Click on WORD or PDF for full content
We’re late and long today. But the cartoons are good and we’ll take tomorrow off so you can catch up.
Pickerhead has often said we now live in a country filled with perverse incentives. This is perfectly illustrated by an article from The Atlantic on for-profit law schools. The writer seems to think this is an example of capitalism run amok, but Pickings readers know it is an example of a government that is out of control. And remember, when the government tries to do something or help someone, it always screws up. The goal was to help more aspiring lawyers find their way into the profession. The result is to saddle many of them with hundreds of thousands in debt and no degree. The operators of the schools get paid up front by the idiots in our governments. The winners are not people who formed companies that create something new. They are people who spotted a fault-line in government and found a way to exploit it. And more and more, our economy is littered with people like that.
David Frakt isn’t easily intimidated by public-speaking assignments. A lieutenant colonel in the Air Force Reserve and a defense attorney, Frakt is best known for securing the 2009 release of the teenage Guantánamo detainee Mohammad Jawad. He did so by helping to convince a military tribunal that the only evidence that Jawad had purportedly thrown a hand grenade at a passing American convoy in 2002 had been extracted by torture.
By comparison, Frakt’s presentation in April to the Florida Coastal School of Law’s faculty and staff seemed to pose a far less daunting challenge. A law professor for several years, Frakt was a finalist for the school’s deanship, and the highlight of his two-day visit was this hour-long talk, in which he discussed his ideas for fixing what he saw as the major problems facing the school: sharply declining enrollment, drastically reduced admissions standards, and low morale among employees.
But midway through Frakt’s statistics-filled PowerPoint presentation, he was interrupted when Dennis Stone, the school’s president, entered the room. (Stone had been alerted to Frakt’s comments by e-mails and texts from faculty members in the room.) Stone told Frakt to stop “insulting” the faculty, and asked him to leave. Startled, Frakt requested that anyone in the room who felt insulted raise his or her hand. When no one did, he attempted to resume his presentation. But Stone told him that if he didn’t leave the premises immediately, security would be called. Frakt packed up his belongings and left.
What had happened? Florida Coastal is a for-profit law school, and in his presentation to its faculty, Frakt had catalogued disturbing trends in the world of for-profit legal education. This world is one in which schools accredited by the American Bar Association admit large numbers of severely underqualified students; these students in turn take out hundreds of millions of dollars in loans annually, much of which they will never be able to repay. Eventually, federal taxpayers will be stuck with the tab, even as the schools themselves continue to reap enormous profits.
There are only a small number of for-profit law schools nationwide. But a close look at them reveals that the perverse financial incentives under which they operate are merely extreme versions of those that afflict contemporary American higher education in general. And these broader systemic dysfunctions have potentially devastating consequences for a vast number of young people—and for higher education as a whole.
Florida Coastal is one of three law schools owned by the InfiLaw System, a corporate entity created in 2004 by Sterling Partners, a Chicago-based private-equity firm. InfiLaw purchased Florida Coastal in 2004, and then established ArizonaSummitLawSchool (originally known as Phoenix School of Law) in 2005 and Charlotte School of Law in 2006.
These investments were made around the same time that a set of changes in federal loan programs for financing graduate and professional education made for-profit law schools tempting opportunities. Perhaps the most important such change was an extension, in 2006, of the Federal Direct PLUS Loan program, which allowed any graduate student admitted to an accredited program to borrow the full cost of attendance—tuition plus living expenses, less any other aid—directly from the federal government. The most striking feature of the Direct PLUS Loan program is that it limits neither the amount that a school can charge for attendance nor the amount that can be borrowed in federal loans. Moreover, there is little oversight on the part of the lender—in effect, federal taxpayers—regarding whether the students taking out these loans have any reasonable prospect of ever paying them back.
This is, for a private-equity firm, a remarkably attractive arrangement: the investors get their money up front, in the form of the tuition paid for by student loans. Meanwhile, any subsequent default on those loans is somebody else’s problem—in this case, the federal government’s. The arrangement bears a notable resemblance to the subprime-mortgage-lending industry of a decade ago, with private equity playing the role of the investment banks, underqualified law students serving as the equivalent of overleveraged home buyers, and the American Bar Association standing in for the feckless ratings agencies. But there is a crucial difference. When the subprime market collapsed, legislation dedicating hundreds of billions of taxpayer dollars to bailing out the banks had to be passed. In this case, no such action will be necessary: the private investors have, as it were, been bailed out before the fact by our federal educational-loan system. This situation, from the perspective of Sterling Partners and other investors in higher education, comes remarkably close to the capitalist dream of privatizing profits while socializing losses. …
… How much debt do graduates of the three InfiLaw schools incur? The numbers are startling. According to data from the schools themselves, more than 90 percent of the 1,191 students who graduated from InfiLaw schools in 2013 carried educational debt, with a median amount, by my calculation, of approximately $204,000, when accounting for interest accrued within six months of graduation—meaning that a single year’s graduating class from these three schools was likely carrying about a quarter of a billion dollars of high-interest, non-dischargeable, taxpayer-backed debt.
And what sort of employment outcomes are these staggering debt totals producing? According to mandatory reports that the schools filed with the ABA, of those 1,191 InfiLaw graduates, 270—nearly one-quarter—were unemployed in February of this year, nine months after graduation. And even this figure is, as a practical matter, an understatement: approximately one in eight of their putatively employed graduates were in temporary jobs created by the schools and usually funded by tuition from current students. InfiLaw is not alone in this practice: many law schools design the brief tenure of such “jobs” to coincide precisely with the ABA’s nine-month employment-status reporting deadline. In essence, the schools are requiring current students to fund temporary jobs for new graduates in order to produce deceptive employment rates that will entice potential future students to enroll. (InfiLaw argues that these jobs have “proven to be an effective springboard for unemployed graduates to gain experience and secure long-term employment.”) …
… InfiLaw does not disclose its finances, but law schools have traditionally been highly profitable enterprises. The reasons are straightforward: law schools are, or at least ought to be, relatively cheap to operate. The traditional lecture method of teaching allows for a high student ratio, and there is no need for expensive lab equipment or, at free-standing law schools like InfiLaw’s, other costly features of university life, such as sports teams, recreational centers, esoteric subjects pursued by an uneconomical handful of students, and so forth. Indeed, until relatively recently, many universities treated their law schools as cash cows whose surplus revenues helped subsidize the institutions’ other operations.
Thus, Sterling Partners seems to have calculated a decade ago that all it needed to make its new law-school venture profitable was large numbers of prospective law students eligible for federal student loans. What the firm must have seen at the time was, from the perspective of a profit-maximizing enterprise, a very large untapped market. Only slightly more than half of the almost 101,000 people who applied to ABA-accredited law schools in 2004 were admitted to even one of these schools. With unlimited federal educational loans available to cover the full cost of attendance at any accredited school, this meant billions of dollars of taxpayer-supplied law-school tuition revenue were being left on the table. …
… The only real difference between for-profit and nonprofit schools is that while for-profits are run for the benefit of their owners, nonprofits are run for the benefit of the most-powerful stakeholders within those institutions.
Consider the case of New England Law, a school of modest academic reputation that for many years produced a reasonable number of local practitioners at a non-exorbitant price. Like many similar schools, New England Law has spent years jacking up tuition and fees by leaps and bounds—after nearly doubling its price tag between 2004 and 2014, the school now costs about $44,000 a year—and graduating invariably large classes, even as the demand for legal services, and especially the legal services of graduates of low-ranked law schools, has contracted radically.
A glance at New England Law’s tax forms suggests who may have benefited most from this trajectory: John F. O’Brien, the school’s dean for the past 26 years, whom the school paid more than $873,000 in its 2012 fiscal year, the most recent yet disclosed. This is among the largest salaries of any law-school dean in the country. (By comparison, the dean at the University of Michigan Law School, a perennial top-10 institution, was reported to make less than half as much, $420,000, in 2013.) Meanwhile, the school’s graduates are burdened with crushing debt loads and job prospects only marginally less terrible than those of InfiLaw graduates. Approximately 41 percent of the students in New England Law’s 2013 graduating class had jobs as lawyers nine months after graduation, and nearly 20 percent were unemployed. …
… Two aphorisms from economists sum up how the story of InfiLaw, despite its idiosyncrasies, illustrates in a particularly sharp way why American higher education cannot continue down the path it has been on for more than half a century—a path of endlessly increasing costs, enabled by an unlimited supply of federal student loans. The first is Herbert Stein’s insight: “If something cannot go on forever, it will stop.” The second is Michael Hudson’s observation: “Debts that can’t be paid, won’t be.”
The applicability of these almost Zen-like adages to the structure of higher education in America helps explain why the Harvard Business School professor Clayton Christensen predicted in 2013 that as many as half of the nation’s universities may go bankrupt in the next 15 years. And it also helps explain why Florida Coastal kicked a dean candidate off campus in the middle of his presentation to the faculty. The alternative was to let him discuss frankly the ways in which the school, like so many of America’s institutions of higher education, is based on a fundamentally unsustainable social and economic model.
Did you know an asteroid just missed earth today? And, it was discovered just days ago? We’re in the best of hands. Our governments can’t do their basic jobs, but do lots of stuff that makes things far worse. WaPo has the asteroid story.
Earth will experience a close call on Sunday, as an asteroid discovered only a few days ago is expected to safely pass very close by. The space rock will zip by our planet approximately 25,000 miles above our heads – one tenth the distance between here and the moon.
The asteroid, which is approximately 60 feet in diameter, will pass closest to Earth on Sunday at 2:18 p.m. ET. Based on current calculations, astronomers suspect it will be over New Zealand at the time. While the asteroid will be too small to see with the naked eye, NASA says it might be possible for sky watchers to catch a glimpse with small telescopes.
While 2014 RC will pass extremely close to the orbiting height of our planet’s geosynchronous satellites, which are parked at a height of 22,000 miles, NASA says it does not pose any threat to the satellites because of it’s path below Earth and the satellite orbit ring. …
There is only one thing to do – start drinking. And, Pacific Standard says drinking is good for you.
Bob Welch, former star Dodgers pitcher, died in June from a heart attack at age 57. In 1981, Welch published (with George Vecsey) Five O’Clock Comes Early: A Cy Young Award-Winner Recounts His Greatest Victory, in which he detailed how he became an alcoholic at age 16: “I would get a buzz on and I would stop being afraid of girls. I was shy, but with a couple of beers in me, it was all right.”
In his early 20s, he recognized his “disease” and quit drinking. But I wonder if, like most 20-something problem drinkers (as shown by all epidemiological research), he would otherwise have outgrown his excessive drinking and drunk moderately?
If he had, he might still be alive. At least, that’s what the odds say.
Had Welch smoked, his obituaries would have mentioned it by way of explaining how a world-class athlete might have died prematurely of heart disease. But no one would dare suggest that quitting drinking might be responsible for his heart attack.
In fact, the evidence that abstinence from alcohol is a cause of heart disease and early death is irrefutable—yet this is almost unmentionable in the United States. Even as health bodies like the CDC and Dietary Guidelines for Americans(prepared by Health and Human Services) now recognize the decisive benefits from moderate drinking, each such announcement is met by an onslaught of opposition and criticism, and is always at risk of being reversed.
Noting that even drinking at non-pathological levels above recommended moderate limits gives you a better chance of a longer life than abstaining draws louder protests still. Yet that’s exactly what the evidence tells us.
Driven by the cultural residue of Temperance, most Americans still view drinking as unhealthy; many call alcohol toxic. Yet, despite drinking far less than many European nations, Americans have significantly worse health outcomes than heavier-drinking countries. (For example, despite being heavily out-drunk by the English, we have almost exactly twice their levels of diabetes, cancer, and heart disease.)
After David Letterman underwent quintuple bypass surgery in 2000, he had Bryant Gumbel on his show. Letterman exercises maniacally, is resultingly skinny and long ago gave up cigars and alcohol. Confronting the slightly doughy Gumbel, Letterman bemoaned, “How come I do everything healthy and you smoke cigars and drink and I end up on the surgery table?” …