If you think higher education should be a ladder for upward mobility, then you should regard these numbers as a disgrace. As we've written before at The Atlantic, elite schools do a consistently poor job recruiting the intelligent but low-income high school students who could benefit most from a top-notch education. Part of their problem, as Josh Freedman explained for us recently, is that many of them can't afford it. Other than a few schools sitting atop enormous endowments, most institutions can only afford to hand out large amounts of aid to individual students. But the roughly 80 schools in the "most competitive" category -- which is based on Barrons rankings -- should be the exceptions. 

And it's not as if there aren't enough smart, poor students to fill up classrooms. As economists Caroline Hoxby and Christopher Avery have shown, about 39 percent of America's high-achieving students are from the country's poorest 50 percent of students. These are teenagers who manage an A- average in school and finish among the 10 percent of SAT or ACT takers. Half of them never even apply to a selective college, which would include schools ranging from the "very competitive" category to the "most competitive" category.

If the wealthiest schools in the country wanted more economic diversity, they could have it.

Business profits are escaping U.S. corporate income taxes in three big ways. First, business is literally moving away from the U.S., as multinational companies have expanded abroad.  Second, large companies are wise to the tricks they can use to move income through foreign subsidiaries that avoid America's high statutory rate. Third, smaller companies are finding ways to avoid corporate taxes, altogether.

Let's flesh each of those out, briefly.

First, global companies are still globalizing. At large multinationals, the share of income from overseas increased from 37.1 percent in 1996 to 51 percent in 2004, according to one report. After the recession, nearly 75 percent of new jobs at 35 large U.S. multinationals were created overseas, according to a Wall Street Journal analysis.

Second, as the business has traveled overseas, multinationals have benefited from lower tax rates and credits against American taxes. "The US combined federal and state corporate tax rate has been stuck at 39% since 1986, while nearly all other countries have cut their rates. Canada, for example, is now down to around 20 percent," said Gary Hufbauer at the Peterson Institute for International Economics. So global corporations will "do their best to report earnings anyplace but in the U.S." What's more, corporate tax lawyers have predictably responded "by devising more ingenious ways to route income abroad." This is the sort of ingenious that leads to the Dutch Sandwich, the Double Irish, and other clever tax-loophole nicknames that when lined up, look like the menu for a European continental breakfast.

Third, the most important reason why corporate taxes are falling while corporate income is rising might be that the government no longer taxes most corporations as Corporations, with a capital C. Sole proprietorships (like any one-man biz), partnerships (like law firms), and S-corporations (like a small real estate company) are examples of "pass-through" businesses, where income is only taxed once. In other words, the income "passes through" the corporate tax code and goes straight to the owners.

"The explosion of pass-throughs" is the main reason for the forking of corporate income and corporate taxes, said Howard Gleckman at the Tax Policy Center. Look at the chart above, one more time. Between the 1960s and today, the percentage of overall business activity conducted by plane-old "C corporations" has declined from about 85 percent to 50 percent. So even as corporate income has increased, "C-corp" revenues have actually fallen as a share of the economy, Hufbauer said.

Lower-c corporations don't mean poor corporations, just smaller ones. Four in five dollars of all pass-through income is earned by taxpayers with earning more than $100,000; and more than a third of all pass-through income goes to millionaires, according to the Congressional Research Service.

The corporate income tax has eroded both because globalization happened and because we let it happen in the way we tax business income. We can't change the first. We can change the second.

A big new study from Pew Research Center on international attitudes toward the economy includes this head-to-head chart comparing Canadian and U.S. sentiment -- and man, does it make us look despondent. Fifty-five percent of Canadians are satisfied with their country, and 67 percent believe their economy is in good shape. Less than a third of Americans feel the same. Canadians also seem to be happier about their personal finances and less worried about rising prices, unemployment, public debt, or having enough money to pay for basic necessities. 

Americans, on the other hand, are slightly more likely to believe their children will be better off than their parents, and that their personal finances will improve. Of course, majorities in both countries think otherwise.

Pew's takeaway is that while Canada is far more content with the present state of things, Americans have a bit more hope for the future. But I think it's equally fair to conclude that Canadians already feel they have a pretty good lot, and there isn't room for dramatic improvement. 

Perhaps this is all just emotional scarring from the recession. Perhaps there's a psychological boost that comes with having a robust social safety net, or maybe living in a country with lower income inequality really does makes people more at ease. Perhaps that American optimism politicians like to talk about is just way overrated. In any event, it apparently feels very good to be a Canadian these days. 

The US government's price-fixing lawsuit against Apple goes to trial next month in New York. Ahead of its court date, the US released emails that purport to show Apple was the "ringleader" in a scheme to set artificially high ebook prices with some of the largest American publishers, which have already settled the case.

The emails have mostly been viewed in the context of the lawsuit, but they also provide an extraordinary view of high-stakes negotiation between the leaders of two powerful firms, Apple and News Corp. They start far apart, but over the course of five days, Apple's then-CEO Steve Jobs successfully pulls the son of News Corp. CEO Rupert Murdoch over to his side.

Jobs was a famously hard-nosed negotiator who won these kinds of battles all the time. Before book publishers, there was the movie industry. And before that, music record labels. But most of those negotiations were hidden from view. What follows are the emails released last week along with some context; spelling and grammar have been preserved from the originals. 

News Corp.'s Opening Move

It was a Friday morning, January 22, 2010. Apple was preparing to release its newest product, a long-rumored tablet computer, the following week. Part of the iPad's appeal was supposed to be the vast array of media that could be consumed on it, but one of the largest American publishers, HarperCollins, was holding out from signing a deal to sell its ebooks in Apple's iTunes store.

Those were the stakes as Eddy Cue, Apple's head of iTunes and the App Store, visited executives of HarperCollins and its parent company, News Corp. The substance of that meeting was conveyed in an email sent to Cue later that day by Brian Murray, the CEO of HarperCollins. It detailed the publisher's opening bid in the negotiation, with five days remaining until the iPad's unveiling.

Eddy,

Thanks for coming in again this morning. We've talked over the proposal and I want to make sure that you have a summary of the deal that HarperCollins would be willing to do in your timeframe.

1. Pricing: We need flexibility to price on a title by title basis outside the prescribed tiers in the contract. We will use our best efforts to meet the tiers we discussed.

2. MFN ["most favored nation" status]: In the event that HarperCollins and Apple disagree on a consumer price for a title, HarperCollins needs the ability to make that title available through other agents who support the higher price.

3. Commissions: We need a lower commission on new releases for the economics to work for us and our authors. We believe a 30% commission will lead to more authors asking for ebooks to be delayed a result that will not work for Apple or HarperCollins.

4. The new release window: We need to have flexibility on the agency window. We believe this window should be 6 months rather than 12 months in the event that one or more large retailers do not move to an agency model.

Leslie will be sending Kevin a contract that reflects these points in the event you wish to move forward on these terms.

Thanks
Brian

Those terms were never going to fly with Apple, which had successfully signed deals with HarperCollins's rivals, like Penguin (a division of Pearson) and Simon & Schuster (part of Viacom). Those deals would allow Apple to set prices for new ebooks at $12.99--three dollars higher than the typical rate at that time on Amazon--and take a 30% cut of each sale.

But HarperCollins wanted the freedom to set its own prices and worried that $12.99 per ebook would hurt its sales on the new iPad as well as the Kindle. It also didn't want to give up 30%. To back up its position, James Murdoch, a high-ranking News Corp. executive, forwarded Murray's email to Apple's then-CEO Steve Jobs, and included the following note. It was still Friday.

Steve,

Thanks for your call earlier today, and for the time last week.

I spoke to Brian Murray and Jon Miller [then the head of digital media at News Corp.]--and Brian is sending a note to Eddy today. I thin I have a handle on this now. In short--we we would like to be able to get something done with Apple--but there are legitimate concerns.

The economics are simple enough. [Amazon] Kindle pays us a wholesale price of $13 and sells it for 9.99. An author gets $4.20 on the sale of a hardcover and $3.30 on the sale of the e-book on the Kindle.

[A portion of this email was redacted by the court.]

Basically--the entire hypothetical benefit of a book without raw materials and distribution cost accrues to Apple, not to the publisher or to the creator of the work.

The other big issue is one of holdbacks. If we can't agree on the fair price for a book, your team's proposal restricts us from making that book available elsewhere, even at a higher price. This is just a bridge too far for us.

Also, we are worried about setting prices to high--lots of ebooks are $9.99. A new release window with a lower commission (say 10[%]) for the first six months would enable us to proce much more kenly for Apple customers. We'd like to da that.

More on this below in Brian's note to Eddy. We outline a deal we can do.

Feel free to call or write anytime over the weekend to discuss if you like.

I am in the UK (so eight hours ahead of CA). My home number is [redacted]. I check the email regularly.

Steve, make no mistake that across the board (TV, Studios, Books, and Newspapers) we would much rather be working with apple than not. But we, and our partners who produce, write, edit, and otherwise make all this with us, have views on fair pricing, and care a lot about our future flexibility. I hope we can figure out a way, if not now and in time for this launch of yours, then maybe in the future.

Best,
JRM

Jobs Digs In

Jobs wasn't willing to compromise. He sent this reply to Murdoch the same day, arguing that Amazon's pricing wasn't sustainable and would train people to think that ebooks were cheap. Jobs also reminded Murdoch of Apple's vast reach--"over 120 million customers with credit cards on file." You need us more than we need you, he seemed to be saying.

James,

A few thoughts to consider (I'd appreciate it if we can keep this between you and me):

1. The current business model of companies like Amazon distributing ebooks below cost or without making a reasonable profit isn't sustainable for long. As ebooks become a larger business, distributors will need to make at least a small profit, and you will want this too so that they invest in the future of the business with infrastructure, marketing, etc.

2. All the major publishers tell us that Amazon's $9.99 price for new releases is eroding the value perception of their products in customer's minds, and they do not want this practice to continue for new releases.

3. Apple is proposing to give the cost benefits of a book without raw materials, distribution, remaindering, cost of capital, bad debt, etc., to the customer, not Apple. This is why a new release would be priced at $12.99, say, instead of $16.99 or even higher. Apple doesn't want to make more than the slim profit margin it makes distributing music, movies, etc.

4. $9 per new release should represent a gross margin neutral business model for the publishers. We are not asking them to make any less money. As for the artists, giving them the same amount of royalty as they make today, leaving the publisher with the same profits, is as easy as sending them all a letter telling them that you are paying them a higher percentage for ebooks. They won't be sad.

5. Analysts estimate that Amazon has sold more than one million Kindles in 18+ months (Amazon has never said). We will sell more of our new devices than all of the Kindles ever sold during the first few weeks they are on sale. If you stick with just Amazon, Sony, etc., you will likely be sitting on the sidelines of the mainstream ebook revolution.

6. Customers will demand an end-to-end solution, meaning an online bookstore that carries the books, handles the transactions with their credit cards, and delivers the books seamlessly to their device. So far, there are only two companies who have demonstrated online stores with significant transaction volume--Apple and Amazon. Apple's iTunes Store and App Store have over 120 million customers with credit cards on file and have downloaded over 12 billion products. This is the type of online assets that will be required to scale the ebook business into something that matters to the publishers.

So, yes, getting around $9 per new release is less than the $12.50 or so that Amazon is currently paying. But the current situation is not sustainable and not a strong foundation upon which to build an ebook business.

[A portion of this email was redacted by the court.]

Apple is the only other company currently capable of making a serious impact, and we have 4 of the 6 big publishers signed up already. Once we open things up for the second tier of publishers, we will have plenty of books to offer. We'd love to have HC among them.

Thanks for listening.

Steve

Murdoch Starts to Bend

Murdoch's reply came the following afternoon, Saturday, January 23. Jobs had made clear that Apple wouldn't budge. Murdoch was about to indicate that HarperCollins would. He proposed two possible compromises, then noted that News Corp. and Apple were negotiating on a number of fronts. "Is it worth considering in the round, over the next few months or weeks, whether or not some of these loose ends can be tidied up?" Murdoch wrote. The iPad announcement was four days away.

Steve,

I think the crux of this is our flexibility to offer product elsewhere at price-points you don't like.

If we could offer to you that a certain percentage of releases (>50%) would be available within your pricing structure (< or = 14.99), does that give you enough comfort?

I think we are worried more about the absolute holdback of product elsewhere, and our ceding of pricing to Apple, than we are about the actual haggle over what the price will be.

I haven't shared this with HC directly--so this is only hypothetical. But if you were willing to accept that a supplier can exploit other avenues (at prices not disadvantageous to you), with a guarantee of substantial volume through Apple--maybe I could work with HC to get to some common ground.

Please let me know.

A different question: we have four areas of discussion (related to our product) between our teams right now: Books, US Video, Int'l Video, and newspapers. All at different stages of maturity, these discussions are all centered, for us, around the desire to make our product widely available, and to make yours and our products more attractive for our customers. It seems though that we in each one we largely encounter a "take it or leave it" set of terms, and predictably we've so far failed to really strike the kind of partnerships that could move things forward.

Is it worth considering in the round, over the next few months or weeks, whether or not some of these loose ends can be tidied up? It's clear that Apple is already becoming an attractive platform for so many of our customers--all over the world. As a creative company at our core, NWS [News Corp.] should be more engaged with Apple, and I think Apple could be more engaged with NWS, globally, than either of us are today.

Best,
JRM

Jobs Goes in for the Kill

With Murdoch indicating that HarperCollins was willing to compromise, Jobs pressed harder. "As I see it, HC has the following choices," he wrote in a reply to Murdoch the following morning, Sunday, January 24. Jobs outlined three stark choices. Accept our terms, he was saying, or good luck with Amazon. "Maybe I'm missing something, but I don't see any other alternatives," Jobs wrote, almost daring Murdoch to spurn Apple. "Do you?"

James,

Our proposal does set the upper limit for ebook retail pricing based on the hardcover price of each book. The reason we are doing this is that, with our experience selling a lot of content online, we simply don't think the ebook market can be successful with pricing higher than $12.99 or $14.99. Heck, Amazon is selling these books at $9.99, and who knows, maybe they are right and we will fail even at $12.99. But we're willing to try at the prices we've proposed. We are not willing to try at higher prices because we are pretty sure we'll all fail.

As I see it, HC has the following choices:

1. Throw in with Apple and see if we can all make a go of this to create a real mainstream ebooks market at $12.99 and $14.99.

2. Keep going with Amazon at $9.99. You will make a bit more money in the short term, but in the medium term Amazon will tell you they will be paying you 70% of $9.99. They have shareholders too.

3. Hold back your books from Amazon. Without a way for customers to buy your ebooks, they will steal them. This will be the start of piracy and once started there will be no stopping it. Trust me, I've seen this happen with my own eyes.

Maybe I'm missing something, but I don't see any other alternatives. Do you?

Regards,
Steve

On Tuesday, a day before the iPad announcement, HarperCollins agreed to Apple's terms. The publisher's ebooks were included in the iBookstore unveiled on January 27 along with new tablet, more than 100 million of which have now been sold.

The big reveal.AP Photo / Paul Sakuma

This year, Washington's political class hasn't merely given up on trying to fix U.S. unemployment; it's given up on even discussing the subject. This is shameful, and not simply because the jobless rate is still two or so percentage points higher nationwide than it should be, or because the long-term unemployed have been left out to dry. No, it's shameful because many communities across the country are still simply being ravaged by the lack of work. 

Particularly the black community. Even in good times, the unemployment rate tends to be roughly twice as high for blacks as whites, if not worse. Nationwide, black workers today are facing 13.2 percent joblessness. In some large states, the rate is far worse, as shown in the graph below, which was recently posted by the Economic Policy Institute. In Michigan, it was 18.7 percent by the end of 2012. In New Jersey, Illinois, North Carolina, California, and Ohio, the rate was above 15 percent. 

Those numbers are grotesque on their own. But they're even worse when you consider  long-term unemployment, which has become a virtually permanent trap for those unfortunate enough to fall into it. In 2012, almost half of unemployed blacks were out of a job for 27 weeks or more. Today, 16 percent have been out of work and looking for at least 99 weeks, compared to about 12 percent for whites. This is the sort of joblessness that devastates families and neighborhoods. 

I realize that, with a gridlocked Congress, any sort of meaningful action on employment is dead near impossible. But the lack of conversation over our jobs problem suggests that a lot of people in power have been lulled into passivity. The stock market is roaring ahead. Their constituents and donors are doing fine. We've have a string of acceptable jobs reports, a strong stock market, and the headline unemployment number that feels somewhat normal compared to the crisis of a few years back. But for a lot of the country, the crisis hasn't even come close to ending.

4 Global Transitions/4 Global Experiments = 1 Unusual Market

Confused about the markets? Don't be. All you need is the above equation to understand the recent past, the present and what may lie ahead. Let me explain.

Five years after the financial crisis, the global economy is attempting four major, multi-year transitions. Each is consequential; and, together, they speak to historical re-alignments.

1. The first transition is from assisted growth to genuine and more inclusive growth, especially in the West;
2. Second, from central banks purchasing financial stability to economies developing more lasting structural stability;
3. Third, from tired China-US relations and a financially-fragmented Eurozone to new regional and global economic arrangements which re-align incentives or, at the very minimum, reduce current tensions; and
4. Fourth, from increasing social inequality and political dysfunction to institutional, political and social renewal.

Each of these transitions is complex and uncertain. Put them together -- as is the case today -- and the result is, to use Chairman Ben Bernanke's insightful formulation, "an unusually uncertain outlook."

Clearly, there is a lot at stake for both current and future generations. So, given the material downside of failed transitions, governments and central banks are reluctant to leave the steering wheel to unfettered "market forces."

Yet they lack immediate solutions. Even if they had them, their execution ability is far from perfect. They also lack proper tools, comprehensive historical frameworks, and trusted analytical models. Meanwhile, the advice they get from professional economists is all over the place. And, after the 2009 peak, global policy coordination has been reduced to ineffective summits and largely ignored communiques.

Accordingly, the world is engaged in four historic and unprecedented policy experiments:

• China, where the new leadership is managing a shift from an increasingly less-potent mercantilist growth model to one based on internal demand, while seeking to deliver it while maintaining high growth rates;

• Europe, where governments (with the help of the European Central Bank) are trying to complete an imperfect economic union in the midst of a recession, alarmingly high unemployment (especially among the young), analytical disagreements and political tensions;

• Japan, where the new government of Prime Minister Abe has embarked on the country's boldest post-war economic experiment, deploying the "three arrows" of highly unconventional monetary policy, aggressive fiscal expansion and (still to come) fundamental structural reforms; and

• The United States, where the Federal Reserve is trying to deliver growth and jobs using partial and imperfect measures, and doing so without the proper support of other policy agencies that are paralyzed by Congressional dysfunction.

At the most fundamental level -- and this is a critical point -- the basic objective of these four experiments is to assist the economic and financial transitions by bringing to today the reality and the anticipation of tomorrow's growth.

Realizing this, markets have aggressively front run tomorrow's financial returns. Why? Because that is what markets always try to do. At times it works and at others it does not.

Given both the depth of the four transitions and the extent of policy experimentation, we should expect this configuration to create a large disconnect between prices and the underlying fundamentals -- and it has.

So much for the past and present; how about the future?

The current disconnect is fine as long as two conditions are met: pragmatic policy experimentation continues for a while AND it succeeds. Then, and only then, would higher growth and stronger corporate top line revenue growth validate market prices and enable them to go higher.

The first condition is highly likely to be met. Lacking what they perceive as a better alternative, governments and central banks have no choice but to venture even deeper into unfamiliar policy territory, and to stay there for quite a while notwithstanding mounting costs and unintended consequences.

The second condition is much more uncertain. Success is needed at multiple levels. Internal and external coordination is far from easy. And the political system complicates rather than facilitates the process.

What should individual investors do? That depends on three key issues: how they assess the future convergence between currently-sluggish fundamentals and artificial pricing; existing portfolio positioning; and overall risk tolerance.

From those that have entrusted their pensions and investment to PIMCO, and having benefited from the considerable market rally, we believe that it is best to gradually reduce risk exposures over time; and to do so especially for companies and sovereigns that lack both solid balance sheets and exposure to solid growth.

This may not be the time to sprint away from risk. But it is the time to walk away, and do so in a measured and disciplined manner.

This is not that week.

Let's start with news that might appear to be the death throes of cable. Cable companies' TV subscribers collapsed by more than 1.5 million in the last year, according to Leichtman Research Group. (The Big Two, Comcast and Time Warner Cable, have declined by more than 900,000, alone.)

In fact, the trend has been underway for a while. Cable TV customers peaked in the late 1990s and have since fallen to early Clinton-era levels (SNL Kagan data)

But the cable companies aren't exclusively in the business of selling TV. They're really in the business of communications infrastructure, which is TV, phone, and Internet. The Internet business in particular has done very well for them. Since cable video subs peaked in the late 1990s, the industry has added 45 million high-speed Internet customers (SNL Kagan data, again).

The two most important reasons why cable is still making more and more money every year, despite a structural decline in cable TV subs, is that they've successfully gleaned more money per customer: both by charging more for television and by getting households to buy more than just TV. For example, 40 percent of Comcast customers take three products (e.g.: video, phone, and Internet) and 70 percent take two products (e.g.: video and Internet).

Cable ≠ video, and nothing says it more clearly than the latest earnings reports from the Big Two: Comcast, the largest provider of pay-TV in the country; and Time Warner Cable, the second largest cable provider (but behind DirecTV and Dish in total video subs). Comcast's total revenue is almost twice TWC's, but their businesses are remarkably similar.

Upshot: If you equate "cable" with TV, you are literally getting only half the story. Cable providers are in the business of communications transport. They're still in business because selling communications access is still a pretty good business, with high barriers to entry and voracious demand.

Meanwhile, as shown on the left, they find just 62 percent of BA's have a job even requiring their degree, which implies a very, very large number of over-educated, underemployed Americans are wasting their talents in the workforce.

We'll get to both stats in time, but let's start with the bit about college majors. When I say the 27 percent figure is a "factoid," I mean it in Norman Mailer's original sense -- something that looks and smells sort of like a fact, but is not one. There a couple reasons why. First, the study doesn't look at Americans with graduate degrees, so any pre-med students who actually became doctors don't get counted, nor do econ grads who went on to get MBA's or English teachers who got went from comp lit to a master's in education. That might seem like a nitpick, until your realize that more than a third of BA's 25 or older have an advanced degree.   

But there are other, more fundamental reasons why the figure is a bit suspect. To figure out which workers had jobs that were related to their major, the authors matched Census data against the National Center for Education Statistics's Occupational Crosswalks. As Matt Yglesias pointed out, the government appears to think his philosophy degree was only good for becoming a college professor, despite the fact that the analysis skills it imparted seem to have served him just fine as a journalist. For fun, I went and checked out what the government believes math majors are supposed to go and do with their lives. The options: professor, math scientist, mathematician, natural science managers, and statisticians. I don't know about you, but the math majors I knew in college went off and made money on Wall Street (or as consultants, if they were into travel). I'm sure their quantitative skills came in handy often enough.

The point here isn't just that the government has fouled up its database. Rather, it's that actually figuring out what any given field of study will prepare students for in an ever-evolving economy is probably an impossible task. 

Now, about that other chart. Are 38 percent of B.A.'s really underemployed? The answer really depends on how you play with the data. I know that's not satisfying, but it's honest. We're beginning to accumulate a decently rich vein of literature that tries to get at this issue, and the conclusions tend to hinge on arcane methodological issues. I've seen numbers suggesting the the underemployment problem is worse. I've seen numbers suggesting the problem is probably better. But you need to look at each conclusion in the context of a larger body of research, as one more stroke on the canvas. 

Now, in fairness, the stats I've focused on here aren't actually the heart of the NY Fed's study. Its main finding is that, according to their definitions, a college grad is slightly more likely to find an appropriate job in larger metro areas than smaller ones, because the labor market is bigger and denser. It's a neat, somewhat intuitive finding that seems to confirm the idea that major, tightly-packed cities are healthier building blocks for an economy than diffuse sprawl. 

But like I said, these are the sorts of figures seem tailor-made to travel around Twitter. So for today, just remember: Whenever it comes to big, bold statistics about the fate of college grads, reader beware. 

• There is the outraged response: "Apple's scheming to avoid paying taxes is unethical and unpatriotic."
  
• There is the proactive response: "The U.S. corporate tax system is broken, and we should fix it."
  
• And there is the indifferent response: "Wow, a multinational company is legally saving money. What color is the blue sky, again?"

A year ago, I would have told you I fall between outraged and proactive. I'm trending rapidly toward indifferent.

'A Bad Boy'
Apple is a multinational company, with 61 percent of its revenue from foreign operations. To (legally) minimize its tax bill, Apple has set up empty subsidiaries in lower-tax countries like Ireland, effectively making them a quasi-stateless corporation with an effective corporate tax rate of about 20 percent.

This might sound devious and and a little bit evil. But we aren't accusing Apple of behaving like a criminal. We are accusing them of behaving like corporation, since it is in the nature of corporations to find ways to save money. Rather than a story about patriotic duty, or funding the social net, or corporate ethics, this is really a story about unrealistic expectations. We wish we could tax American companies on their earnings from all around the world. And we can't. We just can't.

Apple is an American company, in most people's eyes. But it is a global company, insofar as most of its employees and most of its revenue come from outside the country. Since most developed foreign economies have lower statutory rates -- and because there are ways to play national tax laws off each other to further cut taxes -- multinational companies like GE and Google have mastered the global tax labyrinth to save money. Congress operates under the illusion that it can impose U.S. taxes on foreign earnings, but trying to fit a global mesh of far-flung money under Washington's narrow tax purview will always end like all efforts to push toothpaste back into a tube: Messily, somewhat embarrassingly, and thoroughly unsuccessfully.

"The most important takeaway for me from this report how ridiculous the US corporate tax system is," said Gary Hufbauer, an international tax policy expert at the Peterson Institute for International Economics. "We have this illusion of taxing earnings abroad. We think we should be taxing Apple and GM on any income earned anywhere in the world. But we can't, and very few countries even try."

"I would hope this turns out to be a great teaching lesson on how dysfunctional the architecture of our tax system is," he continued. "But it's more likely that we'll learn an easier lesson: That Apple is being a bad boy."

'The Worst of All Possible Worlds'
Tax experts I spoke with called the US corporate tax code "the worst of all possible worlds": a high tax rate, loopholes upon loopholes, billions of dollars falling through the cracks, and trillions stowed away overseas to avoid repatriation.

"When Apple needs money, it's cheaper for the company to borrow from the bond market" than to bring back earnings from overseas, said Howard Gleckman at the Tax Policy Center. "That's just crazy."

But even the simplest solutions to the craziness wouldn't end it. One sensible thing to say, if you're a tax wonk, is that we should "move to a territorial system with a lower statutory rate," which is wonkese for "just tax profits in the U.S., but not so much." It's a fine idea. It might even lead to more revenue, counter-intuitively, since more companies might hire and build here under the lower rate. But it wouldn't stop Apple from employing Apple-y tax schemes, because those tax schemes would save money over basically *any* U.S. statutory rate.

"There is not a simple solution," Gleckman said. "Even with a territorial system, there is no evidence that it would create more jobs here. If you're paying tax in the U.S. on US earnings only at 25 percent, we're still competing with an Irish system at 12 percent. So, [all things equal] if you have a choice of building a factory here or Ireland, you're going to go to Ireland."

The current system of international corporate income taxes is not working. But it might not "work," under certain definitions of the word, no matter what we do. Even as most people publicly agree that the system is "broken," Apple (and GE and Google, etc) aren't terribly enthused about most of the proposed reforms, because their tax departments have already figured out how to exploit the "broken" system to save money.

The Real Problem With Ingenious Tax Schemes
So what's the argument against ignoring this whole thing and directing our finite attention to stuff where reform could really make a difference?

Gleckman responded with a short story: Think of it this way, he said. Apple has got all this money stashed overseas. It wants to make investments in the U.S. But bringing the money back is too expensive because of our tax code. So it sells bonds instead. And then it uses the money from that bond sale to pay tax lawyers to keep its tax burden low. "That's a huge waste of resources."

Even as I've grown cynical about attacking Apple for behaving like a corporation, this argument hits home. In perhaps the most ingenious tax juke reported by the Permanent Subcommittee on Investigations', Apple realizes that the US taxes companies based on where they incorporate, while Ireland taxes companies based on where the subsidiary managers work, so Tim Cook sets up an empty subsidiary in Ireland and manages it in the U.S. to avoid taxes in both countries. Admit it. That's ingenious.

And the fact that it's ingenious is sort of the problem. It would, after all, be nice if America's greatest companies spent more time and resources designing ingenious things than designing ingenious tax schemes.

The rise of women in the workforce has been hailed by The Atlantic as not only the greatest economic development in the last 50 years, but also the most positive overall development in the whole global economy. But a new study suggests that, for working women in the U.S., there is a surprising cost to earning more than your partner. Evidence suggests that couples are less likely to get married if the woman's income exceeds her partner's. Once married, a wife earning more than her husband is more likely to be unhappy in the marriage, more likely to feel pressured to take fewer hours, and more likely to get divorced.

To fully unpack this thing, let's start with a quick and dirty overview of the marriage market, as economist are fond of call it rather un-romantically. In the last 50 years, marriage has been in decline, technically speaking, as the share of adults who are married has fallen from 72 percent to 51 percent of the 18-and-over population. Sounds like one big marriage drought, but in fact, there are two marriage markets (at least). Among the most-educated and highest-earning men and women, marriage rates are generally high and rising, although these couples are also getting hitched a bit later in life than they used to. Meanwhile, the bottom half of female earners have seen their marriage rates decline by 25 percentage points since 1970. Here's the picture from the Hamilton Project:

This drop-off is simply too steep to be explained by randomness or classical economics. If men and women were forming marriages without concern for relative incomes, we'd expect a smoother distribution curve, more like this guy ...

If classical economics doesn't do the trick, maybe it's because the dearth of female breadwinners has little to do with classical economics. In a cool new paper, Marianne Bertrand, Jessica Pan, and Emir Kamenica pose a theory that some people might find controversial but others might find intuitive: What if there's a deficit of marriages where the wife is the top earner because -- to put things bluntly -- husbands hate being out-earned by their wives, and wives hate living with husbands who resent them?

If this were true, we would expect to see at least three four other things to be true. First, we'd expect marriages with female breadwinners to be surprisingly rare. Second, we'd expect them to produce unhappier marriages. Third, we might expect these women to cut back on hours, do more household, or make other gestures to make their husbands feel better. Fourth, we'd expect these marriages to end more in divorce. Lo and behold (as you no doubt guessed), the economists found all of those assumptions borne out by the evidence.

"There simply aren't nearly as many relationships with women out-earning men as we would expect [through random pairing]," Kamenica told me. "And women who should out-earn their husbands based on their education and other demographics are more likely to stay at home [and not work] than the similar women who don't out-earn the husbands," Kamenica said.

But that's not the most surprising finding from their research, he added. The most surprising thing was that wives who earn more from paid work also report doing significantly more chores around the house. This doesn't make much sense, intuitively. For women and men at all income levels, more work in the office usually leads to less time spent doing chores at home. But suddenly, when a wife earns more than her husband, her hours spent on chores and childcare go up.

"Classical economics can't explain that increase," Kamenica said. "The only way to make sense of it is compensatory behavior." In English, please? "Maybe the husband feels threatened, so she does more of the cooking, even though she earns more."

The economists found the exact same trends living in Canada. Not only did they find a "sharp decrease in the number of couples once the wife's income exceeds the husband's," but also they found no correlation between divorce and income ... except when the wife earned more than her husband.

Long and the short of it: Childless couples and empty-nesters really do sink the most into caring for pets. A husband and wife with no kids spends 69 percent more, on average, on their dogs, cats, and whatnot than parents of children under six. Second place goes to the parents of adult children.  

Of course, pet spending also just seems to track pretty closely with disposable income. Two-paycheck households with no children have a lot more extra cash to throw around on premium dog chow and fancy kennels than most singles or young parents, after all. So for those out there who aren't particularly comfortable with Last's brand of cultural criticism, here's another way to think of what this data shows: The more married Americans that shy away from parenthood in the future, the better it'll be for the Purinas of the world.

Investors, take note. 

Uma Swaminathan tuned the television set in the living room of her ranch style home in the suburbs of East Brunswick, N.J. to CNBC. It was 9:00 a.m. on May 18, 2012, a day the retired schoolteacher thought might make her rich. She logged onto her Vanguard brokerage account on her computer and placed an order for 5,000 shares of Facebook at $42 a share.

On TV, wearing his trademark hoodie, 28-year-old Mark Zuckerberg, creator of the world's largest social networking site, stood in the courtyard of Facebook headquarters in Menlo Park, California. A crowd of eager Facebook employees held up company license plates and posters for the cameras. They'd stayed up all night at an employee "hack-a-thon" to celebrate the big day when Facebook was finally going public, in what might have been the most anticipated initial public offering in history. The boyish, blue-eyed Zuckerberg grinned, standing next to Bob Greifeld, chief executive of Nasdaq-OMX Stock Market, Inc., the largest electronic stock exchange in the United States.

With short hair, brown skin, and few wrinkles, Swaminathan looks much younger than her 68 years. She spent most of adult life as a suburban mom, making tofu for her daughter's friends at theater rehearsals, taking her three sons to soccer practice and Boy Scouts, and volunteering in the local community. She served a term as president of the Indian American Association of New Jersey.

Her interest in the stock market didn't develop until her husband died about 13 years ago. Her four children had already moved out to attend college or to pursue their careers. Swaminathan was left with her late husband's 401(k) retirement account, when she started dabbling in the market, investing in stable companies like Microsoft. Not long after, she began to follow the news coverage of initial public offerings (IPOs) -- when private companies enter the public market -- and came to know of the phenomenon known as the first day "pop." On the day that companies would debut on the stock market, the price would tend to shoot up before stabilizing. A year earlier, she watched as social networking site LinkedIn's stock price closed up 109 percent on its opening day.

She'd never placed such a big bet on just one stock, but she felt a personal connection to Facebook. She had been using the site to connect with family and friends since 2009, and almost everyone she knew had an account.

Now, as she watched the TV in eager anticipation, millions of shares were going to leave the hands of private investors and start trading, giving anyone with enough money a chance to own a slice of the social network giant. Silence descended as Zuckerberg came forward to deliver his speech: "I just want to say a few things, and then we'll ring this bell and we'll get back to work. Right now this all seems like a big deal. Going public is an important milestone in our history. But here's the thing: our mission isn't to be a public company. Our mission is to make the world more open and connected..."

Finally he reached the moment so many were waiting for: "So let's do this!" And the opening bell sounded as he signed the digital screen on the podium before him: "To a more open and connected world," he wrote. His handwritten message instantaneously appeared in Times Square just above the giant illuminated NASDAQ exchange ticker.

Facebook shares hit the market at an opening price of $38. Minutes later, Swaminathan's online order was executed, and the retired schoolteacher had just spent approximately half her life savings.

I: THE OFFERING

For Mark Zuckerberg, selling Facebook shares on the public market had a clear downside. Besides the headache of releasing a company's financial details to the public, he worried that increased scrutiny and push for profits would compromise Facebook's mission.

But like any growth-stage company, Facebook needed money, and private companies face restrictions on how much stock they can issue for cash. In early 2011, Goldman Sachs helped Facebook conjure IPO-type money without an actual IPO by creating a special investment product to sell its private shares to Goldman's wealthiest clients. But when the New York Times exposed the plan, the SEC began to investigate the transaction. Soon after, Zuckerberg decided to take the company public. In late 2011, the Wall Street Journal reported that Facebook was anticipating an IPO valuation of $100 billion -- nearly four times more than Google's market cap when it went public in 2004.

On February 1, 2012, Facebook filed its Form S-1 -- effectively a birth certificate for publicly traded companies -- containing everything an investor needs to know before buying shares at an IPO, including basic financial information and the business model. Facebook's S-1 showed that the company was primarily in the display-advertising business, with a net profit of $1 billion in 2011 from total revenue of $3.7 billion.

The S-1 is especially meaningful to investment banks. Facebook listed its underwriters -- the banks picked to buy and sell shares on the IPO -- near the front of the document, from left to right, in order of responsibility, with Morgan Stanley in the coveted "left lead" position.

This put Facebook's IPO in the hands of one of Silicon Valley's most celebrated bankers: Michael Grimes, co-head of global technology banking at Morgan Stanley's Menlo Park office, located just a few miles north of Facebook's headquarters.

II: THE BANK

Michael Grimes, the son of a mapmaker, is a lifelong Californian with a bachelor's in computer engineering from UC Berkeley. A titan in the world of tech IPOs, his status grew not only from expertise in taking small and large digital companies public, but also from his myth-making showmanship. To win Ancestry.com's IPO, he created his own family tree and wore a green Hermes tie with leaves to signify the company logo. To get a Hewlett Packard acquisition, he waited outside an executive's office for hours just to make a pitch.

With Grimes and the investment bank prepping the offering and building demand for shares, it fell to another Morgan Stanley employee, Scott Devitt, to tell outside money managers whether they should buy Facebook stock. As the head of Morgan Stanley's Internet equity research team, Devitt makes a 12-month target price for stocks and provides a rating -- buy, hold, or sell -- for hedge funds like Citadel and large, storied institutional investors like Fidelity. Devitt's agreement with his clients guarantees an independent analysis of company performance -- even if Morgan Stanley is leading the IPO. (Devitt advised clients on whether to buy companies like LinkedIn, Zynga and Pandora while Grimes orchestrated their IPOs.)

The stark division between these two functions of a bank is known as a "Chinese Wall." It forbids investment bankers, like Grimes, from influencing research analysts, like Devitt. Morgan Stanley and other brokerage firms were slammed with fines for repeatedly breaching the "Wall" during the dot-com boom. In the aftermath of the Facebook IPO, the bank would find itself under the spotlight yet again for allegedly sharing key, private information with wealthy clients.

In Facebook's case, the trouble began with a simple revision.

III: THE REVISION

A roadshow -- a city-by-city promotional tour where executives drum up support for their IPO before large investors -- is typically a lackluster affair. Facebook's was more like a Hollywood party.

On May 7, 11 days before the IPO, Facebook management -- CEO Mark Zuckerberg, COO Sheryl Sandberg, and CFO David Ebersman -- stepped out of a black SUV in front of the Sheraton Hotel in midtown Manhattan for their first meeting with investors. A crowd of paparazzi greeted them, and a long line of onlookers wound around the hotel building. Inside the meeting, Facebook played a video introducing the business model to special clients of its underwriting banks.

Although an IPO roadshow is supposed to be an untarnished hype-machine for a company's prospects, back in California, those prospects were hurting. Facebook's new internal forecasts showed revenue growing slower than expected. The reason: Users were flocking to smartphones faster than the company could serve mobile ads.

On the first day of what may have been the most watched IPO roadshow in memory, Ebersman confessed to Morgan Stanley that Facebook had cut revenue projections -- a nearly unprecedented last-minute correction in an IPO of its scale. Even if the changes were small, statistically, in IPO showbiz statistics run second to momentum, and nothing kills momentum like a poorly timed downward revision.

Facebook and Morgan Stanley knew they had to make a public disclosure. But what to disclose? The law requires companies to share all information that would likely influence an investor's decision to buy stock. Plus, Morgan Stanley's research team was still advising clients based on figures that Facebook now considered wrong. With less than a week before the IPO, they came up with a solution that they thought would spare Facebook a modicum of embarrassment -- but would have fateful consequences for Morgan Stanley and investors:

• First, Facebook would file an amendment to its public birth certificate, the S-1, to include information about mobile usage cutting into revenue.

• Second, the company would call research analysts with much more specific information about the company's weakening projections.

IV: THE AMENDMENT

When a company makes an amendment to its S-1, the entire document can be filed again, without track-changes or highlights to specify the changes. When Facebook filed its "Amendment No. 6 to Form S-1" to disclose its ongoing challenge to serve ads to mobile users, changes were embedded on three pages of the 170-page document.

On page 14 and 17, the company said that its users were growing faster than ads due to the increased use of mobile phones and product decisions that allowed fewer ads per page. On page 57, Facebook said the mobile trend discussed elsewhere in the document had continued in the second quarter, due to users shifting from computers to phones. None of the changes suggested any major revision to Facebook's financial outlook.

Facebook's lowered revenue estimates did not appear in the S-1, nor was there any precedent requiring these numbers to be included. Even the most sophisticated retail investors, armed with a software bot that could comb the new S-1 for updates, could not have read what research analysts at Morgan Stanley, JP Morgan, Goldman Sachs, Citigroup, and many other investment banks would learn later that evening: That Facebook, already projected to trade at high multiples given its earnings figures, was slashing its annual projections.

V: THE CALL

Before an IPO of Facebook's size, research analysts and large investors play a massive multi-billion-dollar game of "Telephone," because analysts at underwriting firms are banned from publishing or emailing research about a new public company until 40 days after the IPO. The rule is designed to protect retail investors from taking analysts' notoriously bullish research too seriously. But it has an unintended side effect: Research analysts can pass on exclusive, last-minute information to institutional clients without a paper trail.

And Facebook's last-minute revelation was about to launch a historic game of "Telephone."

After the company's surprising eleventh-hour amendment, the unenviable job of explaining Facebook's revisions to the research analysts fell to Cipora Herman, Facebook's vice president of finance. On May 9, Herman and Michael Grimes huddled in a Philadelphia hotel for a rehearsal session. He played the part of an analyst, while she played herself. They practiced until the amended S-1 was officially made public on the SEC website, at exactly 5:03pm.

Before her first call to Scott Devitt at Morgan Stanley, Grimes left the room to avoid the appearance of breaking the law that bans investment bankers from influencing analysts. "I was far down the hall so I wouldn't hear anything," he testified in a Massachusetts suit brought against Morgan Stanley. "I took extra precaution to do that, and sat on the floor."

But Herman had a script in Grimes' handwriting detailing Facebook's new second-quarter revenue estimates:

"I wanted to make sure you saw the disclosure we made in our amended filing. The upshot of this is that we believe we are going to come in the lower end of our $1.1 to $1.2 bn range for Q2 based upon the trends we described in the disclosure."

The script also showed that Herman had added Facebook's year-end estimates:

"Trend/headwinds over the next six to nine months as this run through the rest of the year, this could be 3 to 3 and a half percent off the 2012 $5 billion target."

Herman's first three calls were to the research desks of Morgan Stanley, JPMorgan, and Goldman Sachs, and after their conversations, all three banks cut their estimates of Facebook's annual revenue by between 3.01% and 3.33% -- perfectly aligned with Herman's notes, as the following charts from court documents show:

The news spread -- from research analysts to their preferred clients -- that Facebook was slashing revenue estimates in the middle of the roadshow. Morgan Stanley, JP Morgan, and Goldman Sachs had effectively sounded alarm bells on Wall Street. Even analysts who hadn't yet made a single call about Facebook's new figures were being inundated with questions. "Our clients were asking us to confirm what they had heard, so we had to tell them what we knew," said a research analyst at one of the other underwriting firms.

Many large investors sensed a rare opportunity: With its revenue projections falling at such a peculiar time, the conditions could be perfect to place a massive bet against Facebook stock.

VI: THE BET

A week before the IPO, confusion reigned in the financial press.

On May 11, Bloomberg reported that demand for Facebook's stock among institutional investors was much lower than expected. But on the same day, Reuters had a conflicting report: Facebook was already oversubscribed, and one large unnamed institutional investor was calling around syndicate desks trying to get more shares.

While retail investors clamored for Facebook shares, some large investors were planning a massive short -- essentially betting against the stock's buyers. Scott Sweet, senior managing partner of Tampa-based research firm IPO Boutique, received calls from hedge fund clients saying they heard from research analysts at underwriting banks that Facebook's mobile trend was behind its lowered earnings estimates. One multi-billion dollar hedge fund client told Sweet that he planned to short the stock as a result. (Sweet didn't name the investor due to a confidentiality agreement he has with clients.)

"The consensus among hedge funds on the West Coast was to short the stock on day one," said one institutional investor at a medium-sized hedge fund specializing in technology stocks. "The call we received from JP Morgan about earnings being lighter than expected gave us even more conviction in our short." Hedge fund analysts at his firm were receiving calls from their personal brokers days before the IPO, hawking an allegedly rare chance to get shares of Facebook stock. "That never happens," the hedge fund investor said. "Supply was definitely exceeding demand."

But despite the growing consensus among some large investors that Facebook was overpriced, on May 15, three days before Facebook's market debut, the underwriting banks increased the IPO range from $28-$35 to $35-$38, citing heavy demand. A day later, they increased supply to more than 420 million shares.

The new share and price allocation placed Facebook's valuation at the iconic $100 billion mark.

VII: THE GLITCH

Back in her home, Swaminathan didn't know about the reduced revenue estimates or about the vast number of hedge funds that were planning to short Facebook. After the opening bell ceremony neared its end at 9:30 a.m., she was still watching CNBC waiting for the stock to begin its scheduled trading at 11:00 a.m. "We are witnessing a lot of American wealth getting generated as we speak," said a CNBC reporter. "After years of people taking risks, dealing with uncertainty, unknowns, rivals, this is the pay-off."

"Awaiting Facebook's opening trade" showed in a breaking news box on the bottom of the screen, while an unchanged $38 opening price appeared on a split screen in anticipation of 11:00 a.m. Minutes later, Swaminathan, eager for the stock to open, called her son, who lives in New York City, to inform him about the 5,000 shares she had ordered. She had placed a buy limit order, a conditional transaction to purchase shares at a specified price -- $42 in her case -- or lower.

Her son, who studied finance at UC Berkeley, was livid. "Cancel the order immediately," he told his mother. "Cancel it! Cancel it!" Around 9:45 a.m., she hit the icon on her trading screen to cancel the order and then resumed watching TV. At 11:00 a.m., CNBC announced that Facebook's opening was delayed until 11:05 a.m. In all the times she had seen IPOs on television, Swaminathan had never witnessed a market delay on the opening day. Something is wrong, she thought.

She turned her attention to her computer screen only to realize that there was no sign of her having voided the order. She kept refreshing the page in hopes of seeing the notification. When no cancellation report appeared, she called her stockbroker at Vanguard. "What's going on?" she asked.

If the cancel order was placed, then it's probably cancelled, the broker told her. She got off the phone and went back to her computer screen. There was no sign of cancellation. She called Vanguard again. This time, she says, she waited on the line for a long time, but no one came to take her call.

Meanwhile, Facebook stock opened at 11:30 a.m. The mysterious delay was due to technical glitches. NASDAQ's electronic trading platform couldn't handle the high volume of trades. In the first 30 seconds, around 82 million shares were exchanged.

Facebook did not experience the anticipated pop. The stock reached a high of around $45 per share. At 4:00 p.m., when the market closed, the stock was priced at $38.23, only 23 cents more than its opening price.

Later that day, the Wall Street Journal reported that Morgan Stanley had stepped in to stabilize the stock, using what is referred to in finance as a "greenshoe option" -- a common stipulation in the IPO agreement that lets underwriting banks sell more shares to investors than they are allotted. The mechanism lets banks buy back the shares at the offering price, in case the company's stock price needs a little help on the first day. The buying action puts upward pressure on the stock.

Her son came to New Jersey to stay with her over the weekend. For two days, they quarreled. He wanted to know why she put so much money into one stock, and she couldn't give him a satisfying answer. "He kept asking me what was going through my head when I bought the shares," she recounts.

On Monday morning, she called Vanguard. "Was my purchase cancelled?" she asked. The answer finally came: No, the broker told her, Vanguard had purchased 5,000 shares on her behalf at a price of $41.25, meaning about $206,000 from her retirement account was spent to acquire her stake.

On that second day of trading, Facebook closed at $34.03. Swaminathan had lost, on paper, about $36,000. Her son advised her to hold onto her shares until she either resolved the matter with Vanguard or the price bounced back.

VIII: THE AFTERMATH

The next couple days were a blur. Swaminathan approached Vanguard again, asking why the cancel order wasn't processed. She could have sold the shares before the price plummeted, she said to the broker, asking to speak with a supervisor. The supervisor blamed NASDAQ and said they would notify the exchange about the incident. When she called a day later, Vanguard declared it a legitimate purchase. There was nothing that could be done for her.

In the meantime, she tuned into CNBC to watch coverage of the IPO's aftermath. When news started rolling in about class action lawsuits filed against Morgan Stanley and Facebook for selective disclosure, she was stunned. Institutional investors received warnings about lower revenue estimates before the opening day, CNBC reported. (Some of these class-action lawsuits are still ongoing.)

Swaminathan wasn't keen on using the court system. She had already lost money and was wary about losing more to legal expenses. But in June, one lawyer told her about the Financial Industry Regulation Authority (FINRA) -- a private corporation that acts as a self-regulatory body among securities firms, such as banks. She believed the agency had a way for her to seek restitution without the complexities of a formal lawsuit. FINRA offered a way for her to air her grievances without a hefty legal fee, and the organization's stated goal is to protect investors -- investors like her, she thought.

She quickly wrote a typo-riddled complaint, laying out her misgivings against Facebook, Morgan Stanley, NASDAQ and her brokerage firm Vanguard, to FINRA. It was a two-page explanation of what happened on the day of the IPO. "I was caught up in the Facebook IPO hype and thought that this would be a good investment and practically put all my retirement money in this stock purchase," she wrote in the complaint. She said Vanguard failed to inform her of the status of her trade, blamed NASDAQ, and then retracted responsibility to say her trade was a proper execution. She complained that "only certain customers, mostly big institutions and hedge funds" could file claims with NASDAQ about the trading glitches.

She also jotted down the expected reparation: $105,000 for compensatory damages, $500,000 for punitive damages, $1 million for "pain and suffering" and $315,000 in damages related to fraud. "I feel jilted and my confidence is now permanently stricken," she said in the complaint. FINRA will be on my side, she thought, as she told her story to the regulatory body.

IX: THE HEADLINES

On July 16, FINRA sent Swaminathan a letter: Neither Facebook nor NASDAQ was a member of their organization, and it lacked the authority to call them in. Still, she was willing to arbitrate with Morgan Stanley and Vanguard.

But in November, a response came from Morgan Stanley in the form of a lawsuit: Morgan Stanley & Co. LLC v. Swaminathan. The bank had essentially filed an injunction to stop the arbitration from happening, requesting that Swaminathan pay legal fees incurred if it is required to participate in arbitration. When Swaminathan read the court documents, she panicked. "They wanted to take what I had left," she cried.

Then she saw the headlines.

Reuters based a story on Morgan Stanley's complaint, entitled, "Morgan Stanley seeks to halt Facebook arbitration case." Gizmodo.com wrote, "A Sad Woman Lost Her Entire Life Savings in the Facebook IPO and Now Wants Her Money Back." Business Insider had "There Actually Is A Widow Who Says She Lost Her Life Savings In The Facebook IPO."

She was mortified. "Whatever happened to confidentiality?" she exclaimed. "FINRA had promised that my documents would stay private." Indeed, her complaint might have stayed private if it went unsettled (FINRA makes awards and judgments public on its website). But Morgan Stanley made her papers available to the press when it attached them to a countersuit filed through New York's public court system.

She eventually withdrew her claims against both the bank and Vanguard. "I just couldn't deal with the stress anymore," she said. "I guess the big guy always wins."

X: THE LOSS

An American flag hangs in front of the JPMorgan Chase tower in midtown Manhattan. In early May, rivaling its height was another banner with a Facebook IPO logo. Business journalist Heidi Moore shared a photograph of the building's façade with her Twitter followers on May 4. Radio reporter Ben Bergman retweeted it with a comment: "In Facebook We Trust."

By Aug. 18, Facebook lost about $50 billion in value. But many big investors made huge profits betting against the company, and others avoided major losses by backing out of the IPO just in time. During the roadshow, Capital Group, a large mutual fund and one of Morgan Stanley's preferred clients, pulled out of the deal after initially showing interest, and many other funds followed suit, according to a research analyst who was in correspondence with investors. SAC Capital Advisors, Steven Cohen's $14 billion dollar hedge fund and another one of Morgan Stanley's prominent clients, took a sizeable short position in the stock, said a research analyst. Scott Sweet's multi-billion dollar hedge fund client flipped the stock at $42. His subsequent short made his firm its "largest profit of the year," Sweet said. There's "no way" a retail investor could have known about the lowered projections, unless he or she "had a friend at a multi-billion dollar institution," he added.

A few days after Facebook debuted, Massachusetts's regulator William Galvin issued a subpoena to Morgan Stanley as part of an investigation into research analysts communicating Facebook's revenue prospects to certain institutional investors. Seven months later, Galvin's office settled with Morgan Stanley for $5 million after charging its investment banking division with inappropriately influencing research analysts during Facebook's IPO roadshow -- essentially breaching the "Chinese Wall." When asked about the script he wrote for Facebook's vice president of finance, Grimes testified, "I don't remember if she had a script or not."

Facebook, Vanguard, and Morgan Stanley declined to comment on all the claims in this story.

Swaminathan held onto her shares and went to her birth city of Chennai, India. She's writing two books -- one about herbs and spices and another about New Jersey's public school system. She hasn't traded stocks in a while, but she checks Facebook's stock price every few days hoping that someday it will bounce back.

Saturday, May 18, marked the one-year anniversary of the IPO. Facebook's shares closed Friday at $26.25 -- exactly $15 below her purchase price.

I don't think suffering is good, but I do believe that we have to pay a price for past sins, and the longer we put it off, the higher the price will be.

But this cure has been one ice-cream sundae after another. It can't be that easy, can it? The puritan in me says that there has to be some pain. That's not to say that there hasn't been plenty of economic pain. But that pain has come from the recession itself, not the cure.

The United States has a problem: rapidly rising student debt. It also has a solution: online education. The primary reason for spiraling student debt is the soaring costs of a college education at a physical college. Online education strips away all of those expenses except for the cost of the professor's time and experience. It sounds perfect, an alignment of technology, social need and limited resources. So why do so many people believe that it is a deeply flawed solution?

Because it means massive swaths of higher education is about to change. Technology has disrupted many industries; now it's about to do the same to higher ed.

But it is the students who need aid, and not the financial kind. They have too much of that as it is. The amount of student debt is large and getting larger. It will top $1.1 trillion this year; two-thirds of college students will graduate with debt. The average debt burden is $27,000, though that is skewed higher by a small percentage who owe a lot more. Forty percent of students owe less than $10,000. The amount of student debt has doubled since 2007, tripled since 2004, and many economists believe that the effect on the overall economy is negative.

While college graduates undoubtedly land in higher-paid jobs (earning almost twice those with only high school degrees), that may be offset by the burden of interest payments on student loans. Says Diane Swonk of Mesirow Financial: "Student debt has a dramatic impact on the ability to buy a house, and to buy the dishwashers and the lawnmowers and all the other purchases that stem from that ... It has a ripple effect throughout the economy."

As for the students, the price of the debt is often not worth the benefits. According to economists at the Federal Reserve Bank of New York, 17 percent of students are in default, compared with 10 percent in 2004. And a large portion of those defaulting are over 30 years old, which means that the problems with student debt don't disappear with age.

Some debt is clearly manageable, rational and reasonable. Taking on a modest amount of debt for a degree that dramatically enhances your earnings power makes eminent sense. Yes, interest rates on federal student loans are too high relative to mortgage and market rates, and they are set to go higher this year, possibly to nearly 7 percent. But the problem with student debt is not that it has gotten so large so fast; it's the extent to which a college degree has become so expensive for so many who cannot afford it, yet leaves so many with a credential that is excessively costly relative to the skills it offers.

Colleges, including commuter community colleges, cost money to run and build, and they cost ever more as even third- and fourth-tier institutions try to entice students. Most students earn a degree because the credential is required for almost all higher-paying jobs. If the cost is between $25,000 and $75,000, and more than $200,000 at elite schools, then that is the price that must be born.

But is it? That is where the burgeoning world of massively online education presents such an opportunity. Institutions like the University of Phoenix have been offering online courses since the 1990s, but this new wave is larger in scale and now includes traditional universities. Online courses cost a fraction of a brick-and-mortar education. New companies such as Udacity and Coursera have been experimenting with new models, ranging from per fee, limited-enrollment classes with select professors to the so-called MOOCs ("massive, open, online classes") that attract tens of thousands of students per class. Coursera, barely a year old, already has 3.5 million registered users. Students anywhere in the country and indeed the world can sign up, take a course with skilled professors, meet with other students in their area for study groups and learn the material. Even more crucial, they assemble a menu of courses that combine pure learning and more-tailored vocational studies based on skills needed for particular jobs. And all for a fraction of the costs.

The problem is that many in the business of higher education hate the idea. It's disruptive to the traditional model and profoundly threatening to the current economics of the academic industry. The elite schools have embraced the online world because it allows them to use the power of their brand to extend everywhere. But many community colleges find the prospect more challenging, as it could well undermine their mission and the need for them. One critic quoted in a recent New Yorker described what might happen:

Imagine you're at South Dakota State and they're cash-strapped, and they say, 'Oh! There are these Harvard courses. We'll hire an adjunct for three thousand dollars a semester, and we'll have the students watch this TV show.' Their faculty is going to dwindle very quickly. Eventually, that dwindling is going to make it to larger and less poverty-stricken universities and colleges.

Unquestionably, the next wave of online education will disrupt. It will threaten faculty and colleges, but it will empower students. Yes, we are a few years away from online courses providing degrees and credentials that will be seen by the marketplace as adequate. For now, taking courses online may enrich your life, but it will not provide the entrée into jobs requiring a degree, whether associate's or bachelor's. Many fields of graduate study will be untouched, but many others - law, accounting and others - are ripe for online credentializing.

Having spent almost a decade as a graduate student and professor, I was always struck by how resistant to change and questioning academic cabals could be. The growth of online education is yet another example. Many are embracing it, and many are resisting it because it represents change to a world that often moves at the pace of medieval guilds.

The beneficiaries, however, are students, which really means all of us. The costs of obtaining needed credentials will plummet, and the ability to create more tailored, vocational programs aligned with the skills employers need will increase exponentially. That will likely lead to some shrinkage in the number of physical institutions offering degrees, but an increase in the number of people obtaining them. It will also mean that those taking on debt - especially at elite schools - will be those most likely to be able to bear those debts, while those who need more specific and vocational education for decently paid but not high-paying jobs will not be saddled with loans out of proportion to their earning potential.

This online educational revolution is the next wave, and it is still very early. Rarely has a societal problem been presented with such an ideal solution. We should embrace it passionately, because it's happening whether we do or not.

"The Edgy Optimist" column is initially published at Reuters.com, an Atlantic partner site.

Fewer people going to college? Could this possibly be good news?

Actually, yes. For three reasons.

First, it's probably a sign that the economy is getting healthier. Conventional wisdom says that as the economy tanked, students took refuge from the job market by heading to campus. Some critics say that storyline is bunk, and that the last few years of enrollment growth were really just the continuation of a long-term trend. But either way, fewer new students seems like a sure sign that, if they were before, Americans have stopped turning to education as a professional measure of last resort. Would these folks be better off with a degree? Probably. But there's a pretty decent chance that many students on the fence about signing up wouldn't have graduated anyway.  

Which brings us to point two: Even if you think more Americans need degrees, we should probably be focused on improving our nauseating dropout rates rather than adding more bodies to classrooms. 

And finally, we really, really do want some of these colleges to shrink. As shown in the graph below from Inside Higher Ed, The biggest fall-off by far has been in ever-unsavory for-profit sector, which has been pulling back lately in an effort to improve their abysmal track records and slim down on their cost structures. And the more overall enrollment shrinks, the harder for-profit schools will have to compete to provide better services and, hopefully, results. Meanwhile, the next biggest drop has been in community colleges, where in many states over-crowding has made it nearly impossible for some students to finish degrees, pushing them into the arms of ... the for-profits. 

Our views on college at The Atlantic are pretty simple. We want more college graduates to leverage an affordable education to get a great job. Falling enrollment sounds like an enemy of that goal ... but not when enrollment is falling the fastest at schools with the worst debt and drop-out rates.

Remember when you first learned what socialism was and somebody explained that it was nice in theory, but bad in practice? Here's the sort of thing they were talking about. 

Venezuela is now suffering from a government-induced toilet paper shortage. The situation has become politically dire enough that the government has promised to import 50 million rolls to calm shoppers. 

For those familiar with the Bolivarian Republic's less-than-sterling economic record of late, this won't come as a surprise. The country, while relatively wealthy by developing-world standards, has been suffering through a chronic shortfall of everything from groceries to asthma inhalers, resulting in desperate lines of shoppers and a healthy black market trade in kitchen staples like flour. 

While the government prefers to blame shadowy political enemies for the shortages -- according to the AP, Commerce Secretary Alejandro Fleming said the toilet paper crisis was the result of "excessive demand" sparked by "a media campaign that has been generated to disrupt the country" -- the explanation is much more straightforward.

In 2003, then President Hugo Chavez slammed currency controls into place to prevent money from fleeing the country while government seized land and corporate assets. Those rules have made it harder to buy imports. Meanwhile, price caps meant to make basic staples affordable to the poor are so low that, for many products, they don't pay for the cost of production. 

Nobody's going to make toilet paper if they'll lose money selling it.  

It's tempting make light of this situation, but it's really sort of tragic, yet another self-inflicted wound on an economy rich in natural resources. The shortages are bad enough that Venezuela's central bank has created a scarcity index (shown below in this WSJ graph), which has lately been hovering around a four-year peak. "The revolution will bring the country the equivalent of 50 million rolls of toilet paper," Fleming told a state news agency. It would be much easier to let the free market do it instead. 

[My editor has forbidden me from writing puns into this story, but feel free to get them out of your system in the comments.]

Why might that be the case? The combo of debt and murky career prospects has a way of chilling one's desire to invest in a home. It also doesn't make much sense to settle down when there's a good chance you may have to move for work. 

But there's more to it than that. Lending standards have gotten suffocatingly tight in the wake of the housing bust, and young people with too much student debt compared to their income, or who've fallen behind on their loan payments, may simply be unable to qualify for a mortgage. As the Fed noted, student borrowers now also have worse credit scores, on average, than their ed-debt-free peers.

That's the big picture story. But I want to focus on the small picture for a moment -- the granular picture even. Because the truth is that most young people with student debt are still more likely to take out a mortgage than their debt-free peers, as this New York Fed graph from a separate report shows. The big exception is borrowers who are delinquent on their loans (shown in red). 

The problem is that the delinquency rate has just about doubled since 2004. More than 15 percent of all borrowers under 30 are now 90 days or more behind on their payments. The universe of young adults who have any shot of getting a mortgage has shrunk.

This is why I'm both a bit less worried about the impact of student loans on the economy than writers like Mike Konczal, but more so than my colleague Derek Thompson. Student borrowers who have managed to keep up with their payments are buying homes less often than they were before the housing crash, but the decline seems to have halted, and hasn't been far out of step with what's happened to their non-borrowing peers. On the other hand, the problem pretty clearly isn't a result of students consciously choosing to invest in education rather than real estate. It's that there's a significant chunk of twenty-somethings who borrowed to finance school and are now swimming in debt they're having difficulty paying back. Paying back student loans is probably stopping some young adults from buying a home. But I'm guessing it's the ones who can't pay them back who are the much bigger problem. 

***

For a bit more about student loan delinquencies, and what might cause them, check out my piece from yesterday. 

We like to view higher education as the "great equalizer" that leads to social mobility. But selective colleges have long been accused of perpetuating class divides, rather than blurring them.

A recent landmark study by Stanford's Caroline Hoxby and Harvard's Christopher Avery lent further empirical evidence to this accusation, finding that high-achieving low-income students do not have access to selective schools. The study showed that the mismatch is due to a lack of knowledge, not quality. Low-income students outside of major urban centers do not even apply to the top-tier colleges for which they are qualified.

Many commentators and the study authors themselves have looked for ways to alleviate this mismatch. A follow-up study found that supplying basic information to applicants could substantially increase the number of low-income students applying to more selective schools. Just giving low-income kids packets of information helped them apply to better schools.

Yet while the information gaps are real and need to be addressed, there is a much deeper structural problem. If most top colleges wanted to be truly equitable, they could not be with their current business model. There is not a golden pot of low-income applicants that schools want but are failing to reach. Instead, many schools don't want more low-income students because they won't be able to pay for them without a major overhaul of school funding practices. Outside of the handful of super-elite universities with fortress endowments, colleges' finances are currently designed around enrolling a disproportionately high number of high-income students. These schools could not afford to support more low-income or middle-income students absent either a huge increase in tuition, a commensurate reduction in spending, or a dramatic change in public funding.

In fact, schools are already moving away from a more equitable system. Colleges actively recruit "full pay" students who can attend and will not need financial aid. A 2011 survey by Inside Higher Ed found that about 35 percent of admissions directors at 4-year institutions, particularly public colleges, had increased their efforts to target "full pay" students. Far from wanting to enroll more low-income students, colleges recruit more affluent ones who will pay full price to attend. A follow-up survey of college business officers found that the most common strategy to deal with financial challenges in the next few years was to "raise net tuition revenue." More than 7 in 10 college CFOs cited this answer. In other words, schools are becoming more reliant on the inequality in the system than ever before.

If colleges cannot even currently support their business model with enrollment skewed toward higher-income students, a fairer distribution would make the system completely dysfunctional. What's really holding back a more equitable distribution of access to selective colleges is the financial model of colleges. For systemic reform to work, the government will have to take a leading role in fixing incentives and stopping the college spending arms race in its tracks.

High-Aid, But Not Enough Poor Students

What would selective college populations look like if their student body perfectly reflected the population of qualified students? The short answer is: They would have many more poor students -- and it would wreak havoc on their finances.

High-income students account for about a third of the high-achieving students graduating from high school (see graph above). But estimates suggest that 74 percent of students at the top 146 top colleges came from the richest quartile of households. The Center for Education Policy Analysis (CEPA) at Stanford looked at 174 top schools and noted that richest 20 percent of households were seven to eight times more likely to enroll in a selective institution than those from the poorest 20 percent, even though Hoxby and Avery's research suggests that a fairer distribution should be two to one. The CEPA team also found that the gap between the highest and lowest income groups in college enrollment has increased over time, "as more and more seats in highly selective schools have been occupied by students from high income families."

What would the current high-tuition, high-aid model look like with an enrolled student body that reflects the true distribution of high-achieving students?

At The George Washington University, right around the corner from my office in Washington, D.C., the advertised price is $58,985 for the 2012-2013 school year. For the more than 4,000 undergraduate students (out of about 10,000) who are judged to be unable to afford the advertised cost, GW provides an average of $36,789 in aid to offset this cost.

If GW's demographic profile matched the actual distribution of high-achieving students - that is, if there were one bottom-quartile student for every two top-quartile students -- GW's revenue would plummet by about 20 percent. The school would have to raise its tuition for students that are paying full price. But there would be far fewer of them. To take in the same amount of money as they currently do, GW would have to raise its price by approximately $30,000 per full-pay student, for a sticker price of about $90,000 a year. The actual increase would likely need to be more, given that families making $120,000 per year are classified as high income but cannot afford a college cost that would consume three-fourths of their annual income.

This is not a sustainable model. Colleges will not be able to raise sticker prices to these levels while preserving enough aid for low- and middle-income students. They will either raise prices across the board or recruit more affluent students.

Either way, the unequal system will remain.

How to Keep Prices Down: Be Really Rich

Not all colleges, however, would need to raise tuition drastically to pay for a larger number of low-income students. Schools with large endowments can cover the shortfall in tuition by drawing money from these reserves. But keeping tuition constant and paying more from the endowment is only an option for schools with monstrous endowments.

Many writers cite Amherst College as a success story, which has "aggressively recruited poor and middle-class students in recent years" and has increased its share of low-income students. But Amherst has a very large endowment for the size of its student body. Its strategy is only viable when backed with an endowment of more than three quarters of a million dollars per student from which it can draw additional funds to cover its costs while remaining competitive in its levels of spending.

Amherst is better than others, however. Some schools that already do have sizable endowments and could increase aid are instead decreasing it. Cornell, which has an endowment of about $5 billion, took $35 million from its endowment in 2009-2010 to fund financial aid. It is now changing its policy to draw less from the endowment, which includes lowering its financial aid policies.

For GW, with $1.33 billion in its endowment (about 1/18 of Amherst's per student), it's more difficult to use the endowment as a primary backstop. GW only has around 11.7 percent of its endowment, or $155 million, available for student aid. As such, GW - and most selective schools - would only be able to preserve student revenues by raising tuition.

The Public College Crisis

This problem is not reserved for private colleges and universities like GW. In fact, the problem is even worse at public universities.

In addition to competing with private schools, public universities are dealing with cutbacks in public funding as state governments turn to austerity to restore their balance sheets. State funding for colleges and universities dropped substantially after the 2001 and 2008 recessions. States are now spending 28 percent less per college student than they were in 2008, according to the Center on Budget and Policy Priorities, and the College Board reports that average state appropriations for higher education per $1,000 in personal income have declined from $9.74 in 1990 to $5.63 today. These budget cuts have forced states to raise their tuitions in turn. Over just the last 10-year period, combined tuition, fees, and room and board at public 4-year universities have increased 45 percent in inflation-adjusted dollars.

Flagship public universities illustrate this trend. Every flagship state university has seen its tuition increase faster than inflation over the last five years. The biggest price increases are enormous. The University of Arizona raised its tuition 81 percent above inflation, and five other schools saw tuition increases of more than 50 percent in real terms. As one CFO of a public university explained to Andrew Delbanco, the author of College: What it Was, Is, and Should Be, the issue at public schools is "not so much the cost of college, but the shift of the financial burden from the state to the student." If these trends continue, public universities will limit access to low-income students and increase the number of affluent students. This will create a more unequal system than the already unequal one we currently have.

Can the Drive for Reputation Save Us?

All of these calculations assume that colleges do not, and will not, change their spending. But perhaps the key to fixing the structural problem lies on the spending side, rather than the revenue side. Spending is not bad per se. If increased spending is necessary to contribute to the quality of the education or on increased financial aid, it would be good for colleges to continue to spend this money. Unfortunately, much of the spending has been on new buildings, administration, or "amenities" spending, rather than on the education itself.

Financial aid demands will rise for schools that want to attract more low-income students, as David Leonhardt of The New York Times notes. He is hopeful that the drive for reputation that includes a commitment to equity and supporting low-income students will encourage colleges to ditch the arms race of spending on new buildings and sports teams. If the spending arms race is a fight for more spending on financial aid, rather than other expenditures, it would be an arms race worth having. He writes:

"It is hard to think of a form of spending more consistent with top colleges' self-image and mission than scholarships for low-income students who have managed to overcome barriers and excel."

The problem, however, is that the capital arms race burnishes a school's reputation far more than a greater commitment to low-income students. Under the current set of incentives, colleges are rewarded for providing more of these "amenities" expenditures but not greater access.

A recent NBER working paper found that students value non-instructional amenities and are more likely to attend an institution that spends more on consumption amenities. While high-achieving students also value more spending on instruction (whereas low-achieving students do not, and even think additional instruction is bad), both high-achieving and low-achieving students tend to favor amenities. Universities, responding to this "demand-side pressure," spend more money on these consumption amenities, thus driving up the need for revenue.

Moreover, the current amenities expenditure arms race has succeeded for schools. Before Stephen Joel Trachtenberg took over GW in 1988, the school was "a nonentity in national rankings." Last year it was ranked 51st in the annual U.S. News and World Report list. "Spending more money can lead to higher rankings," writes the Center for College Affordability. This perverse incentive encourages the higher spending that leads again to the need for more revenue. Colleges then compete to outspend each other, leading to the never-ending arms race.

A recent report by my colleague at the New America Foundation, Stephen Burd, tracked colleges' net price for low-income students and what percentage of their students receive federal Pell Grants. Pell Grants can serve as a proxy for how many low-income students are enrolled. Of the 22 selective schools that enrolled a larger share of Pell Grant recipients and kept net price for these students low, only five schools had endowments smaller than $150,000 per student. None of these five schools were ranked in Barron's "most competitive" category. In other words, providing affordable access to more low-income students does not translate into a better reputation. Capital spending of the kind pioneered by GW's Trachtenberg does.

It is difficult to hope that colleges will change their path when the current one they are on has succeeded for their brand, even if it leaves lower- and middle-income students behind.

Perhaps the best example of capital spending trumping financial access is the story of Cooper Union, a small elite private school in New York City that has been free for students since its founding in 1859. Cooper Union used to fund itself on the proceeds from owning the land underneath the Chrysler building and other land assets in New York. To increase its reputation, the school tried to build its brand by building a fancy building. But facing large deficits after taking out a $175 million mortgage to erect the new building and incurring investment losses in the financial crash, the school's board of trustees announced that Cooper Union will start charging undergraduate students tuition in 2014. The consequence of the capital spending, combined with other financial struggles, is that something had to give. Undergraduate students will now be charged tuition (up to about $20,000 per year) for the first time in the school's history.

If reputation cannot slow the spending arms race, could technology? The rise of massively-open online courses, or MOOCs, raises the possibility that we could slash the price of college by replacing expensive college campuses with a broadband connection. But if digital colleges are going to have an effect, it will likely be felt at non-selective low-quality schools, such as for-profits, that currently leave students with few opportunities and plenty of debt. At selective schools, the introduction of online learning does not change the basic incentive structure that pushes schools to spend for the sake of their brand.

What Can Be Done?

In an optimistic scenario, finding ways to increase the information available to high-achieving low-income students would increase the number of applications and put pressure on colleges to end the amenities arms race, decrease costs, and spend more time and resources on learning and education supports.

But a more likely scenario is bleaker. Even if we end the information mismatch, colleges will find ways to preserve their existing business models to avoid fundamental reform. Once again, colleges already do this. Not only do they actively recruit full-pay and out-of-state students, they engage in a practice called "admit-deny." As Burd writes, admit-deny is when "schools deliberately underfund financially needy students in order to discourage them from enrolling." Nearly two-thirds of private colleges and one-third of public schools currently engage in this practice.

We need to fix the underlying incentives, and the best institution to lead these changes is the government. It is necessary to have a large public role to guarantee that a basic postsecondary education is not merely a luxury for the wealthy but is instead available, affordably, to every student who wants it.

A public sector that is not caught up in the arms race should serve as the proper "public option" to attempt to drive down costs at private schools in a semi-competitive sphere. The cutbacks in public funding of higher education have made it more difficult for public institutions to keep their prices down and provide a comparable quality of education. The fact that public schools are actively recruiting full-pay and out of state students means that they are moving away from their necessary function as the core provider of higher education to residents in its state. We need not only to restore funding of public universities, but substantially increase it.

Additionally, many of these schools are reliant on federal aid and federal loan programs to finance their students' educations. For example, the government provides Pell Grants to low-income students up to an amount of $5,550 and subsidizes student loans. Rather than continue to offer federal aid to schools that absorb these costs and continue to operate under the unsustainable high tuition, high-aid model, the government can tie its financial aid support to the elimination of the arms race.

As with a military arms race, no individual actor in the education arms race will voluntarily pull back. Only an external force, like the public sector, can make across-the-board changes to fix the problem. The government has leverage because of the importance of federal programs like Pell Grants and subsidized student loans.

To end the arms race, the government should decrease or eliminate federal money to students at schools that continue to increase prices while enrolling disproportionate levels of high income students. Schools would then need to prioritize costs and access, rather than spending and reputation, to be able to function. And no individual school would have to unilaterally draw back.

More broadly, the public sector can also help drive down runaway costs by pushing for policies to promote full employment and the creation of good jobs that do not require a college education. When college is all but required to be able to have access to decent quality jobs, colleges can extract economic "rents" because there is no alternative for people entering the labor force. For students who need access to college as an economic stepping-stone to future employment, simultaneous changes on both the educational and labor market fronts can increase the chances of successful reform. Labor market policies to put pressure on college costs can range from creating more useful, high-quality public sector jobs, like childcare and eldercare services, to increasing the minimum wage or supporting workers' bargaining power.

Any and all of these policies will help drive down the natural inclination for colleges to pursue the arms race and push schools back to the quality, accessible education they should be providing.

Until the underlying problems of arms-race expenditures and declining public funding are addressed, colleges will continue to use high-cost, high-aid strategies that are inherently unsustainable and inequitable. Many selective schools derive their status because of the information asymmetry, not in spite of it. It is the structural deficiencies in the higher education system that are pushing college further away from being the much-hallowed "great equalizer" and instead perpetuating privilege for those who can pay.

A statistical case-in-point: According to the Federal Reserve Bank of New York, 17 percent of all student borrowers are 90 days delinquent on their payments, yet only 11.2 percent of all loan balances are that far behind. That gap suggests there are lots of small-time debtors in trouble these days.

Looking at the geography of student borrowing teaches us a similar lesson. As part of its most recent report on household credit, the NY Fed has produced a neat pair of maps detailing which states have the highest education debt burdens and which have highest delinquency rates. The two pictures overlap less than you might expect. 

As shown below, student borrowers in the mid-Atlantic, parts of New England, the Southeast, Illinois, and California tend to have above-average balances compared to the rest of the country.  

Yet they also have a superior record of paying them back. Delinquency rates in Massachusetts, New York, Pennsylvania, New Jersey, Connecticut, Delaware, Virginia, Illinois, and Washington, D.C. are lower than average, even though their debt levels are high. Meanwhile, borrowers in low-debt states like Nevada, New Mexico, and Idaho have some of the worst payment records in the country. 

What's going on?

It's possible that students are paying lots of money for private schools in high-debt, low-delinquency states that equip them well enough to handle their loans. Graduates of elite schools also tend to congregate in and around the Beltway, which would help explain the debt levels in Maryland, Virginia, and D.C. itself. 

Then there's the job market. If you borrow cautiously for your education, but end up in a state like Mississippi or West Virginia with a high unemployment rate, you might end up in bad spot with your loans. That's straightforward enough. 

Another factor may be the echoes of the housing bust. This is often missed, but it's not young student borrowers having the most difficulty paying off their debts. It's 30-to-49-year-olds, who may also be coping with other financial obligations gone sour. Foreclosure and mortgage delinquency rates in Florida and Nevada -- two big student loan trouble spots -- are still quite high. And, I don't think coincidentally, more than a quarter of delinquent student borrowers are also more than 90 days behind on house payments. They're not just sinking in education debt. They're sinking in debt, period.

And finally, it might be a matter of staying in school. When you talk to higher-ed policy folks, one of the first things they'll tell you is that student debt delinquencies or defaults don't just happen because students borrow too much. Often, it results from a lack of information. When students drop out of school -- which, at many institutions, is the norm rather than the exception -- they usually don't get an exit interview from an administrator explaining their debt repayment options, such as income-based programs. So they end up trying to pay it back too quickly and fail. I wouldn't be surprised if that scenario were replaying itself often in low-debt, high-delinquency states. 

In any event, the point remains: When it comes to the student loan mess, it's not just the size of the debt that matters.