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Economic Liberty and the Growing Student Loan Bubble

The argument continues over whether the housing bubble was caused by government regulations, predatory lenders, or a combination of both.  I think Thomas Sowell did an excellent job making the case against the government in Housing Boom and Bust, and Wendell Cox at the National Center for Policy Analysis recently published an excellent article detailing how local zoning and Smart Growth initiatives caused the worst housing bubbles in the United States.

While the housing market is still sluggish—a nightmare in some places—the job market is starting to have serious implications on what I’ve long considered The Next Bubble: student loans.  On Monday, the Department of Education announced that in the Fiscal Year 2009 the national student loan default rate rose from 7% to 8.8%. This measure only counts recent graduates whose first loan payments came due between Oct. 1, 2008 and Sept. 30, 2009.  Given that many recent grads can defer repayment for a time, these numbers are probably getting worse.

What’s the cause of the increase in defaults? According to the DOE’s press release, it’s premiums that are too high, institutions that offer programs with poor employment prospects, and, of course, “misleading or overly aggressive recruiting practices.”  The solution? More regulation! The DOE will now work to make schools more transparent, issue price controls, and place additional oversight on educational programs.

Mike Riggs at Reason makes the connection between defaults and the college industry quite forcefully:

Why [Education Secretary Arne] Duncan is insisting that more money be funneled to schools that will turn around and jack up tuition and fees, as opposed to lambasting state legislatures that require poor people to attend for-profit colleges before they can transcend the grease-caked plexiglass ceiling of customer service, is beyond me.

Indeed, in this economy we’re facing the reality of professional regulation as protectionism.  According to the Institute for Justice, in the 1950s only one in twenty jobs required a professional license; today it’s more than one in three.  Although many unemployed Americans may have too much pride to try out a “lesser” job than the one they lost (and their numbers are likely dwindling now that we’re three years into this), those who are eager to be entrepreneurial are discovering that even many service jobs are now protected by cartels.

As I’ve acknowledged previously, Wyoming’s unemployment rate is not too bad compared to other states, but we’ve got plenty of cartels.  Title 33 of the Wyoming Statutes lays out 47 chapters of professional regulations, supposedly designed to protect you. Of course, the only thing we know for sure is that they’re protecting those who’ve already satisfied the regulations from competition. Here’s but a few examples:

  • Would you like to advise people on how to eat healthy in Wyoming? You’ll need a license, and to get one you will need a college degree and 900 hours of training.
  • Would you like to be an athletic trainer? You’ll need a license for this, too, which requires a four-year college degree and an exam, administered by the Wyoming Board of Athletic Training.
  • What if you found a way to turn your fascination with geology into a career? In order to be a “professional geologist,” it will take a four-year degree (with the right coursework), passing examinations, four years of professional practice and—my favorite part—“written endorsements from peers attesting to [your]  professional competency.”

This is but a small sampling of Title 33, and I only point these jobs out because these are professions that could well arise from hobbies.  There are people who know from years of experience how to eat, how to train athletically, and how to study rocks.  Most others could learn these jobs from professionals through an informal institution that once defined America, apprenticeship.  Alas, no, a college degree is required, then exams, and maybe even an approved apprenticeship, with a closely guarded curriculum.

Just by suggesting this I’ve probably ruffled some feathers.  Many dieticians, athletic trainers and professional geologists will insist licensure is protecting consumers from malpractice, quackery, and perhaps even death.  As a member of not one, but two cartels, take it from me: this is nonsense.  Contract law and tort law in these United States are more than enough to redress and deter professional malpractice.  For those who commit crimes we even have criminal laws.

So, as college grads find themselves unemployed and shouldering student loan debt, do they switch careers?  As we’ve seen, it’s not so simple: just to try and enter a different market, they have to go back to college, and more often than not take on more debt.  So, the Next Bubble continues to grow, fostered by free money from the federal government and barriers to entry erected by the states.

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