Red Wave


Financialization in American higher ed

Like many systems of social provision—from housing to pensions—American education has become increasingly financialized. In a recent paper, Charlie Eaton, Jacob Habinek, Adam Goldstein, Cyrus Dioun, Daniela García Santibáñez Godoy, and Robert Osley-Thomas consider the scope and consequences of financialization in the market for higher education.

From the paper:

“Increasing dependence on financial markets may bias resources towards revenue-generating commercial projects and increased student loan origination. We document the growing role of finance across the heterogeneous subsectors of US higher education: traditional public and non-profit educational providers have come to rely more heavily on financially mediated flows of investment revenue and debt-funded capital. Meanwhile, equity capital fueled the growth of an explicitly financialized sub-sector of for-profit providers. Finally, educational consumers have been saddled with growing interest payments as debt balances grew. Interestingly, the state has been one of the main participants in the transformation we describe.

How does financialization affect educational outcomes and educational stratification? We show that students’ average student loan borrowing increased fastest and to the highest levels at for-profits. Yet for-profits and the poorest public institutions disproportionately enroll minorities and students from lower social class backgrounds. Together, these facts suggest that the financialization of higher education may play a significant direct role in exacerbating educational and economic stratification. We can also expect significant effects among public and non-profit institutions. Borrowed capital has disproportionately funded investments in non-instructional commercial activities, including amenities. In this way, bond markets promote organizational behaviors that may be at odds with the goals of cost-efficient social provision in areas like higher education.”

Link to the full article.

  • Another Eaton paper, co-authored with Sabrina Howell and Constantine Yannelis, uses “novel data on 88 private equity deals involving 994 schools” to study the impact of private equity buyouts on higher education: “After buyouts, we observe lower education inputs, graduation rates, loan repayment rates, and earnings among graduates.” Link. See also this detailed report on financialization and higher education from the Roosevelt Institute. Link.
  • “When public higher education cannot keep pace with growing public demand for access and programs, governments often allow for-profits to rush in and help fill the gap. The future tertiary market will not be the result of a well thought out policy at the national or state levels, but a quasi-free market result that will foster lower quality providers and fail to meet national goals for increasing the educational attainment level of Americans.” A 2012 article by John Douglass analyzes the rise of for-profits in the aftermath of the financial crisis. Link.
  • “One generation of Americans owed $86 billion in student loan debt at last count. Its members are all 60 years old or more.” At the WSJ, AnnaMaria Andriotis writes on the emergence of senior held student debt. Link.

New Researchers

The inception of capitalism through the lens of firms

In a fascinating 2019 paper, NBER postdoctoral fellow KRISZTINA ORBÁN looks at the output patterns of post-communist economies. Using firm-level financial statements from administrative sources and a database of financial access and banking relationships from Hungary covering the period from 1986-1999, the paper investigates the factors that accounted for the steep decline in output after the fall of communism, and the mechanisms that drove those changes.

From the paper:

“After the fall of communism, output declined by 29% in the average Eastern European country. This average output recovered to its prior trend 16 years later, making this macroeconomic event comparable to the Great Depression in magnitude and length. The large output decline was a surprise to economists: Communism imposed distortions on firms and markets, and removing these distortions was expected to increase output. Despite the importance of the event, the channels behind the output decline and recovery have not been identified or quantified using comprehensive microdata.

I develop a novel decomposition of output change. To the best of my knowledge, this paper is the first to incorporate allocative efficiency to the traditional output decomposition, Growth Accounting. The decomposition in this paper is based on the intuition that output can be thought of as the sum of two terms: first, output level if labor, capital, and productivity were randomly assigned across firms; second, the additional output if labor, capital, and productivity are sorted positively or negatively. The decomposition and its results allow me to evaluate previously proposed channels explaining the surprising output pattern of post-communist economies: first, the decreasing contribution of labor accounts for the majority of the decrease in output; second, improvements in aggregate productivity, in particular via allocative efficiency, account for 123% of output recovery.”

Link to the paper, link to Orbán’s website.

Each week we highlight great work from a graduate student, postdoc, or early-career professor. Have you read any excellent research recently that you’d like to see shared here? Send it our way:

+ + +

  • On the blog last week, we published the third iteration of our series Phenomenal Works, featuring political scientist Alexander Hertel-Fernandez’s pick of essential reading. Link.
  • JFI fellow Johannes Haushofer published an exciting paper this week—with co-authors Dennis Egger, Edward Miguel, Paul Niehaus, and Michael Walker—on the general equilibrium effects of cash transfers. Link to the paper. And link to coverage on NPR.
  • “More than 53 million people—44% of all workers aged 18-64—are low-wage workers. They earn median hourly wages of $10.22 and median annual earnings of $17,950.” A new Brookings report on the realities of America’s low-wage workforce. Link.
  • Several weeks ago we shared the first part of historian Aaron Benanav’s essay on automation for the New Left Review. Part two is out now: “It is crucial that we reconceive of the present situation as marked not by the imminent arrival of mass unemployment, as automation theorists suggest, but by continuously rising under-employment.” Link.
  • From our colleagues Dubravka Ritter and Doug Webber, a new and comprehensive Philadelphia Fed discussion paper on income share agreements. Link.
  • A very short post by Brad DeLong: “One of the key insights of the Reverend Thomas Bayes was that your results give you a map between what you thought before and what you should think now. I would think that the Bayesian tradition would be to report this map. But it doesn’t.” Link. The instigating post by Andrew Gelman—”Here’s an idea for not getting tripped up with default priors”—offers a response. Link.
  • On race and networks in the job search process. “We develop and articulate two pathways through which networks may perpetuate racial inequality in the labor market: network access and network returns.” Link. See also: our interview on social network analysis with Mark Granovetter. Link.
  • By Jeff Powell and Yuliya Yurchenko: the evolution of private provision in urban drinking water. Link.
  • From VoxEU, a proposal by Samuel Schmassmann, Ulrich Schetter, and Hans Gersbach for a unified theory of public basic research. Link.
  • In the New York Times, economist Seema Jayachandran writes about RCTs that—rather than experiment with new, possible unimplementable social provisioning programs—uncover flaws in existing ones. Link.
  • “The labor share of income in China substantially declined from the mid-1990s to the late 2000s.” Hao Qi in the Cambridge Journal of Economics. Link.
  • “The Church’s real estate in Colombia was inalienable, free of taxes, and owned in perpetuity. In this article, I explore the evolution of political violence after an institutional reform that radically changed the Catholic Church’s property rights: the disentailment of mortmain. I measure the impact of the expropriation of Church assets on political violence after 1850. With yearly data on the number of battles per municipality, archival information on the reform, and difference-in-differences, the paper documents a reduction of political violence in places where the Church’s assets were expropriated. The paper contests the traditional idea of the expropriation of Church’s real estate as a source of political violence. It highlights changes in political competition after the alliance between Conservative factions and the Church was weakened.” Link.

Each week we highlight research from a graduate student, postdoc, or early-career professor. Send us recommendations:

Subscribe to PW Sources