Class of 2015 Law Grads Will Have Six-Figure Earnings after All

Certainly that’s what the IRS will tell them in 2035 when ED cancels their loan balances on IBR. Of course it won’t be real income; it’s non-negative income that they’ll never see but will have to pay income tax on nonetheless. Don’t worry though, after they wipe out their savings and take second mortgages on their houses (they will own houses, right?) they will learn the true value of higher education, to say nothing of the Social Security system they will depend on into their dotage.

This joke popped into my mind when the powers that be at the Federal Reserve opened their ecclesiastic doors and told us that six-figure student loan debt isn’t a problem and certainly not a national crisis. Not that these same folks have any credibility after ignoring an $8 trillion land bubble and their mandate to ensure full employment over price stability. That doesn’t mean they’re wrong, but it does mean we get to laugh and hurl fruit at their expensive robes.

And laugh we will, for instance, when Zero Hedge plants a FRED graph of government-held nonrevolving debt growth, and proclaims, “Please mark your calendars accordingly as yesterday [August 7, 2012] the Chairman just guaranteed that student loans will be cause for the next ‘financial stability issue.'” (Emphasis original). Funny, yes; accurate, no.

Rather, it’s ED cutting its own loans and relieving banks of their FFELP loans, which transforms them into Direct Loans. Here’s the amount of government-held nonrevolving debt to GDP (bottom), all other nonrevolving debt to GDP (middle), and all nonrevolving debt to GDP (top).

All other types of nonrevolving debt are dropping as we’d expect when everyone’s trying to pay down their debts simultaneously, but mostly it’s government debt growing and taking up a larger share of total nonrevolving debt.

So why is the government issuing and buying all these loans?

(1)  Deficit reduction shell-gaming. When the government makes interest on your student loans, it “doesn’t have to raise taxes,” meaning the federal student loan program’s purpose has quietly shifted from “making college affordable” to secret, misleadingly voluntary taxes that allow politicians to avoid discussing who should actually pay for high per capita health care costs, to say nothing of all those aircraft carriers and air-conditioned tents in Afghanistan. Issuing a guaranteed loan is also a risk-free way for banks to make money—which they do—and the federal government wants in on that. Don’t worry, though. At some point in the next decade the government will tell you that the only way to bring the deficit under control is by making you pay VAT just to buy shoes.

(2)  Bank bailout. If the government guarantees a loan, cancels the guarantee, and then allows the debtor to discharge the loan in bankruptcy, the bank gets hosed. The benefit of buying up the loans is it takes that risk off the banks’ books. Remember, guaranteed loans are pre-TARPed, and direct loans are Auto-TARPing in that the government bails itself out by raising taxes to cover shortfalls to its creditors, something banks can’t do.

(3)  Giving borrowers better terms? Maybe, but FFELP loans have the same options as Direct Loans, e.g. they’re just as eligible for IBR.

And what of IBR, which opened this discussion? EduBubble intelligently points out that IBR socializes the debt. Not only do debtors pay taxes on their canceled debts but the revenue shortfalls must be compensated by everyone’s taxes, so debtors pay twice, once for their canceled student debts and again for others’ student debts. The latter isn’t going to be a big chunk of anyone’s tax bills, but it’ll be used as a pretext to enact poverty 1.0 taxes like VAT.

But let me soothe you: VAT is a political non-starter. Sure, Japan just doubled its VAT to 10 percent by 2015 to “reduce its deficit” (it won’t), but that country is run by masochists. In the U.S. of A., the nation’s elderly will descend on Washington like unpaid mercenaries if it tries to do something so stupid as make them pay sales taxes on their Social Security benefits. No, I suspect that by 2025 or so political gridlock caused by the taxes-on-rich-people-are-the-second-evilest-thing-in-the-history-of-evil caucus will cause our friends at the Fed to finally monetize the debt by printing money, which the taxes-on-rich-people-are-the-second-evilest-thing-in-the-history-of-evil caucus considers the evilest thing in the history of evil. Heckuva job evil-haters.

This comes as good news for our class of 2015 law grads, for the inflation will erode their debts, and they’re going to need it because almost paradoxically one of the biggest engines of inflation (the reduction of purchasing power of goods and services for the same nominal currency) is wage inflation (the reduction of purchasing power of labor for the same nominal currency). Given that we now live in the era of perpetual McJobs, here’s the hourly wage for three possible categories for underemployed law grads: retail, manufacturing, and construction over the years (2012 $).

Average Hourly Earnings of Production and Nonsupervisory Employees: Retail Trade

Average Hourly Earnings of Production and Nonsupervisory Employees: Manufacturing

Average Hourly Earnings of Production and Nonsupervisory Employees: Manufacturing

So what’s $20.00/hour worth? In full-time annual salaries that’s $41,600. Naturally, this excludes income taxes, payroll taxes, sales taxes, property taxes, health care taxes, rents to landowners, rents to intellectual property holders, costs for subsidizing imports, student loan payments, pollution costs, commuting costs, and global warming costs.

Where does this leave our folks who don’t see student debt as a crisis? Aside from Chairman Bernanke, we have two contributions: Eric Kelderman, “Student Debt Is Growing but Is Not a National Crisis, Speakers Say,” Chronicle of Higher Education, and Tyler Kingkade, “Six-Figure Student Loan Debt Reviewed in Study by Mark Kantrowitz, Showing Rapid Growth in Past Decade,” Huffington Post.

Starting with Kantrowitz:

“[News articles about students graduating with six-figure debt levels] have shock value and sensationalize the student debt problem, but the borrowers depicted in these stories are not representative of typical college graduates,” Kantrowitz writes, going on to add “Nevertheless, much can be learned by examining extreme examples. Extrema can help identify the strengths and weaknesses of the student loan system.”

In an amusing note he tucks in his paper, Kantrowitz acknowledges that he’s only talking about people who graduate with $100,000+, not people who have that amount. He does, however, have the decency to advocate for allowing the discharge of student loans, but that’s as far as he’s willing to go because arguing that the Direct Loan Program is probably doing more harm than good means arguing himself out of a job. Can’t have that. It’s much easier to wag fingers at families and say it’s their fault the government has given up on creating living wage jobs for young people and offers them a higher education system that essentially requires students to “buy” their jobs with time and debt dollars. A hundred years ago they called this “graft”; today, they call it “getting ahead,” or “upward mobility.”

The senior economist for the Federal Reserve Bank of Kansas City, whom the Chronicle reports on, Kelly D. Edmiston, is equally unhelpful.

“The typical student borrower is not in crisis,” … [T]he median student debt—the middle range for all borrowers—is less than $14,000 … The average student debt is significantly higher, at more than $24,000, due to the 25 percent of borrowers who owe at least $30,000 for their college education. Still, another quarter of student borrowers owe less than $6,000, Mr. Edmiston found, and less than 3 percent have debt exceeding $100,000.

Elsewhere I think Edmiston misses the meaning of the default rates, as more careful Fed economists analyzed earlier this year, but the point is how the dialogue has now played out since it began a couple years ago.

Debtors and Friends: “Unpayable debt and underemployment suck hosewater.”

Establishment: “…”

Debtors and Friends: “Really, unpayable debt and underemployment suck hosewater.”

Establishment: “…”

Debtors and Friends: “Do we have to set up tents in parks? Unpayable debt and underemployment suck hosewater.”

Media: “These people have lots of debts, some graduate with more than six-figures into glutted labor markets.”

Establishment: “Hm. Let’s see. Ah, according to my research only a few of you have an arbitrarily high amount of debt (say $100,000+) and since that won’t topple the economy—not that we have any credibility predicting that—we can ignore you. You’re all ants in a glass case as far as we’re concerned.”

Liberal Establishment: “Most of you will pay those loans back anyway, and we don’t care if that reduces your standard of living compared to earlier generations. Some jobs and a little wage inflation will solve all your problems. The real problem is people with large amounts of underwater mortgages, even though they can simply mail their house keys to the mortgagees and discharge the deficiencies in Chapter 7. You need to make better arguments.”

Three responses:

(1)  As Michael Hudson says, Debts that cannot be repaid, will not be repaid. Our 2015 grads will not repay their debts, IBR or no. Nor does it matter if it’s 30 million debtors or just one million. If the debts can’t be repaid, that’s a problem. I may not write about (or even think a lot about) prison abuse or drone strikes, but that doesn’t mean that I lack the compassion to form political opinions about the victims when I do read about them. It’s one thing to say that we as individuals don’t have the bandwidth to care about every single problem in the world equally; it’s another to say that because one problem is small compared to others, we don’t have to care about those suffering from it.

(2)  No, student debt isn’t exactly like the housing bubble, but that doesn’t settle the issue. If the Great Depression was like a spinal fracture, and the housing bust a femur fracture, then student debt is like anemia. Defaults, negative amortization, accounting shortfalls, IBR cancellations, overpriced educations, credential inflation, and opportunity costs of schooling will sap the economy’s strength if nothing is done. This is the benefit to the government of Auto-TARPing the loans: the losses are hidden.

(3)  Remember whom you are dealing with. Student debtors are an easy constituency to mobilize, and they are no less sympathetic to others who are suffering, e.g. underwater homeowners. Alienating them with condescension leaves political capital on the table for others to use. Like extremists.

The takeaway for our 2015 law grads is that the Establishment has spoken: Until the Monetary Miracle of ’25 and IBR cancellation of ’35, you will be an “extrema” for arrogant social scientists’ curiosity. Expect low wages and even less sympathy from the public. You are on your own.

Financialism, Bubbles, & Law Schools

Tom Armistead, “Jungle-ethics Financialism vs. Free Market Capitalism,” in Tom Armistead’s Instablog

ThoughtOfferings, “The Mystery of Japan’s Private Debt Levels Solved?” in Thought Offerings

Andy Xie, “What We Can Learn as Japan’s Economy Sinks,” in Caijing.com.com

Alan Nasser, “The Student Loan Debt Bubble: Curse of the First ‘Austerity Generation’,” Global Research via LewRockwell.com

Financialism, Bubbles, & Law Schools

I must’ve heard of the term “financialism” somewhere (probably as “financialized”), so I looked it up.  It’s not in the dictionary yet, but I suspect it will be.  Two years ago Tom Armistead stepped up to define it:

Financialism is an economic system where the primary activity consists of creating and manipulating financial instruments.  Financial instruments…are in their original form firmly linked to economic reality.  However, when financialism sets in, financial instruments become progressively further removed from their role in supporting commerce in the real world and develop a life of their own.[i]

Armistead essentially grounds his definition of capitalism concretely: an economic system that creates things people need.  Financial regulation protects capitalism from financialism.  Perhaps he could’ve emphasized how financialism enables asset bubbles, for the term links nicely to my semi-off-topic readings on Japan’s economy.  Readers may not know that I spent a good chunk of my adulthood in Japan, and while there people were still talking about the real estate bubble that wrecked its economy twenty years ago.

If an economy lacks the kinds of regulations that Armistead proposes, bubbles form and then burst, leaving the economy with a high overall-debt-to-GDP ratio.  In Depression-era America, that was roughly 180%, 1990 Japan 450%, and 2007 U.S. 350%, courtesy of ThoughtOfferings.

The solution?  It depends on your economic ideology.  Conservatives (?) will tell you to bail out banks to prevent a depression—hence TARP.  Austrianists[ii] will tell you the debt must be worked off, and any government intervention simply fails while increasing public debt, citing Japan’s experience between 1990 and now; alternatively, they point to the sovereign debt crisis Greece faces.  A Keynesian will tell you that government interventions work, citing post-WWII America.

Personally, I side with the Keynesians on this one.  Why?

(1)  Something happened between 1929 and 1945 to put the U.S. on track, and it wasn’t lassez-faire government.  Growth tracked New Deal deficit and wartime spending.  You can see the massive growth in the U.S. financial sector during my lifetime here:

(2)  Greece is a bad example because (a) it doesn’t have its own currency (compare it to Iceland, Poland, or 2000s Argentina) and (b) its government wasn’t even collecting taxes.  Weimar Germany is a poor example because its hyperinflation related to gold-denominated war reparations payments, which incidentally, it finally paid off late last year.  The U.S. Treasury can issue treasuries, have the Federal Reserve buy them, and then rebate the interest back to the Treasury.  Much like a corporation retiring its own stock, there’d be no interest burden on future generations.

(3)  Japan didn’t really adopt Keynesianism.  I lean on Xie:

The Japanese government did choose to let the corporate sector earn its way back, first by preventing bankruptcies and second by stimulating demand. To achieve the first goal, the government kept interest rates near zero and Japanese banks did not pursue mark-to-market accounting in assessing borrower solvency. With a big chunk of the corporate sector zombie-like, the economy, of course, was always facing downward pressure. The government had to run large fiscal deficits to prop up the economy. After the bubble, Japan’s economic equilibrium stagnated and the fiscal deficit swelled.

Without wiping out the debt, all the “roads to nowhere” Japan built to connect rural towns were ineffective.  The trick to cleaning up the leftovers from an asset bubble is to (a) encourage bankruptcy/restructuring/debtor-bailouts, and then nationalize any failed banks and resell the good assets to the public, (b) increase government spending in the interim,[iii] and (c) adopt regulations to prevent the problem from occurring again.  The result increases the proportion of government debt to the total, but private sector debt is wiped out and the economy will grow out of the debt, reducing the absolute percentage.  Sadly, the U.S. is doing neither of the first two (deficit increases have been due to drops in income tax revenue): mortgage cramdowns are still barred, and banks were bailed out for more than their market value instead of being nationalized after going bankrupt.  I don’t know enough to comment on the financial regulation bill.

So how badly financialized is the student debt sector of the economy?

Nasser, who’s my new favorite old-school New Dealer, adeptly describes how higher education does not lead to “knowledge jobs” in the “New Economy.”  Much of his article is spent explaining how states cut public universities’ budgets, but allow them only so much in tuition increases—a 14% cut for a 7% increase.  The public system gets overloaded, so everyone spills over into private non-profit and then to for-profit education.

Critical to assessing any asset bubble is the default rate:

There is about $830 billion in total outstanding federal and private student-loan debt.  Only 40% of that debt is actively being repaid.  The rest is in default, or in a deferment, which means payments and interest are halted, or in forbearance.

60% of loans in limbo means misallocated capital and money that’s not going back to the banks to be used to finance things people need.  As a chunk of banks’ assets are diverted this way, the non-performing loans eat up their balance sheets.  When this near-trillion dollar bubble pops, the result could be TARP 2.  Unfortunately, the actual solution requires bankruptcy, government spending, and rethinking how higher education is funded.  These require more thought-work than taxpayer bailouts.

But to bring things from the universal to the particular of this blog, how does financialism affect America’s law schools?  Let’s compare Xie’s description of China’s current real estate bubble—the largest in world history—to your average law school:

China’s businesses increasingly focus on asset investment rather than core business. When an asset bubble boosts corporate profits, it seems benign at first. Nobody sees the harm. However, when businesses earn profits from the investments in each other rather than their corporate businesses, their operating profitability deteriorates because they don’t invest in their core businesses anymore. Accounting profitability is just a bubble.

What is a law school’s core business?  Producing practice-ready attorneys as cheaply as possible.  Yet how do law schools “earn profits” off debt money if they’re non-profits or public schools?  What is the “accounting profitability”—the financialized side—of a law school?

Answer: Prestige.

I concede there is a bleeding-over of core business and rankings dog-piling, but every time a law school dean sends out a letter at the beginning of the school year, what does he or she discuss?  New faculty hires, increased student diversity, interesting scholarship, new clinical programs, and new facilities.  Reining in costs is not up for discussion, and once the bubble pops the money is gone for good.  If you look at law schools’ websites, as I’ve been doing for the research project I’ve been promising, you’ll find that they’re savvily (speaking of words that aren’t in the dictionary…) designed to direct prospective students towards financial aid.  That prospective law students can’t finance their own way through law school is taken as a given, not as a problem.

Nasser closed his piece with this delightful nugget:

We need to begin thinking of political organization that has little to do with the ballot box.  And thinking won’t be enough…

I think it’s also time for legal educators to minimize the damage to the profession’s reputation the bubble will cause by demanding bankruptcy and higher education finance reform for students and graduates because make no mistake: there will be no Legal Education Relief Program (LERP) to bail law schools out.


[i] Sharper readers may realize that the term bucks Marx, who viewed the speculative booms and busts of 19th century gold-standard England as capitalism at its worst.  Read Brad DeLong on the subject.

[ii] And apparently Karl Marx, if you read the link in FN [i].

[iii] I’m only mildly in favor of directly devaluing the currency to produce inflation.  It does work, reducing the burdens on debtors, but it’s a flat tax on all net creditors, many of whom knew of the bubble and stayed clear.  Instead, per (c), I’d increase capital gains taxes.  If you’re going to redistribute the wealth, at least hit the wealthiest first.  Ultimately, though, we have to remember that poverty is its own curse.  No one benefits.

Pre-election Musing on Federalism

Image of the US House mathematically redistricted over the lower 48 states using the "Shortest Splitline Algorithm"

I saw two televised debates this election cycle: New York’s US Senatorial race (the Schumer one—I get to vote in two Senate elections this year, YAY!), and oddly, the Colorado gubernatorial debate.

Aside from the Coloradoans discussing higher education (I forget if it was the Republican Maes or American Constitutional Party Tancredo who mentioned that university professors teach only thirteen hours per week and that they should amp that up to thirty), nothing laworthy came up, which isn’t unfair—legal education isn’t the biggest problem in the country.

Two moments in the debates made me ask, just what good are state governments right now?  One moment was when Schumer’s opponent, Republican Jay Townsend, criticized Schumer for inaction while 1.5 million residents left New York during his twelve years in office, as well as watching other states receive giveaways from the federal government (Umm, TARP?).  The other occurred in various discussions between the would-be govs about how to entice businesses to locate or remain in Colorado.

So, I define government as a mandatory, necessary, non-profit social-insurance corporation.  The operative term here is “public goods”.  With this in mind, why should state governments care if people leave or businesses move away, provided standards of living remain constant?  Pride, yes.  But the debates gave me the feeling that all federalism does now is cause states to beggar one another for businesses’ affections.  More people in your state gives it more clout in the US House, diverting funding, but again, states’ goals shouldn’t be overpopulating themselves for more money.  Nor should affluent states whine if their federal tax dollars are spent on poor people elsewhere—that’s the federal government’s job; we are one nation.  As for the Senate, everyone believes their Senate candidates must play leader and come up with his or her own 13-point plan to balance the budget, stimulate the economy, end the wars, continue the wars, bring peace to the Middle-East, neutralize Iran, stop China’s imports, force the Chinese to buy our exports, etc. etc.  Unrealistic expectations.

In the context of depression-era economics, we have state governments that can’t run deficits, can’t print money, and can’t stimulate their economies.  With a federal government unwilling to invest in its own people, I find myself fantasizing of living in a well-apportioned parliamentary state.

Magical Mystery Links—ABA-Accredited Schools in China, Reasons for Law Practice Reform, & More on Tenure

(1)  Edward A. Adams, “Harvard Prof Sees Legal Profession in Turmoil”.

Mr. Adams proves I’m clairvoyant.  I published this a few days ago, “[A law school is] really something a community can only build when it is surging with growth.  Like China or India surging.  Not U.S.A. deflating.”  Here, Harvard Professor David B. Wilkins says:

Governments are investing in law and legal innovation as an export item. China and India have both created transnational law schools in which students are trained in English about U.S. and international law. The school in China even plans to seek ABA accreditation so its graduates can take the bar in any U.S. state…” [my emphasis].

Really??  I doubt this ABA-accredited school would be emigrating attorneys to the U.S.A. to open solo practices.  Moreover, its students won’t be borrowing from U.S. banks or the federal government for tuition money.  Something tells me few Americans will move to China for law school, so legal education is unlikely to come across the ocean in the same containers as finished goods.  BRIC (Brazil, Russia, India, China) countries are investing in law because their economies are growing rapidly and becoming more sophisticated.  When American law schools require courses in these countries’ legal systems, then I’ll be impressed.  As an example, I had to go overseas to take a course in Chinese law.

Continue reading

True Links–NY State Bar Wakens to the Legal Professsion’s Problems

(1)  Priyanka Singh, “Legal benefits: Job options, Fat Salaries Draw Students to Law.”

Sound crazy?  When I read the title, I thought I was in for some fun.  Turns out I was wrong, psyche!  It’s talking about India, which is a fast-growing economy that could conceivably suffer from a legal services shortage.  Notice, though, that India has an undergraduate law degree rather than a three-year India Bar Association (if it exists)-accredited degree.  Kinda amusing how different countries do things differently.

(2)  Victor Li, “NY State Bar to Consider, Propose Changes to Legal Profession.”

Stephen Younger, New York State Bar Association President, is creating a task force to reform the legal profession before we witness another 2009.  Younger appears to have a better pulse on what’s going on than the ABA.  In the June 2010 NYSBA Journal, he writes, “Since April 2008, the legal sector has lost more than 50,000 jobs…At the same time that job opportunities for law school graduates diminished, tuition rates and student loan debt loads rose.  It will clearly take time for us to get our profession back on its feet.” (“President’s Message” 5).  Hopefully the NYSBA will see the tuition bubble and act on it.  I wonder whether President Younger is a bubbler or a bottlenecker.  Until then, I say, “Your skills will be put to the test.”

The Juris Doctor Is Your New Bass-O-Matic

Now With 10 Interchangeable Rotors and 1001 Ways to Harness Bass!

In the last post, I pointed out that the law school tuition bubble is technically a juris doctor bubble, the distinction referring to the asset that is being overvalued and not the loans taken to acquire that asset.  For instance the previous economic bubble was a housing bubble (not a mortgage bubble) because real estate was the overvalued asset.[i] Knowing this, (a) what a J.D. does, (b) its academic requirements, (c) how long it takes to obtain one, and (d) its cost are more central to the bubble than related issues like attorney oversupply, which I’ll not shy away from.  The bubble is in the education system, but if J.D.’s were readily useful beyond legal practice, easily obtained, or dirt cheap, then the problem would be different or nonexistent.

These four factors interrelate, but bear with me as I focus on the first.

I’ve heard people say, “I’m going to get an MBA.”  I’ve never heard someone say, “I’m going to get a J.D.” or, “I’m getting a law degree.”  If you’ve experienced otherwise, feel free to comment.  In fact, I don’t think I even heard a law degree called a J.D. until fairly late in life, and I hadn’t heard of a L.LM. until well into my 2L year.  I think the semantics here is important: People who go to professional school talk about the school or the profession, not about its degree.  Instead, I’ve heard, “I want to go to law school,” or, “I want to become a lawyer.”  As a result, we can agree a J.D. is a professional degree whose purpose is legal practice.  Doesn’t sound so revealing, huh? Continue reading

Follow

Get every new post delivered to your Inbox.

Join 136 other followers