By Daniel L.
Bennett
In mid September, the Congressional duo of George Miller and John
Tierney joined their Senate colleagues Tom Harkin and Dick Durbin and the
Department of Education in what might be described as the ongoing Beltway Witch
Trials, where the alleged witches are the colleges that are legally organized
on a profit-making basis. Messrs. Miller and Tierney proposed a new line of
assault to rein in these alleged evil doers that they have creatively named
the College
Student Rebate Act of 2012. The objective of the proposed
legislation is to exert political control on how private sector colleges
allocate their financial resources, as the bill calls for a cap of 20 percent
for expenditures on "advertising and promotion activities, excessive
administrative expenses including executive compensation, recruiting, lobbying
expenses, or payments to shareholders." Expenditures on these activities
exceeding the cap would need to be refunded to students and/or the government.
Rep. Miller told the Huffington
Post that since "for-profit colleges tend to get a great deal of
revenue directly from the federal government...how schools spend this money must
be carefully examined."Examination is one thing, but what the bill would really
do is enable politicians and unelected bureaucrats to limit the ability of
private firms to attract customers and strengthen their brands, compensate
their managers for successful performance, protect themselves from additional
onerous regulations, and reward owners for their investments. The bill would
seriously inhibit the incentive structure necessary to promote private investment,
innovation and growth in an industry greatly in need of improved efficiency.
The bill is simply the latest installment in a series of attempts to
rein in the growth and success of the for-profit tertiary education market.
Economic data illustrate the success of the private sector colleges. Between
1986 and 2008, the market share of for-profit colleges increased nearly
fourfold: from 2.4 to 9.2 percent; and the sector managed to compete for 21
percent of all Pell Grant and subsidized Stafford Loan dollars in 2007-08.
Economic theory might suggest that the firms comprising this sector have been
successful by putting on their entrepreneurial hats and finding ways to satisfy
unmet demand. Other economic data -- namely higher average student debt and
default rates among for-profit colleges -- paint a drearier picture of the
sector. These data have often been coupled with horror stories of for-profit
colleges preying on naïve student victims by luring them in with misleading
advertising and promises of a better future as a means to capture their federal
aid dollars. While there are no doubt instances of academic malpractice of this
sort in all sectors of higher education, I suspect that such instances are the
exception rather than the norm. Nonetheless, these testimonies along with the
ugly debtdata have spurred a striking amount of criticism about the private
sector and initiated the witch hunt.
Readers might recollect that over the past few years our Washington
witch hunters have proposed and implemented a variety of approaches to reign in
the successful influx of private
sector colleges. This witch hunt
coincides roughly with the beginning of the Obama Administration, as the
Department of Education initiated the so-called program integrity round of the
negotiated rulemaking process in 2009. Out of this process eventually came the
highly controversial gainful employment rules, part of
which were recently overturned by a Federal court, as
well as other less publicized regulations including a ban on the use of incentive compensation and
stricter rules concerning the link between student loan default rates and
eligibility for federal student aid programs. Additional legislative and
regulatory changes, including a decrease in the share of a school's revenue that
is legally permitted to come from federal financial aid as well as stricter rules over the use of veteran's education benefits at
private sector schools, have been promoted by Messrs. Harkin and Durbin, but
have failed to pass muster.
Recent reports indicate that
enrollments have declined for many schools in the
sector. In addition, several for-profit companies have announced substantial job cuts and campus closures. A hostile
regulatory environment coupled with an onslaught of negative press has played
an influential role in slowing the growth of the sector. For our witch hunters,
this news is likely encouraging that their efforts are exerting the desired
effect.
The private, profit-seeking colleges were previously at a competitive
disadvantage compared to public sector schools that receive myriad direct
subsidies and tax exemptions. That for-profit schools have been able to compete
is a sign of entrepreneurship and optimism that higher education can be
delivered much more efficiently when organized using market-oriented processes.
Recent regulatory changes have further tilted the competitive playing field in
favor of the non-profit schools. The latest effort to further constrain the
competitiveness of the for-profit schools, the Miller-Tierney bill, seeks to
limit the functions that enable firms to promote innovation and growth, as well
as those that enable defense from an overzealous state.
These policies are anti-competitive and anti-entrepreneurial -- two
facets that deter a vibrant market economy. These acts of political
gamesmanship appear to be characteristic of the disturbing trend towards
competition through the political process rather than the market. The
successful erection of entry barriers and other competitive advantages gained
through the political process increases the attractiveness of crony capitalism
and results in a redirection of resources from productive to unproductive
rent-seeking activities. This entails a loss of efficiency as well as a
reduction of societal well-being. While a few bad for-profit actors will likely
experience an accelerated exit from the market as a result of the ongoing witch
hunt, the benefits of doing so are likely far surpassed by the costs of
reducing the competitiveness of private enterprise and a rise in cronyism.
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Daniel L. Bennett is a Ph.D. student in economics at Florida State University, a Mercatus Center Adam Smith Fellow, and a Research Fellow at The Center for College Affordability and Productivity.
