Foundations of the Regulatory State
Spring 2005, Section 3Comments on memo assignment #1
(Posted 2/16/2005)
For your reference, here is a link to the original assignment.
The first set of essays were, in general, a good effort on your part and you made many cogent arguments. Not all the memos were equally effective, however. The best ones concisely set forth a clear thesis and defended that thesis using a combination of concepts from the course and ideas taken from the background materials.
Perhaps because you took to heart our admonitions to use the limited space effectively, your memos were more concise as a group than those I received in past years. Still, this was an aspect we stressed in our comments to you. Because the 500-word limit is extremely tight, it is not a good idea to spend two paragraphs or even one long paragraph restating the assignment or the positions of the prior bloggers. Instead, you should briefly introduce your topic, and then move directly to your argument. A common failing was to spend excess time discussing Posner's or Becker's comments, or to focus too closely on those comments as opposed to course concepts.
Other common failings included making too many conclusory statements and slighting or ignoring important counterarguments. Given that the assignment asked you to write a blog entry, it was appropriate for you to take a relatively argumentative or adversarial tone if you wished, but even when writing in this style, it is still unpersuasive to ignore obvious counterarguments, to caricature opposing positions, and to overstate one's case.
Finally, a number of students spread themselves too thin by trying to cover too many points. In general, it is better to explain one's points in depth rather than to cover many issues superficially, but given the nature of the assignment [i.e., a blog entry, not an issue-spotter], coverage was less somewhat important than usual.
In our comments we tried to focus on how you could have written a more effective essay, both stylistically and substantively, since the main point of this exercise was to provide practice for the future.
Most of the memos were initially graded by the TA's; I then looked over the memos and made a few changes and a number of comments [generally in purple marker]. The TA's will hold individual office hours so that you can discuss your individual memo with them if you wish. You are also welcome to discuss with me memos that were graded by the TA's.
Attached to this memo are a sampling of student essays that I thought were among the most effective we received.
[1]
We have an age old saying in Minnesota which states, “If it ain’t broke don’t fix it, and if it is broke either fix it or get a new one, and if it might or might not be broke either write a stirring blog entry to sort it out, or take a nap and hope the problem goes away by the time you wake up.” I already took a nap today, and the debate rages on, blogging has become the only option.
The only way to determine if the system of subsidized student loans is broken or not is to evaluate its overall performance in light of its central goal of providing the greatest possible access to higher education to the greatest number of people in society. Posner, eternally the pragmatist, would be quick to argue that this goal is itself suspect because the potential benefits to society do not outweigh the costs to society involved in its implementation. The real trick of Posner’s rhetoric occurs slightly after this when, in a moment of seemingly prescient vision, he appears to effectively parry the impending counterstroke of distributional justice concerns by claiming that subsidization does not necessarily lead to any transfer of wealth from the rich to the poor. This, however, is a gross mischaracterization of the distributive intent of student loan subsidies. Government subsidization of student loans is not primarily intended to be a tool of fiscal redistribution, although it may very well provide society with ancillary benefits to this effect. Rather, student loan subsidies represent an attempt to create an equitable distribution of opportunity regardless of material concerns.
The question that needs to be asked is how well the current program is doing in the furtherance of this goal. Becker makes a solidly convincing argument that the current system of subsidized borrowing is inefficient because it does not adequately discriminate based on need, thus providing a windfall for upper and middle class students with the ability to secure loans in the private market. This criticism should not, however, lead one to adopt a stance in favor of a market based solution. The fact of the matter is that regardless of whether student loans are subsidized by the government or left unfettered to drift on the currents of market forces, the rich will still be better off vis a vis the poor in terms of loan repayment capability. Additionally, the private market can, and most likely will, discriminate against applicants from disadvantaged socio-economic backgrounds under the pretext that they represent a greater repayment risk. Furthermore, the private market system encounters a problem of perspective; it is unlikely, in light of overwhelming experience showing the reluctance of banks to lend money to those around them, that underprivileged individuals will believe that they can secure these loans. Not only will this prevent them from trying to obtain them after graduating high school, but it will structure their life choices antecedent to this point.
[2]
An ideal student loan system would ensure that all qualified and deserving students could afford higher education, irrespective of their financial situation. A modified government subsidy program would best achieve these objectives.
The present system of government subsidies for student loans has advantages and disadvantages. Its greatest strength is that the government’s guaranteed repayment of defaulted principal and interest results in lower interest rates. But the system still has many inequities. First, there will always be qualified students too poor to apply for the loans despite the lower rates. More importantly, even upper and middle class students who might be able to finance their educations independently can receive loans while poorer individuals not able to avail themselves of educational opportunities subsidize them, resulting in unequal distributions of wealth.Relying upon a commercial market to provide student loans would not accomplish the objective of ensuring higher education to qualified students in need either. First, with no collateral for their loans, private lenders would screen candidates more thoroughly and exclude financially disadvantaged students because of their higher default risks. Furthermore, there is no guarantee that all students would pay higher interest rates because of the investment value of their education and prospective higher incomes. This argument fails to consider that many socially valued jobs, such as teaching and public interest positions, require higher education but do not provide robust incomes. Making student loans nondischargeable and using future earnings as collateral to lower the interest rates would not rectify the situation either. As Posner points out, the gains of lower interest rates to students would be offset by the increased risk of default and the resulting higher interest rates on other loans. Moreover, it is unlikely that the benefits of saved costs to taxpayers would outweigh the disadvantages of excluding poorer students from higher education. Lastly, a private system may significantly increase transaction costs because of more vigilant screening of candidates and the activities of collection agencies.
A modified, more need-based government subsidy program for school loans could ensure that all deserving students in need receive a higher education and would result in a net positive gain for society as a whole. The new system should stop subsidizing loans for upper and middle class students able to finance their own educations and limit loans to those truly in need. On the one hand, the wealthier students are losing the subsidy but they will still be able to go to school and the marginal utility of the dollar taken from them is less than the benefit it will give those in greater need. Not only will the neediest students directly gain from a new system but their increased productivity and additional skills will benefit society as a whole. More educated students would also confer benefits upon society since they make better citizens and, for example, are less likely to commit crimes or end up on welfare.
[3]
The federal government’s student loan guarantee program should be abolished. While arguments can be made in favor of the program on communitarian, social justice, and efficiency grounds, I do not think these arguments hold up to criticism.
From a communitarian perspective, education is important to promote cultural norms and to turn students into good citizens. The loan guarantee program subsidizes higher education and encourages students to pursue a college degree. However, it is not clear that the program actually works to create a better educational system or a more educated citizenry. Guaranteed student loans may lead to more students in school and more money spent on education, but more money does not necessarily mean higher standards. Schools might compete for students by making improvements to their dormitories or dining halls rather than concentrate on the quality of education. Indirectly subsidizing all kinds of colleges might work to undermine a sense of national community as some schools might use the “extra” money to support radical or reactionary faculty to indoctrinate students with “fringe” beliefs.It can be argued that the loan guarantee program is justified on social justice grounds. Poor people might have difficulty getting student loans in a privately run system and might be burdened with high interest rates. An objection to this reasoning is that the subsidized loans are available to students of any financial background. The tax dollars of working class people are used to subsidize loans for children from upper middle class families. A rejoinder to this is that high-income Americans pay a much bigger share of the tax burden than do people with lower incomes. This response still does not explain why government loans should be available to all students. It might make more sense from a distributive standpoint to simply subsidize higher education for lower-income Americans. The loan guarantee program looks more like a middle class entitlement than an honest attempt to provide opportunities to all. A real effort to help young people get out of poverty through education would have to start much earlier than college.
Defenders of loan guarantees may claim that subsidizing education is efficient because it creates a positive externality. As mentioned above in the discussion of the communitarian argument, it is not clear whether the program has really led to a better educational system or a more educated populace. Any attempt to correct “market failure” or encourage positive externalities relies on cost-benefit estimates. These estimates can have a large margin of error. Information reflected in market prices is often lost when dealing in aggregates. The program may encourage overspending on higher education. In addition, the high barriers to entry for a new college make it unlikely for schools to compete on price. Since tenure makes it difficult for colleges to compete in teacher quality, colleges compete on other “quality of life” features. This is where much of the subsidy to higher education is going. Spending taxpayer money on nicer gyms doesn’t seem like an efficient policy.
[4]
Everyone has an interest in an educated society. Individuals enjoy the financial benefits education generally affords. The government has an interest in its positive effects on crime and national welfare. Society at large benefits from a strengthened sense of common identity and civic duty. But despite the universal appeal of education, government subsidization of student loans is not the most equitable means of promoting it.
First of all, students do not depend upon government subsidies to finance their education. In general, students seek higher education in the hopes that its benefits (e.g. a higher future earning potential) will significantly outweigh its costs. While it is true that the commercialization of the student loan market would inevitably result in higher interest rates, increasing the overall cost of financing an education, student demand for loans would likely not be much reduced as a result. As long as interest rates remain low enough so as not to unduly disturb the cost/benefit equation (which, as Gary Becker’s remarks make clear, is quite possible if a few requisite conditions are met), the demand for student loans would probably remain little changed.
Commercialization of the student loan market is at least as economically efficient as the current scheme of government subsidization. Although students would necessarily pay more for their education, the government would no longer shoulder the burden of defaulted principle and interest on student loans. Indeed, the overall default rate might fall considerably—since the government would no longer serve as a guarantor, students would have no adverse interest in trying to stick the government with their bills. The efficiency loss incurred in commercializing student loans, if indeed there is one, thus appears to be minimal.
However, commercializing the student loan market would clearly result in a more equitable distribution of taxpayer resources. The basic justification for government sponsorship of student loans is that lowering the overall cost of education makes it more accessible to those who can least afford it. However, because the current program makes subsidized loans available to all but the wealthiest students, in practice, those intended to benefit from government sponsorship are actually disserviced. Instead of aiding the economically disadvantaged, government benefits inure disproportionately to those most likely to pursue an education—in other words, the more prosperous members of society.
By contrast, commercializing the student loan market would require only those who actually seek an education to bear its costs. Those unlikely to seek an education (i.e. the poor) would not be taxed to support a program that largely benefits the middle class. Neither would those students whose wealth precludes them from obtaining government-subsidized loans be required to subsidize those who do qualify for the program. This is a more equitable outcome for all concerned.
While it is true that the government has a strong interest in promoting education, subsidizing student loans does not much advance this pursuit. As long as the expected benefits of education significantly exceed its costs, students have no need of added governmental encouragement. Therefore, for reasons of distributional justice, it is preferable to require those who actually seek an education to bear more of its costs.
[5]
Even from a strictly economic viewpoint, higher education is valuable: it creates greater economic efficiency and promotes economic growth. Higher education helps young people to achieve greater levels of productivity and, therefore, earn higher incomes. This would in turn translate into greater overall productivity in the national economy and a larger tax base. Furthermore, higher education will encourage innovation, which is essential for economic growth. Thus, the society has a huge stake in ensuring that young students have access to resources to fund their education.
However, the market cannot fulfill this function because of imperfect information. If private lenders had an inexpensive way of gauging each student’s future income-earning potential, the market could efficiently allocate loans to the more deserving candidates. In the real world, however, such information cannot be ascertained accurately or cheaply. Even such data as enrollment in certain schools and programs yield only a rough projection of the students’ future income stream. As such, without a co-signor or collateral, private lenders will treat the unknown as “risk” and charge higher interest rates than what is efficient. This is why the government needs to step in to ensure a more efficient allocation of society’s resources to students.
Becker and Posner argue against such government intervention. Interestingly enough, both Becker and Posner raise non-economic concerns in criticizing the current system of government-backed student loans. While Becker talks about economic waste, he also raises distributive concerns by pointing out that the loans are equally accessible to students from wealthier families. Posner argues that the benefits of higher education are not large enough to justify “the cost of subsidy to the taxpayer.” While Posner is not explicit as to what he means by “cost to the taxpayer,” he seems to imply that the government should not infringe upon taxpayers’ economic liberty by levying taxes to support a student loan program.
Becker’s proposal to privatize student loans, however, addresses neither the economic grounds for government intervention nor his distributive concerns. While making loans non-dischargeable may somewhat reduce the risk to private lenders, it does nothing to address the fundamental problem of imperfect information. Furthermore, distributional imbalance may be aggravated by allowing the lenders to set the interest rates: other things being equal, private lenders will be more willing to charge lower interest rates to students from wealthier families because those students have another source of funds to rely upon to make payments. Also, his proposal to allow lenders to garnish students’ future income will raise serious liberty concerns, which may far outweigh any benefit to the students through reduced interest rates.
In my view, Becker’s concern about distributive justice is misplaced. The current system is better understood as treating all young students – whatever their socio-economic background – as a disadvantaged group whose access to loans is limited due to their age. While some students may have alternate sources of funding, the vast majority do not. As such, when seen as an inter-generational concept, distributive justice is served by the current system.
Key to symbols used to mark essays:
On some essays we circled particular words or phrases that seemed found questionable or unclear, and attached these symbols to them.
good point or argument ! excellent point or argument ~ fair point, or incompletely or unclearly expressed – weak point … point needs elaboration " point already made, repetitive ? unclear ?? very unclear, confused, mixing together separate points x mistake of law, misstatement of fact, misuse of term x? point appears mistaken # irrelevant or tangential point #? point's relevance unclear #cl
point irrelevant to interests of client or to your assigned role abs overly abstract c-a fails to discuss obvious counterargument conc conclusory; result of argument stated without reasoning contra
contradiction dir? didn't follow directions exag otherwise good point is overstated or exaggerated ff fighting facts: contradicting stated facts or making assumptions inconsistent with them jg
jargon: using technical language as substitute for analysis lec lecturing: abstract discussion unconnected to or unnecessary for the problem at hand ll laundry list: throwing in relevant and irrelevant arguments alike, without distinction mix mixing together issues that should be discussed separately ns non sequitur: conclusion does not follow rew reword phrasing or diction rf repeats facts unnecessarily sa straw argument: weak or caricatured argument set up merely for sake of rebuttal ss
slow start: too much space spent restating the issue or getting to the point tc throat-clearing; same as slow start ua unsupported assertion vb verbose; too much space devoted to the point or points in question vg discussion is overly vague