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Privatization and Oligarchy

Cass Sunstein: I'm not capitulating, I'm nudging

The main goal of any sensible oligarch is to get high returns with no risk. Real estate mortgage-backed securities served that purpose in the run-up to the Great Crash. Oligarchs didn’t buy RMBSs; they served them up to others and took huge profits from a scummy mélange of cheating home-buyers and telling half-truths about their own involvement in the deals.

Another great way to make money risk-free is to tap into taxpayers through privatization. The idea is that government provides necessary services, paid for by taxes. If you can get the government to bow out, you can put that tax money into your own wallet. For-profit proprietary schools, which let you tap into the flood of student loan money Uncle Sam offers to those trying to better themselves, are a great example, as we learn in the New York Times.

The public justification for privatization is the fantasy that the private sector does a better job than government at everything. The anti-tax movement fits right into this nasty little idea, because state governments cut funding to post-secondary education and raised the costs to students who needed technical training for good jobs.

There was always a sector of the education system that was private. It included business colleges, where you could learn secretarial skills; and barber schools where you could learn how to cut hair; and one of my favorites, schools where you could learn the fine art of electrolysis. It was a sleepy backwater, providing a living for the teachers, a small profit for the owners, and valuable training for all kinds of people in needed crafts.

When it became obvious that there was money to be made, chains of proprietary schools sprang up, covering all kinds of technical training, from dental assistant to computer systems administrators and even college degrees.

Their big problem is that potential students don’t have any money. The answer to that problem is to tap into the federal education loan programs. The idea is to collect revenue from the government, and let their customers pay the debts later. That would work if the customers completed the training and got jobs, but that doesn’t happen nearly enough. The abuses have been horrific, and the debt load is $1 trillion, crashing the lives of ex-students, and all of it non-dischargeable in bankruptcy.

It finally dawned on the Department of Education to do a study to find out how the students at for-profits were doing, and they uncovered a disgusting pile of garbage. For example, the University of Phoenix gets 88% of its revenue from the government, and has a default rate of 18%. Because this is a nominally Democratic administration, the civil servants at the Department thought they might actually be able to accomplish something valuable for prospective students through stiff regulations.

Well, that would never do. It turns out that all kinds of rich people have a stake in abusing the system. The NYT tells us about some of them: Donald Graham of the Kaplan Washington Post; John Sperling, who controls Apollo Group which owns the for-profit University of Phoenix, and who is a close friend of Nancy Pelosi; Jamie Rubin, a big bundler for the Democratic party, whose private equity fund owns a chain of for-profit schools, and Avy Stein, another private equity guy with a stake in a chain. This crowd had no problem finding money to pay a horde of lobbyists to weaken the regulations and keep the money flowing.

It’s no surprise that the leading lobbyists are from the nominally Democratic side. The NYT says that the effort was led by Anita Dunn, who was the White House communications director under President Obama. Among the named lobbyists is Tony Podesta, whose clients include Bank of America on financial matters, BP, and a bunch of health care businesses. Richard Gephardt worked the issue. His clients include Goldman Sachs, and Sodexo, the French food services company involved in a fight with the SEIU. And for the conservative Democrats, the proprietary school business hired John Breaux, the former senator from Louisiana, who works for the giant lobby firm Patton Boggs.

For completeness, I add the obligatory denial from the Administration as they capitulate:

“The haranguing had zero effect,” said Cass R. Sunstein, the White House official who oversees rule making. Rather, he and other administration officials said they listened to what they viewed as reasonable arguments and decided to narrow the scope of the original plan.

Whatever. Sunstein no doubt thinks lobbyists are only interested in what’s best for everyone, and he is the judge of the good, the true and the beautiful. He didn’t even need the threat of a filibuster to give the rich what they want.

This is a typical story of how oligarchs use privatization to tap into government largesse at the expense of average Americans. It’s also a typical story of how sleazy influence peddlers do their dirty work. And it’s a typical story of the foolishness of political amateurs who undermine Civil Servant experts.

Update: How could I have omitted the odious Lanny Davis from my list of nominal Democrats lobbying for the for-profit colleges?

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