Peter Krupa

The longer I’m alive, the more I think economists are the academic version of Gypsy palm readers: They charge you a lot of money to make stuff up about the future, then when it doesn’t work out, you go back to them for more advice. Watch Eugene Fama, founding father of the efficient-market hypothesis, scuttle sideways like a crab:

So what is your explanation of what happened?

What happened is we went through a big recession, people couldn’t make their mortgage payments, and, of course, the ones with the riskiest mortgages were the most likely not to be able to do it. As a consequence, we had a so-called credit crisis. It wasn’t really a credit crisis. It was an economic crisis.

But surely the start of the credit crisis predated the recession?

I don’t think so. How could it? People don’t walk away from their homes unless they can’t make the payments. That’s an indication that we are in a recession.

So you are saying the recession predated August 2007, when the subprime bond market froze up?

Yeah. It had to, to be showing up among people who had mortgages. Nobody who’s doing mortgage research—we have lots of them here—disagrees with that.

So what caused the recession if it wasn’t the financial crisis?

(Laughs) That’s where economics has always broken down. We don’t know what causes recessions. Now, I’m not a macroeconomist so I don’t feel bad about that. (Laughs again.)

Haha! But the really funny thing about the efficient-market hypothesis is that we know market prices are correct because they are set by markets. Got that? It’s the same reason the Bible is God’s word – because He said it is. In the Bible. Hilarious!

I looked into going back to school recently. I might still do it some day. In some ways it’s hard to see a financial benefit. Cost = ($30,000 annual tuition x 2) + ($40,000 in annual salary foregone x 2) = way more than the benefit I’d gain from Master’s-level government employment (Oh, didn’t you hear? Private sector job growth during the last decade was negative).

Still, I wonder if the current wailing and gnashing of teeth over the expense of undergraduate and graduate education fails to account for details. Take college. The average debt from a four-year degree is now $23,200. That’s either a little or a lot. It’s a little if you studied engineering at MIT. It’s a lot if you majored in Christian Studies at Hillsdale College.

Same with, for example, law school. People gasp about $140,000 debt incurred in the hallowed halls of the Ivy League. However, that cost is neither surprising nor excessive considering it gives one access to six-figure Biglaw salaries. If one doesn’t mind settling for a normal (probably government?) salary, it’s not too difficult for a reasonably intelligent person to get good LSAT scores, get scholarships to a decent law school, graduate with debt that’s not overwhelming, and go on to have a nice local career.

The problem is that Americans are making the same mistake with education as they recently made with real estate. We justify massive borrowing by blindly assuming that the investment will always maintain its value and pay a return. While this was perhaps true for education during the last several decades, it no longer is. Students must now make good choices to get good value.