Policy Institutes

Neal McCluskey

National Review Online is in the midst of its “education week” – including offerings by yours truly and Jason Bedrick – and today brings us a piece by AEI’s Andrew Kelly on how to fix our higher ed system. Unfortunately, while he largely nails the problems, he stumbles on the solution.

Kelly is absolutely right when he criticizes the Obama administration for demonizing for-profit colleges – see my piece for the evidence that for-profits are not the problem – while simultaneously observing how odd it is for conservatives to decry as some great violation of free-market ideals attacks on institutions that get the vast majority of their funds through Washington. He is also right that the entire ivory tower is awash in waste and failure, and all institutions – for-profit or putatively not-for-profit – are self-interested money-grubbers. Finally, he correctly notes that it is a big problem that by far the largest student lender is the Bank of Uncle Sam, who basically gives to anyone who can breathe.

Where Kelly starts to get into trouble is in suggesting that a lot of these troubles could be meaningfully mitigated if we just had the right data readily available to consumers. He writes, “Basic pieces of information needed to make a sound investment — out-of-pocket costs, the proportion of students who graduate on time, the share who earn enough to pay back their loans after graduation — are either incomplete or nonexistent.”

As I’ve written before, there is actually a huge amount of information available on jobs and schools, and many students appear to simply ignore it. For instance, according to federal data, bachelor’s degrees awarded in journalism ballooned from 59,000 in 2000-01 to 88,752 in 2011-12, despite the very well publicized busting of the industry. Indeed, the BLS reports that as of 2012 there were only 57,600 Americans employed as “reporters, correspondents, and broadcast news analysts,” and 115,300 as editors. And it’s not like those with these job are striking it rich: the median annual pay for reporters in 2012 was $37,090, and for editors, $53,880. And yes, those jobs are expected to contract in the next ten years.

How about psychology majors? This is a regular resident on worst-employment lists put out by major news outlets, but it continues to draw big enrollment. In 2000-01 there were 73,645 psychology bachelor’s degrees awarded, and by 2011-12 there were almost 109,000. Meanwhile, according to the BLS, there were only 160,200 people employed as psychologists in 2012, and to be a practicing psychologist one typically needs a doctorate.

But we couldn’t possibly find out if a school has a poor six-year graduation rate, right? Wrong. If you’re willing to pay the $30 fee to access it – a microscopic investment compared to the overall price of college – you can get all sorts of useful data for schools from the hated U.S. News and World Report “Best Colleges” site. For instance, you can see that Lycoming College – a fairly middling school – has a four-year graduation rate of 54 percent, a 59 percent six-year grad rate for Pell Grant recipients, and a 64 percent grad rate for students receiving neither Pell nor Stafford Loans. You can also find financial aid information and cohort loan default rates for the school.

How about Cleveland State University? You can see that it has a puny four-year graduation rate of 8 percent, a six-year grad rate for Pell recipients of only 28 percent, and a six-year grad rate for non-Pell or Stafford students of just 34 percent. You can also discover that it nonetheless had enrollment of over 12,000 undergrads.

Now, is the data so exhaustive that any question anyone might have is answered? No, but while calling for federal data collection and publication, Kelly acknowledges that inherently “college is hard to evaluate until it is actually experienced.” So federal data collection and publication is also likely to leave a lot of unanswered questions. Of course, that doesn’t matter if the information is going to be ignored anyway, as present experience indicates it almost certainly would be.

In addition to getting out more info, Kelly calls for making colleges have “skin in the game” by holding them responsible for paying a part of their students’ defaulted loans. This certainly makes some sense: The big winners in American higher ed are the colleges that get paid no matter what, and the politicians who come off as caring when they furnish taxpayer-funded aid to almost anyone who wants it.

Still, it is uber-optimistic thinking to believe that skin-in-the-game efforts would be applied equally – or meaningfully – to most schools. For-profits would no doubt get hammered, state-subsidized public schools would have a huge advantage over tuition-dependent private institutions, and loveable but woefully ineffectual community colleges would almost certainly be protected. Indeed, Kelly reports that already:

Democratic senators Jack Reed, Dick Durbin, and Elizabeth Warren have introduced legislation that would force colleges with high default rates to pay back a share of defaulted loans. But here again, Democrats would rather play favorites than hold all colleges to account. The bill includes exemptions for historically black colleges and universities and for community colleges, schools that have default rates higher than the national average. And the proposal would cover only campuses where more than 25 percent of students take out loans. In other words, Democrats believe that only a subset of colleges should have skin in the game.

More important, perhaps, is that while many institutions are happy to take money from students who exhibit little if any evidence they can handle the programs for which they are signing up, it is Washington that gives those students much of the money in the first place. And if we should have learned anything from the housing-induced Great Recession, it is that were schools to start turning woefully prepared low-income people away, the Feds would employ both carrot and stick to get them to enroll those students.

Unfortunately, Kelly dismisses the only solution that would do more than skim the edges of the monstrous waste in higher education: phasing out federal student aid, which as Kelly notes, is now at about $170 billion. Quite simply, it is largely aid that encourages people to sign up for programs that huge numbers will not complete. It is aid that enables individuals to enroll in studies that even if they complete them, will not result in a job requiring their credential. It is aid that has fueled credential inflation such that even many of those jobs requiring degrees don’t really require degrees. And on top of it all, it is aid that has fueled huge price inflation and growing student debt.

Calls for phasing out massive aid, Kelly says, has “ceded…ground to Democrats,” and would perpetuate “the under-provision problem we started with: Many low-income students who would benefit from post-high-school education could not afford it.”

Alas, Kelly offers no evidence for this latter proposition, and logic suggests he is largely wrong. While there is huge waste in higher education, it is still true that an average person with a degree – especially in an in-demand field – stands to make big profits from going to college. That means a low-income student would likely be able to find private-sector aid, both charitable and from professional lenders, were they to meaningfully demonstrate the ability and desire to handle college-level work in a needed field. Both lender and borrower would stand to profit. And yes, there would often be little or no collateral for the loan, but lenders always consider risk, and the benefits would almost certainly outweigh it in most cases.

It’s also important to put the claim of an “under-provision” problem under the microscope. Need-based federal aid started in earnest in the 1960s. How many people went to college back then? In 1960, only 7.7 percent of Americans 25 years and older had a bachelor’s degree. In other words, relatively few people – low, middle, or upper-income – had degrees, making it hard to say we had a big problem of under-provision to low-income students when major federal aid started. And, as has been pretty firmly established, the educational challenges facing low-income people have much more to do with factors outside of the education system – especially the higher education system – than the system itself. If any generalization should apply, it is that low-income students are underrepresented because they are, for numerous reasons, too often underprepared.

Folks like Kelly who advocate for more data, skin in the game, etc., are trying to make any improvements they can. But reasons to believe their proposals will do much good are few, while the root problem is clear: Aid fuels massive price inflation and incredible waste. It has to go.

Walter Olson

Excellent article by Jon Campbell for the Village Voice about New York City’s zeal for arresting people on charges of possessing so-called “gravity knives” – knives whose blade can be opened without the assistance of a second hand, and then be secured in place for use. Used in countless trades and occupations, knives fitting this description are sold at hardware, sporting, and work-gear stores from coast to coast. But New York City routinely prosecutes persons in possession of them even in the absence of any indication that the holder was up to no good or knew they violated local law. Excerpt:

For years, New York’s gravity-knife law has been formally opposed by a broad swath of the legal community. Elected officials call the statute “flawed” and “unfair.” Defense attorneys call it “outrageous” and “ridiculous” – or worse. Labor unions, which have seen a parade of members arrested for tools they use on the job, say the law is woefully outdated. Even the Office of Court Administration – the official body of the New York State judiciary – says the law is unjustly enforced and needs to change. They’ve petitioned the legislature to do just that.

A move in Albany to revamp New York’s law to cover possession of such a knife only when accompanied by “unlawful intent” failed, due in part to opposition from some quarters in the law enforcement community, where collaring some poor guy walking home from the subway for a “GK” (gravity knife) is known as an easy way to boost arrest numbers:

A poster on Officer.com, a verified online message board for law enforcement officers, put it bluntly in 2013 when he advised a rookie to be on the lookout for “GKs”: “make sure they have a prior conviction so you can bump it up to that felony!!!”

New York’s controversial stop-and-frisk policies are one reason it has such a high number of knife charges:

Village Voice analysis of data from several sources suggests there have been as many as 60,000 gravity-knife prosecutions over the past decade, and that the rate has more than doubled in that time. If those estimates are correct, it’s enough to place gravity-knife offenses among the top 10 most prosecuted crimes in New York City.

More recently, Manhattan District Attorney Cyrus Vance in 2010 deployed the law as a municipal money-maker by charging Home Depot and other hardware and sports chains for selling what many of them had assumed were lawful knives, and extracting large “restitution” payments as part of the ensuing settlements.

In much of the rest of the country, fortunately, the law is on a sounder path as Arizona, New Hampshire, and other states revamp outdated laws to respect the peaceful ownership and carrying of knives. (The national group Knife Rights monitors and advances this progress.) Read the whole Voice piece here

Matthew Feeney

Yesterday, San Francisco’s board of supervisors voted 7-4 to legalize and regulate the online rental marketplace Airbnb.

The legislation, which is expected be be implemented in February, was welcomed by Airbnb. Nick Papas, one of Airbnb’s communications staffers, wrote on the Airbnb public policy blog that the vote was “a great victory for San Franciscans who want to share their home and the city they love.”

Airbnb might be praising the legislation, but it contains a number of restrictions on Airbnb hosts. Under the new legislation non-hosted entire-home rentals are limited to 90 days a year, and it will be up to hosts, not Airbnb, to provide the documentation to prove that they are not in violation of this regulation. Airbnb hosts will have to pay a $50 fee to be part of a public registry, pay a hotel tax (which Airbnb will reportedly remit), register with the city planning department, and not charge more than they are paying their landlord. Hosts must also have liability insurance or offer their listing through a platform that provides coverage.

The legislation will also prohibit buildings that have had Ellis Act evictions from being used for short-term Airbnb rentals, as TechCrunch’s Kim-Mai Cutler explains:

What’s the Ellis Act? Well, San Francisco city and California state rental laws have some strange overlaps. The city has incredibly strong rent control laws, that cover 172,000 of the city’s 376,000 housing units. As long as the tenant handles their basic obligations like paying rent on time, they can’t really be evicted and there’s a culture of lifetime tenancy in the city that’s fairly unique. But the state of California passed a law in the mid-1980s that allows landlords to “go out of business” and take their rental units off the market. The concern in red hot San Francisco housing market is that this law is abused and landlords will take their units off the market to convert them into tenancies-in-common or permanent Airbnb rentals. This change is supposed to clamp down on that.

The board of supervisors rejected an amendment put forward by member David Campos, which would have required Airbnb to pay an estimated $25 million in back taxes. Airbnb announced in September that it would begin collecting 14 percent occupancy tax in San Francisco from the beginning of this month.

Although the new legislation contains some restrictive provisions it is understandable that Airbnb is accepting these new regulations. Airbnb, which was valued at around $10 billion earlier this year, wants to grow, and accepting regulations like those passed by the San Francisco board of supervisors allows for Airbnb to operate legally in San Francisco while refuting accusations that it evades taxes and operates in a grey market.  

Daniel J. Ikenson

Last week the U.S. government settled a long-running trade dispute with Brazil, winning taxpayers the privilege of continuing to subsidize America’s wealthy cotton farmers in exchange for our commitment to subsidize Brazilian cotton farmers, as well. That’s right! We get to pay U.S. cotton farming businesses to overproduce, export, and suppress global prices to the detriment of Brazilian (and other countries’) cotton farmers provided that we compensate the Brazilians to the tune of $300 million.

Some background. Ten years ago, in a case brought by Brazil, the WTO Dispute Settlement Body ruled that the United States was exceeding its subsidy allowances for domestic cotton farmers and that it should bring its practices into compliance with the relevant WTO agreements. After delays and half-baked U.S. efforts to comply, Brazil sought and received permission from the WTO to retaliate (or, in WTO parlance, to “withdraw concessions” because opening one’s own market in a world of mercantilist reciprocity is, perversely, considered a cost or concession). Under the threat of such retaliation, instead of bringing its cotton subsidies into WTO compliance, the U.S. government agreed to pay $147 million per year to Brazilian farmers so that it could continue subsidizing U.S. farmers beyond agreed limits. That arrangement prevailed for a few years until the funds were cut during the budget sequester earlier this year – an event that triggered a renewed threat of retaliation from Brazil, which now has been averted on account of last week’s $300 million settlement.

The Peterson Institute’s Gary Hufbauer characterized the agreement as a “good deal” because it ends the specter of soured bilateral relations, which $800 million of targeted retaliation against U.S. exporters and intellectual property holders would likely produce, for a reasonable price of $300 million “spread widely across the US population, around 90 cents a person.” In Hufbauer’s opinion:

Money damages, paid in this way, are much fairer, and do not destroy the benefits of international commerce, unlike concentrated retaliation against firms that had nothing to do with the original dispute. The WTO system is only designed to authorize such retaliation, but the US-Brazil settlement points the way towards a better way of satisfying breaches of WTO obligations.

While I share Hufbauer’s desire to avoid retaliation and soured relations, his rationale for endorsing the settlement seems a bit strained. If the settlement is justifiable because the costs are spread across 300-plus million Americans, then Hufbauer can probably lend his support to most subsidies, tariffs, and other forms of protectionism, which endure because the concentrated benefits accruing to the favor-seekers are paid through costs imposed, often imperceptibly, on a diffuse base of unorganized consumers or taxpayers. Does the smallness or the imperceptibility of the costs make it right? No, but it makes it easy to get away with, which is why I think it’s pennywise and pound foolish to endorse such outcomes. There are all sorts of federal subsidies to industries and tariffs on goods that may be small or imperceptible as a cost on a standalone basis at the individual level.  But when aggregated across programs, the costs to individuals become more significant. It’s death by 10,000 cuts.

Hufbauer implies that $0.90 per American is not an unreasonable amount.  Does he have a threshold per-person cost above which he would consider the burden unjustified? As it stands now, the cost to taxpayers is well in excess of the $0.90 – a figure that accounts only for the subsidies to the Brazilians.  We know that the U.S. subsidies are approximately $800 million in excess of allowance, which means that the violating portion of taxpayer subsidies to cotton producers amounts to $2.40 per American.  For the “right” to spend that $2.40 per American, each American must spend $0.90 for a total of $3.30 each.  So, instead of saving $2.40 per American by bringing subsidies into compliance, taxpayers are in the red by $3.30 each – a $5.70 reversal. But, of course, the real cost to Americans is not the excess subsidies plus the cost of subsidizing Brazilians, but the overall cost of cotton subsidies, which were close to $2 billion per year for the period 1995-2012, or over $6.00 per American per year during that period. But why should Americans be forced to support wealthy U.S. cotton farmers in the first place?

Hufbauer’s point is that money damages spread over a broad base of payers is more fair than targeted retaliation, which would impose those costs on a few innocent U.S. industries and IP holders, and he writes that “the WTO system is only designed to authorize” such retaliation.  But I think Hufbauer is selling the system short. Compliance with the rules is preferable to both targeted retaliation and damages spread across a broad base, and the WTO system is designed to encourage such compliance without imposing on national sovereignty.

First of all, retaliatory trade measures are something most governments prefer to avoid because trade restrictions hurt businesses and consumers in the country imposing them. But the purpose of permitting a WTO member to withdraw concessions in response to another Member’s violations and persistent non-compliance is, ultimately, to encourage compliance by bringing otherwise dormant domestic pressures to bear on the offending government. The threat of retaliation along with publication of a target list essentially broadens the dispute by creating more stakeholders – specifically, domestic stakeholders with an interest in compliance.  In 2002, when the United States imposed restrictions on steel imports from most countries, which were found to violate the WTO Safeguards Agreement, the EU’s retaliation list included products known to be important to organized lobbies or states with particular relevance to congressional and presidential electoral outcomes – products such as citrus, textiles, and motorcycles. The credible threat of retaliation against these and other industries created a powerful political constituency encouraging compliance with the WTO ruling by ending the steel restrictions, which also brought U.S. producers and consumers the benefits of lower steel prices.

In the cotton case, instead of achieving compliance and reducing burdens on U.S. taxpayers, the targets of Brazilian retaliation managed to get themselves out of harm’s way, but at the expense of U.S. taxpayers. Any leverage to compel the U.S. government to do the right thing and rein in the cotton subsidies has been spent. Hufbauer’s outlook differs:

Brazil’s agreement to drop its WTO case against US cotton subsidies (specifically an export credit program known as GSM-102) and not to launch a new case expires at the same time that the US Agricultural Act of 2014 expires in 2018. What this means is that the US Congress in 2018 will face pressure not to renew a subsidy program that enriches a few already rich American farmers.

The problem with that logic is that the same “pressure” existed this year, before Congress passed the farm bill.  Yet, the Agricultural Act of 2014 includes the same offensive provisions for cotton.  Moreover, what incentives exist for Congress “not to renew a subsidy program that enriches a few already rich American farmers” if the price of buying four more years of peace is a comparably reasonable $0.90 per person?”

Settlements like these may appease the primary governments involved in the dispute, but they leave unresolved the original sins, which impose a lot of collateral damage on a variety of interests.  In that regard, settlements are failures.

Finally, if the cotton settlement and the tobacco settlement (the latter is described by Bill Watson here today) – which both, essentially, release the United States from its WTO commitments in exchange for some form of payment to the complainant – are portrayed as trade policy successes, it will be just a matter of time before WTO adjudication devolves into a claims court before descending into irrelevance.

K. William Watson

The World Trade Organization’s judicial body determined over two years ago that a U.S. law banning clove cigarettes while leaving domestically produced menthols on the shelf was protectionist discrimination.  Now the U.S. and Indonesian governments have reached a “settlement” in which Indonesia agrees to drop the case in exchange for nothing.

Technically, the settlement, as reported, includes a few promises from the United States, but these are so weak as to be practically meaningless.  For example, the United States agrees to refrain from “arbitrary discrimination” against Indonesian cigars (which is already not allowed) and to “postpone” filing its own case against Indonesian export restrictions (which no longer impact U.S. companies).

American refusal to comply with global trade rules against regulatory protectionism is both unfortunate and, in this case, unsurprising.  There were two basic ways that the U.S. government could have come into compliance: 1) by dropping the ban on cloves, or 2) by extending the ban to menthols.  Neither of those options was politically feasible, so the United States did nothing.

Normally, the WTO dispute settlement process can be very helpful in overcoming political barriers to trade liberalization.  When one country loses a case at the WTO and fails to comply, the complaining country has the right to retaliate by raising tariffs on goods from the losing country.  This creates concentrated losses that have much greater political impact than the generally diffuse costs of protectionist policies.  The ultimate goal is to “induce compliance”—the losing country discontinues its offending practice so that the retaliation will stop. 

But the United States is very big and powerful, so that for most countries cutting off imports from the United States is not only ineffective at swaying Washington policymakers but also very harmful to their own economy. Indonesia appears to have decided that dropping the case and walking away makes more sense than continuing to press forward with costly, futile retaliation.

Unfortunately, the clove cigarette settlement joins a growing list of similar cases in which the United States has taken advantage of its economic and political power to avoid complying with WTO rules.  These include a successful challenge by the tiny island nation of Antigua against U.S. restrictions on cross-border online gambling that Antigua has no way to enforce. 

Perhaps the most embarrassing example of noncompliance is the deal between the United States and Brazil reached after Brazil won a case against U.S. cotton subsidies.  The United States managed to avoid retaliation and keep the subsidies by agreeing to send Brazilian cotton farmers a check for $147 million every year. That arrangement appears to be coming to an end with the United States providing one final payment of $300 million and keeping the cotton subsidies indefinitely.

The United States doesn’t always refuse to comply with WTO decisions.  The threat of retaliation from Canada and Mexico may very well make a difference in the ongoing fight over protectionist U.S. regulations related to origin labels for meat.  A big difference between that case and clove cigarettes is that Canada and Mexico are the two largest export markets for U.S. products. 

There’s reason for optimism, but the reputation of the WTO dispute settlement process is being put at serious risk by this administration’s lack of commitment to the rules of the international trading system.

Doug Bandow

Hong Kong is part of China.  But administered separately from the rest of the People’s Republic of China, the territory respects civil liberties while hosting the world’s freest economy. 

Demonstrators are pressing Beijing to make good on its promise of  democratic rule and free elections.  But the PRC will not, indeed, cannot, give residents of Hong Kong what it refuses to give the rest of its citizens.  The city’s future depends on finding a compromise that preserves Hong Kong’s freedom and peace.

The British colony grew out of imperial China’s weakness.  London seized Hong Kong Island, then the Kowloon Peninsula, and later “leased” the New Territories.  In 1997 the latter’s 99-year term ran out.  At which point Beijing was legally entitled to take back the New Territories.

Dividing Hong Kong would have been a practical nightmare.  And Beijing might not have continued to honor territorial cessions forced more than a century before.  So in 1984 London agreed to the full territory’s return.

One wonders:  What if Prime Minister Margaret Thatcher had scheduled a referendum in which the territory’s residents could freely express their decision?

At the time a still weak and isolated Beijing probably would have felt little choice but to accept an adverse vote.  However, the PRC might have chosen to bide its time, as it has done with Taiwan, and now would be demanding the territory’s return.

Returning Hong Kong meant transferring millions of people to communist China.  The PRC committed to respect Hong Kong’s uniqueness for a half century. 

However, Beijing never promised to hold fully free elections.  Rather, it stated:  “The chief executive will be appointed by the Central People’s Government on the basis of the results of elections or consultations to be held locally.” 

The Basic Law (essentially the territory’s constitution), approved six years later by Beijing, provided for “nomination by a broadly representative nominating committee in accordance with democratic procedures.”   The PRC claims that is what it is implementing. 

As of 2017 residents will be able to elect their ruler, but only from candidates vetted by Beijing.  It won’t be real democracy, but then, there never was much chance that the Chinese Communist Party would institute real democracy in any area under its control.

That’s not fair to Hong Kong’s residents.  So it’s impossible not to admire the protestors.  However, their very passion threatens their objective.  They have divided over tactics and sparked criticism from some other residents. 

The greatest risk is that the Chinese leadership might believe it must choose between repression and either chaos or democracy.  In 1989 the CCP sent in tanks to clear democracy-minded demonstrators out of Tiananmen Square.

Beijing would pay an even higher price for cracking down in Hong Kong.  Still, the Chinese regime places self-preservation above everything else.

Moreover, if China violently dispersed the protestors, it would not likely stop there.  Media freedom and judicial independence also would be at risk. 

This week tensions eased as demonstrators and government officials agreed to talks.  Democracy advocates should temper their idealism with an acute sense of pragmatism. 

Beijing might sacrifice the territory’s chief executive, Leung Chun-ying, and make other concessions, such as broadening the nomination process.  But the PRC will insist that Chinese officials, not Hong Kong residents, be in charge. 

Unfortunately, as I write in Forbes online, “Nothing the U.S. does can bring democracy to the territory.  To the contrary, the more Washington attempts to intervene, the more likely China is to perceive the demonstrators to be threats.” 

Democracy advocates have moral right on their side.  Still, raw power is likely to prevail in any showdown.  The protestors must temper idealism with prudence.  They must not allow the perfect to become the enemy of the good for their own sake—and ultimately that of Hong Kong and China as well.

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