Crony Capitalism at the Department of Education

My colleague Richard Vedder once described former Undersecretary of the Department of Education Robert Shireman as “the only guy I ever met whose very appointment to public office destroyed hundreds of millions of dollars in wealth.” Of course, Vedder was referring to the rapid devaluation of publicly traded higher education firms’ stock prices that followed Shireman’s appointment. Investors feared Shireman, who, as the founder of the Institute for College Access & Success (TICAS), advocated for stricter regulations on for-profit colleges and nationalization of the student loan market.

They were right to worry. Shireman’s enhanced scrutiny of the for-profit sector resulted in an $8 billion loss for investors of the 13 publicly-traded for-profit institutions during the second half of 2010. The for-profit seeking sector and its investors were particularly concerned over the ED ‘s efforts to enhance regulations through “gainful employment” rules that would withhold  federal student aid from for-profits that did not satisfy highly subjective metrics. However, the eventual rules that emerged were weaker than anticipated, prompting a rise in stock prices for the education stocks; moreover, last summer a judge struck down the rules, deeming them “arbitrary.”

Shireman’s behavior in implementing these regulations is now under scrutiny. The ED inspector general is investigating whether Shireman violated a conflict of interest agreement by improperly disclosing governmental discussions to TICAS and select individuals in the investment community prior to public disclosure. One such individual is Diane Schulman, a stock analyst whose circle of industry friends is believed to include short-seller Steve Eisman. Shireman faces potential civil and/or criminal charges if the allegations are confirmed.

The government should broaden its investigation. One group that has likely benefited during this debate are hedge fund traders such as Eisman, who may have advocated tougher regulation of the sector for his own benefit and has possibly received insider information from ED officials and politicians. Though the SEC investigated Eisman’s former firm FrontPoint for insider trading, to my knowledge, no one, is investigating  the potential Eisman-for-profit scandal, despite several prominent federal watchdogs advocating for one.

Both Karl Marx and Joseph Schumpeter predicted that capitalism would eventually falter. Marx assumed that that people would eventually succumb to the allure of socialism as a means to improve their lives. Recent history does not bear out his prediction. Schumpeter’s prophesy, on the other hand, was based on the idea that capitalism would falter because its foremost beneficiaries would eventually cease to defend it. The spout of crony capitalism surrounding ED policy is but one example of the rising tide of cronyism that might prove him right.

Daniel Bennett

Daniel L. Bennett is a Research Professor at the Baugh Center for Entrepreneurship and Free Enterprise at Baylor University.

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