, and lower their monthly payment! As one loan officer explained to me: "It's almost too good to be true."

In fact, it is too good to be true. What the prophets of the new housing paradigm don't discuss is that real estate markets have experienced similar cycles in the past and that periods described as new paradigms are often followed by periods of distress in real estate markets, including foreclosure sales, bankruptcy and bank failures.
Granted, Thornton is from the Austrian School, so he can't possibly know anything about economics or what happens when the Fed forces down interest rates. And given that Austrians are so ignorant about everything, I will use another Austrian, Doug French, to give a counterpoint to Krugman's latest missive about higher education.

Krugman's latest column attacks Republicans for questioning ANYTHING about higher education, claiming that anyone who might have such thoughts is championing ignorance. I hate to say it, but it is not just the Republicans who are asking some serious questions about what is happening and whether or not our system of higher education is sustainable.

Krugman writes:
Here’s what the candidate told the student: “Don’t just go to one that has the highest price. Go to one that has a little lower price where you can get a good education. And, hopefully, you’ll find that. And don’t expect the government to forgive the debt that you take on.”

Wow. So much for America’s tradition of providing student aid. And Mr. Romney’s remarks were even more callous and destructive than you may be aware, given what’s been happening lately to American higher education.
I hate to say it, but most "student aid" is in the form of loans, and when one takes a student loan, their is no divorce from it until every farthing is repaid. (Student loans cannot, by law, be figured into bankruptcy proceedings, so if one owes huge amounts of money and cannot pay it back, tough luck. The government will make your life miserable, and in a recent case in California, government agents literally sent a SWAT team to a house where a man's estranged wife was behind on her student loan payments.)

Krugman goes on to blame Republicans and anyone else who refuses to submit to the fantasy that state governments can continue to spend at Krugman-approved levels, including continuing payments to public colleges and universities at pre-depression levels. However, because he claims that the only thing that is needed solve the problems of higher education is for taxpayers to throw more money at it, he ignores the real underlying financial crisis that involves higher education.

Doug French knows otherwise. In a recent article, he takes on what he calls the "Higher Education Bubble" and throws cold water on the fantasies that Krugman is trying to weave. He writes:
Like all booms, higher education has been fueled by credit. In June of last year, total student-loan debt exceeded total credit-card debt outstanding for the first time, totaling more than $900 billion.

All of this credit has pushed the average cost of tuition up 440 percent in the last 25 years, more than four times the rate of inflation. But while the factors of production on campus have been bid up, just as they are in any other asset boom, the return on investment is a bust. In 1992, there were 5.1 million mal-employed college graduates. By 2008, the number was 17 million.
With Krugman, the answer is simplistic: throw more money into the higher education fire and out of it will appear a wonderful, golden calf.

French, on the other hand, sees the trends and the hard numbers to boot. And while Krugman might claim to have been a prophet on the housing bubble, he clearly is blind to what is happening in higher education. And when someone tries to point out the realities, Krugman does what Krugman always does: he makes insults and partisan statements.

I will go further: higher education really has become a consumer good instead of a producer's good for many people. As a college professor, I can attest to that last statement, as much as I wish that Krugman were correct. But he is not.

30 comments:

Dennis said...

Krugman cannot seem to understand that subsidies always lead to higher costs due to the phenomenon of rent-seeking. It's true of subsidies for any industry. This attitude sets in place a vicious cycle: higher education costs necessitate ever higher subsidies, which in turn drive up costs as the service providers take advantage of all the largesse. Students are forced to rack up ever larger debts as time progresses, and often pay them back by working at jobs that are unrelated to their degree. At some point, they won't be able to pay them back and defaults will collapse the whole sordid house of cards.

Lord Keynes said...

"The government will make your life miserable, and in a recent case in California, government agents literally sent a SWAT team to a house where a man's estranged wife was behind on her student loan payments.)"

The very link you used in this sentence shows that your statement is false:

“While it was reported in local media that the search was related to a defaulted student loan, that is incorrect. This is related to a criminal investigation. The Inspector General’s Office does not execute search warrants for late loan payments,” Hamilton said. “Because this is an ongoing criminal investigation, we can’t comment on the specifics of the case.”

http://www.rawstory.com/rawreplay/2011/06/swat-team-busts-into-house-over-student-loan-default/

Are you going to correct this false statement?

William L. Anderson said...

So, you believe that the SWAT team was necessary for someone who was not armed and who posed no threat to the public? Oh, that's right, it had to be justified. The Obama administration authorized it. Therefore, it must be good.

Lord Keynes said...

"So, you believe that the SWAT team was necessary for someone who was not armed and who posed no threat to the public? Oh, that's right, it had to be justified."

LOL.. This loaded question is irrelevant. We know NOTHING about the facts of case.

You are a master of rhetorical tricks and logical fallacies, aren't you.

Anyway, I said that the very link you cite above demonstrates that your assertion is wrong: SWAT teams and search warrants are not used against people with late loan payments.

Again: are you going to correct your blatantly false statement?

Also, I notice you continue to dodge the question how is it that a government deficit covered with dollar-for-dollar bond issues inflates the money supply.

macroman said...

I would think having a sense of history would help. We haven,t had debtor prisons would at least a 100 years, so knowing that, one would immediately suspect there is something wrong with the claim that a swat team was sent after someone because of student loan arrears. Then one would read the article, like LK did, and avoid embarrassing oneself by repeating the silly claim, even tho it fitted perfectly with one,s own view of the world.

macroman said...

Looking further into the imaginary swat team student loan case, according to the tv reporters the search warrant contained the mans name as well as his ex wife. It was part of a fraud investigation, no debt collection procedure. It was not a swat team but agents of the education department. Just because the guy says "they wanted my wife not me" doesn't mean it is true. Your link wasn't even to a news station but some private site. And anyway, do you believe everything you read in the papers? it would take hours of work to check all this.

William L. Anderson said...

Notice how the Keynesians always support the police state. Whatever violence the police commit is OK.

Having dealt with the realities of police misconduct, not to mention prosecutorial misconduct, it interests me that now that Democrats run the administration, many of the so-called civil libertarians suddenly have no problem with the zillions of SWAT raids done every year, police lying on the witness stand (called "testilying" by cops), and massive prosecutorial misconduct.

But, then, Keynesianism is a religion that holds that state power is sacred and that the state can force an economy into prosperity. So, the police state figures into that equation.

macroman said...

Prof anderson, What I and I think LK are defending is the idea of truth in blogging, or some measure of fact checking. When you make allegations unsupported by facts, and sweeping statements about keynesian motives, the less reason anyone has to believe anything you say. It would look much better if you merely said, ok I made a mistake on this one, won't happen again.

ekeyra said...

macro, LK,

Yea dont bother to actually address the entire article of exploding student debt and the ridiculous solution of throwing public money at a crumbling higher education system, just take cheap shots at an off hand comment about a swat team. Then try to play it off as concern for integrity instead of the petty bullshit it truly is.

This is a new low for both of you.

Tel said...

Macroman, if you believe in truth in blogging then take a moment to read the search warrant yourself... it's published online.

The warrant was requested by the U.S. Department of Education, and authorizes search of a specific premises. It does not include anyone's name other than the Judge and the investigating agent.

There are some pages missing so presumably a second premises was also searched, because this is mentioned in attachment B. The suspected violations listed are:

* Financial Aid Fraud.
* Conspiracy
* Theft of Government Funds
* False Statement to Government Agency
* Wire Fraud

The list of "items to be seized" is long and broad, but "student aid", "student loans" and "fraud" get mentioned often.

What exactly constitutes "theft of government funds" or "financial aid fraud" could be a whole lot of things... probably more serious than simply non-payment, but you never know. I guess we either see more of these things happening or we don't. I expect a lot more defaults happening.

As for how violent the officers need to be in order to search a place, I guess that's a matter for common community standards, and in this day and age as long as no one gets killed, no one really cares about police giving people a bit of a rough over. Doesn't even make the news.

macroman said...

Ekeyra, I don't know what my views are on the higher education explosion. Would need to read some reasoned analysis. Anderson may be right, but once I see that bs about the swat team I figure it is not worth reading the rest of the piece. It is unlikely to be be reasoned analysis.

Mike M said...

LK : Also, I notice you continue to dodge the question how is it that a government deficit covered with dollar-for-dollar bond issues inflates the money supply.

Are you naturally obtuse or do u have to work at it?

Fiat money is debt. Expand it and it is inflationary. To the extent existing stock is not destroyed is inflationary. Whether it has negative consequences for consumers is dependent on a host of factors not the least of which is demand for the currency in question.

Demand for the USD is moving to the downside not the upside. We are in the midst of watching the end game of western welfare state fiat currencies. The monetary system will be reorganized. The statists and crony capitalists have wrecked the system. They are burning it down and trying to usher in a full fascist state.
So LK, you go ahead and wallow in your smug, pseudo intellectualism. You’re going to get run over. I take no pleasure in seeing it. From a humanitarian perspective I hope you and your ilk have protected yourself. Somehow I doubt it however.

frediano said...

In the 70s, four years at even Princeton was only about $20k, which correlated easily with a yearly starting salary. Debt-to-income was little more than a soft on-ramp to a credit history.

Today, not so much.

In between, research universities were newly able to cash in on patent streams, and yet... tuition skyrocketed. Subsidies for education have never been greater, and yet... costs are going through the roof.

Harvard, Princeton, Yale have endowments that rival small countries, in the tens of billions. Tiny Princeton pushes out maybe 1000 undergrads a year--like a large high school.

Yale, for years, has made noise about offering free tuition, to compete for the best and brightest. The other Ivies would soon follow, and other schools with smaller endowments would at least have some drag on rising tuition costs in order to compete.

And yet, it never happens. The answer is, price fixing. Harvard, as a corporation, owns half of Rt 128. Bidness is good. Why should they?

Modern debt-to-income ratios have skyrocketed compared to the 70s.

Quality demand is up, quality supply not so much, any port in a storm will do.

What species does this to their young?

macroman said...

Tel: The warrant was requested by the U.S. Department of Education, and authorizes search of a specific premises. It does not include anyone's name other than the Judge and the investigating agent.

That is interesting. My (mis)-information came from a TV reporter holding a piece of paper in her hand and saying: here is the warrant given to the man, which he gave to us, it includes his name and his ex-wife's name.

The physical evidence of violence is a broken door. The man says in his news statement to the TV cameras, "I told 'em to wait, I couldn't get the door open". If I was searching a place, with a warrant, and the occupant says he can't open the door, my suspicious mind thinks he is busy hinding the evidence, and breaking the door may be the proportinate response. (I can see it now - macroman and keynesians and liberals approve of the police state breaking down private doors whenever they like).

The evidence for the claim that a SWAT team were searching the wrong house came from statements by the occupant of the house to TV cameras. So what are you going to tell the neighbors when you house is searched? Yes, they were searching for evidence of fraud and other criminal activities?

Maybe we will hear more from the guy's lawyer. As I say, a lot of work would be required to get to the bottom of this, which is why I was scornful when I saw it thrown in from a source which made no attempt to get the official/other side of the story.

macroman said...

Mike M LK asked how is it that a government deficit covered with dollar-for-dollar bond issues inflates the money supply.

You replied Fiat money is debt. Expand it and it is inflationary. To the extent existing stock is not destroyed is inflationary.

I am just wondering if, in your view, anyone ever borrowed money under gold standard money (or whatever alternative to Alfa Romeo money you prefer) and did that increase the money supply?

1) Does gold make any difference in you view? Because debt may be your problem, rather than the type of money.

2) Does government borrowing, as opposed to private borrowing, make any difference, in your view?

Mike M said...

Macroman:
…I am just wondering if, in your view, anyone ever borrowed money under gold standard money (or whatever alternative to Alfa Romeo money you prefer) and did that increase the money supply?

The sardonic tone is noted. I’m making the point of the significant flaws in the currently monetary system. I in no way imply there is a perfect one. Gold standard included. People (government and bankers particularly) can and will misbehave under any monetary system. The question is which one is the least flawed given tht propensity.

… 1) Does gold make any difference in you view? Because debt may be your problem, rather than the type of money.
Yes Gold makes a difference as it is not simultaneously someone else’s liability. Debt is not MY problem it is our problem. Invariable gold and/or some commodity asset will move back into the monetary system in some form. It always does after abuses and run their course.

…2) Does government borrowing, as opposed to private borrowing, make any difference, in your view?
To the degree it is monetized instead of borrowed from the stock of savings of course it makes a difference. To the degree private borrowing is accommodated with changes in fractional reserve standards it makes a difference.

Chad said...

Not directed at me, but I would like to answer macroman's four questions.

1. Yes, borrowing still occurs under a reserve currency. However since it is limited to the amount of reserves set aside to be loaned out, the interest rates would reflect the supply and demand of credit.

2. No, it does not increase the money supply since what is loaned out is transfered from one person to another. In the same manner me loaning you a hammer does not increase the supply of hammers.

3. Gold makes a huge difference. A gold standard backed by 100% reserves is entirely stable. In effect the main reason the standard was abandoned was that the system shifted to fractal reserve and foriegn debt holders essentially made a run on the gold reserve. So rather than admit that the government issued more gold claims than there was gold, Nixon retired the gold standard.

4. Private borrowing and government borrowing are very different. A private entity would have to perform a cost/benefit analysis to determine if the benefits of the loan exceed its cost. Also the collateral and credit rating are those of a vested interest.

Government borrowing, however, will essentially boil down to political expediency. The costs faced by political powers are measured in public favor more than economic feasability. Since they will borrow and leverage things that they do not own, there isn't a vested interest beyond maintaining political control.

macroman said...

Thanks, Chad. You have indenitified fractional reserve bank as the main(?) problem. So what laws should there be stop the free market from re-inventing FRB, the way it always seems to do, even when gold is money?

macroman said...

Chad: Private borrowing and government borrowing are very different.
We all agree that governments spend borrowed money on different things from that which the private sector spends on, and that seems to be all you addressed. My question was in the context of LK’s question how is it that a government deficit covered with dollar-for-dollar bond issues inflates the money supply?

When the government borrows from the private sector, unlike a fractional reserve bank, it does not give the lender (the bond buyer) a deposit account which functions as money - the bond is not accepted as money. It is basically the same when the Ford Motor Company sells a bond – no new money is created.

The Fed chooses to buy Treasury bonds on the open market, to increase the money supply, but the Fed is not required to buy the government bonds merely because the government issued them. If there were no government bonds the Fed could technically buy private bonds. Would that mean the Ford Motor increased the money supply by borrowing (selling bonds)?

macroman said...

Mike M: Yes Gold makes a difference as it is not simultaneously someone else’s liability.
Chad: Gold makes a huge difference. A gold standard backed by 100% reserves is entirely stable.

In 1844, the Bank of England was required by law to have 100% gold backing for every bank note in circulation – the currency was limited by the gold supply. The banking industry gradually switched from making loans in the form of bank notes, to making loans in the form of checking accounts, and the system was not "entirely stable".

I think bank debt is your culprit, fractional reserve banking in which a bank's liabilities are of shorter term than its assets; gold makes no difference to that.

So I ask, what laws are required, in your opinion to stop FRB, and why won’t the free market re-invent FRB in some other form?

jason h said...

So I ask, what laws are required, in your opinion to stop FRB, and why won’t the free market re-invent FRB in some other form?

FRB does not have to be legally prohibited - just end the State support of it. And prosecute fraud just like any other case.

People would be free to openly and honestly engage in FRB. Don't bail out the banks when there is a run on their reserves. And please don't turn around and blame the 'rigid' & 'archaic' gold standard for the problems created when the bank issues more notes than they have collateral.

Many Austrians just play the game out and assume eventually bank runs will end the free market practice of FRB.

macroman said...

jason h Assuming Hayek's Prices and Production is correct, then FRB is unstable (and other people may have other reasons to think it is unstable). You say leave it alone, end the state support of it.

Isn't this a bit like saying, let's not have any restrictions on the freedom to light fires in a forest, none of this "High Fire danger" rubbish and bureaucratic snooping around to see if people are freely choosing to cook over open fires on hot, dry and windy days. And when the forest burns down, the government fire service shouldn't step in to alleviate the problems. If it spreads to private property the private people can hire a fire service, etc etc.

So, if FRB is unstable, leading to the boom and bust cycle, it does wide spread harm, not falling necessarily on only those who benefited from the boom. There are external effects, and external effects violate the conditions that allow us to show the market is perfectly just and proper, and perfectly efficient.

So, if FRB is unstable, shouldn't it be banned or shouldn't the government alleviate the harm, or try to make it stable? Otherwise you are playing with fire.

macroman said...

jason h the bank issues more notes than they have collateral.

Banks no longer lend in the form of notes, they basically lend in the form of a checking account. But it amounts to the same thing.

When banks did lend in the form of notes, they did not issue more notes than they had assets (or collateral). The banks had long term loans owing to them, and short-term liabilities (notes or deposit accounts).

You probably mean "reserves"/ready cash, not collateral. I don't like to be petty about words, but there is a chance you and I have a different view on what FRB is, how it works, which may need to be clarified.

jason h said...

And when the forest burns down, the government fire service shouldn't step in to alleviate the problems.

If the gov't has taxed people for this service they better meet their obligation.

If it spreads to private property the private people can hire a fire service, etc etc.

Absolutely - If the gov't doesn't hold a monopoly.

If FRB is inherently unstable there is nothing the gov't can do to alleviate or stabilize it, and propping it up with deposit insurance and overnight money printing only amplifies the instability by masking the true problem.

jason h said...

To clarify, I meant when the bank loans out demand deposits while also guaranteeing availability for immediate withdrawal.

In that case I used 'notes' as Federal Reserve Notes, deposit receipts, cash, etc. and 'collateral' as reserves, or (classically) gold.

macroman said...

jason h If FRB is inherently unstable there is nothing the gov't can do to alleviate or stabilize it ..

So if you are right, why not ban FRB? Rothbard seemed to want to ban it, as did Irving Fisher, but I can never get a clear handle on how to do so.

jason h said...

why not ban FRB?

Because when a free-market economist or anarcho-capitalist calls for a State ban on FRB, the trolls cry, 'hypocrite!'.

States of the past have banned FRB and placing it under bureaucrats' jurisdiction merely opens the door for the ban to be lifted at a later date, followed by the inevitable deposit insurance and lenders of last resort.

A ban is unnecessary as the market will root out unstable and unsustainable ventures.

macroman said...

jason h States of the past have banned FRB and placing it under bureaucrats' jurisdiction merely opens the door for the ban to be lifted at a later date

What states? What is the historical example you have in mind? I really want to know how it can be done and how the ban was circumvented.

A ban is unnecessary as the market will root out unstable and unsustainable ventures.

Do you mean FRB will cause an economy wide-depression, harming people other than those who benefited?

You may as well say speed limits are unnecessary because those who speed will all kill themselves. This overlooks the harm done to others.

You obviously see the dilemma, that you might be hypocritical if you say ban FRB. But if FRB is unstable (which you admit) and does harm to by-standers (a possibility which you ignore), perhaps you should change your thinking?

Eliss said...

I can suggest my own personal point of view on this problem or find a good one essay writer service at http://papersmart.net/essay-writers.html made for me and other students. In general, great deal of meaning of all scientific data that are gathered in it come from social studies, historical facts and general surveys. Some information nevertheless remains an open question for me as well as for lots of distant learners of our country.

Jake Roberts said...


Thank you for your interesting and informative blog. I have enjoyed reading it and appreciate the work you have put into it. Here is some relevant information for you to review .
SWAT vest sets