Education – The Greatest Fraud Exempt from Law

by Martin Armstrong, Armstrong Economics:

QUESTION: Trump seems to be interested in changing education. This seems to be really controversial. What are your thoughts on this subject.

ANSWER: Yes, there are people yelling about reducing or gutting public education. Let’s get real about this. The two WORST areas of abuse have been medical care and education. Both are increasing at costs way ahead of anything else in the economy. Why? Corruption inspired by subsidizing from government. Trump has been talking about:

Consolidate ALL current repayment plans into a single Income-Based Repayment program (IBR) where students pay 12.5% of their income toward their loans each month and receive total loan forgiveness after 15 years

Plans to cover increased forgiveness amounts (and the higher cost to taxpayers) due to shorter repayment terms by lowering federal spending accordingly

Promises to scale back funding significantly for the Department of Education

There is a test in economics known as the Baumol’s cost disease, or the Baumol effect. The assumption is a free market study whereas a rise of salaries in jobs that have experienced no actual increase in the labor productivity is a response to rising salaries in other jobs where there has been an increase in labor productivity growth. This Baumol effect operated counter to the classical economic theory which assumed real wage growth is closely tied to labor productivity changes.

In other words, let’s say the average wage is $10,000 annually. There is a shortage in IT developers. Suddenly they now pay $20,000 annually. The rise of wages in other jobs without any productivity gains whatsoever takes place as other jobs now have to compete with rising wages in an unrelated field. How many student have gone to school for medicine or law simply because they were the higher paying jobs.

There are quantitative studies that have shown that there are significant rises in tuition for college that is disproportionate to the rise in potential income one would earn (see Tuition-Study). The Federal Student Loan Program (FSLP) has fuel the increases in the costs exponentially because the colleges know they will get paid. They do not have to compete so the costs have increased beyond the increase in wages. Forbes Magazine showed that 60% of students cannot find a job in what they paid for in college. If this was finance, they would be in prison for 25 years calling in fraud. We have consumer fraud laws, but none of this applies to education. Students are burdened with loans that are for degrees that are totally worthless.

College tuition rose 106% between 1987 and 2010, which was far more than the 78% increase salaries. Tuition studies have shown that the FSLP alone generate a 102% tuition increase. Such studies have stated that their findings “cast doubt on Baumol’s cost disease as a driver of higher tuition.”

This is the greatest of all frauds because the Clintons handed to the banks to exempt students from the bankruptcy laws. They go into debt to pay loans for degrees that are worthless. Then, the bankers are clever. They won that exemption from the Clintons, which Larry Summers supported, under the pretense that these students had no collateral and were thus risky warranting that they could not go bankrupt. Then the bankers would demand the parents cosign. Hence, they played fast and loose with the laws and managed to get collateralize loans exempt from bankruptcy.

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