The Economics of Higher Education

An editorial in today's New York Times laments the "soaring tuition and dwindling aid" in US colleges.

...the aid programs contained in the federal Higher Education Act of 1965, which is due to be reauthorized this fall, need to be updated. The top priority should be increasing the amount of the Pell grant, which covered more than 80 percent of public-college tuition a quarter-century ago but covers only about 40 percent today.

Why would the government need to back a loan made for college tuition anyway? If tuition loans are a good investment, does a bank need an incentive to offer them. If tuition loans are a bad investment, why is the US government getting involved in a losing proposition, and using public money to fund it?

Nevertheless, tuition costs are soaring, coincident with 39 years of federal largess, and someone at the New York Times suggest more largess. I wonder how an economist on the NY Times Editorial staff would fair with the following brain-teaser:

A wealthy benefactor decides to hand out tuition loans willy-nilly to millions of students that aren't necessarily up to par for a period of 40 years. Relative to the price of tuition had the benefactor NOT acted, the price of tuition will:

a) increase
b) decrease
c) stay the same
d) none of the above

I suspect (s)he would have answered 'd'.

Share this

well noone would have

well noone would have incentive to provide a grant (at least not a bank.) Maybe there's an exception to this. But it's pretty clearly a "social benefit" thing.

anything less than market

anything less than market terms and interest IS a grant, no doubt financed by a 'coalition of the unwilling'(taxpayers and banks) under some vague threat by the Federal gov't. at least thats how it works in Kanadastan.

Grants aren't necessary. An

Grants aren't necessary. An intelligent person (absent government largess) would have a huge incentive to invest in his own education.

It's an investment that typically pays off. It can lead to a higher salary - which makes paying off a loan possible. No state-mandated right to education is necessary.

Bill, if you even make an

Bill, if you even make an attempt to explain that 'fact' to most Canadians they'll go into a writhing, apoplectic fit and start spewing out socialist psuedo-intellectual mantras like a backed up sewer. can they not understand why tuition is so high in the first place? anything the gov't hydra touches turns into a whirlwind of price inflation, brought on by the same university educated economists whose remedy for everything is printing more money.

anything less than market

anything less than market terms and interest IS a grant, no doubt financed by a ?coalition of the unwilling?(taxpayers and banks) under some vague threat by the Federal gov?t. at least thats how it works in Kanadastan.
it's not neccesarily financed by the unwilling taxpayers. You guys seem to nail Gov't action right on the head most of the time, so why do ever bother presuming that it's blindly benevolent? I would bet it's a result of popular pressure.

Grants aren?t necessary. An intelligent person (absent government largess) would have a huge incentive to invest in his own education.
are you really rich or something? The point is that there's no money with which to invest. I also might add that many of the degrees aren't beneficial on a private cost/private benefit curve intersection. They are achieveable on a social cost/social benefit curve though.

Of course tuition costs are

Of course tuition costs are soaring, for the same reason medical costs are soaring. In both cases, when third party payments come into the picture, the utility of the good being paid for is no longer directly tied to the disutility of paying for it. And the consumer has much less incentive to be frugal, to shop for the best deal, or to make any kind of rational calculation of means and ends.

By the way, I'd say "federal largesse" goes back at least to the G.I. Bill, if not to the Hatch Act of 1877 (which set up land-grant colleges).

The problem is heightened because universities have ceased to be autonomous federations of scholars or students, on the medieval pattern, and instead come under the control of boards of regents and presidents representing outside interests. The fact that the faculty and students are subject to an outside authority whose interests are not their own, means that the services provided by faculty and consumed by students are no longer determined by their own judgments of the innate utility of those services. Instead, the universities are harnessed to promote external objectives, become bureaucratized under a caste of administrators with prestige salaries, and devote their resources to showboat projects to impress people on the outside.

Two of Paul Goodman's books, The Community of Scholars and Like a Conquered Province, have some great insights on these issues.

The point is that there?s no

The point is that there?s no money with which to invest.
You slightly mistake the use of the term. "Invest(ment)" the economic term means something rather different than "invest(ment)" the English word/financial term. To invest economically is to produce/procure an intermediate good in order to increase productivity of final goods. This is frequently accomplished by borrowing funds, when the projected increase in productivity per time eclipses the cost of borrowing (interest).

What that means in the case of financing higher education is that a college degree has a certain expected increase in salary attached to it, against which funds can be borrowed to obtain it. Therefore, it's not a question of having money to invest in one's education, it's a question of being able to justify that education on a return-on-investment basis in order to borrow said money.

Obviously, it's hard to get a degree in Sociology, English, Women's Studies, etc. on such a basis.... which is exactly as it should be.

(The preceding was a reply to matt27, the following is a general comment in continuation)

Nearly all the problems of higher ed can be traced to subsidized funding thereof. Why is it so hard to get a job without a degree? Why do all degrees, from Associate's to Doctorates, become less valuable and poorer indicators of ability every passing year? Why do people persist in getting useless degrees (see above)? The answer to all of those and more is third party payment. Quite simply, because of the subsidized cost, too many people are getting degrees, and they're getting them in the wrong things. It's awfully un-PC to say that not everyone ought to go the distance in their education, but it's also true.

Tongue-in-cheek...
We certainly wouldn't be losing as many manufacturing jobs if fewer people had degrees ;)

I also might add that many

I also might add that many of the degrees aren?t beneficial on a private cost/private benefit curve intersection. They are achieveable on a social cost/social benefit curve though.

Examples?

"it?s not neccesarily

"it?s not neccesarily financed by the unwilling taxpayers"
yes it is. i'm a taxpayer and i'm un willing. thats all that counts and until i have a check box on my income tax slip its ripping ME off.

I also might add that many

I also might add that many of the degrees aren?t beneficial on a private cost/private benefit curve intersection. They are achieveable on a social cost/social benefit curve though.

...

Examples?

Since private benefits/costs can't be added together to form social benefits/costs (owing to the invalidity of IPUC's), any "example" would be false by definition.

actually Noah I think you're

actually Noah I think you're astonishingly wrong here- the familiar market Demand Curve is almost exactly such an aggregation.

Roy- Noah gave the example of English which fits prety well. There are contributions to culture and society and all sorts of intangibles that accrue to such a major, yet they aren't represented by average salary. If Noah thinks it's desirable to live in a society in which people have ever-narrowing incentives to contribute in such ways, then we obviously have different values. Such a society sounds like hell.

it still doesn't answer the

it still doesn't answer the question of why should i pay for someone elses education, if i don't want to. force is the only way people can afford get useless majors ,or pay for it themselves.

Sorry if I offend anyone

Sorry if I offend anyone (well, maybe not really), but I see little to no benefit to the mass production of English majors. Vague handwaving about "contributions" and "intangibles" doesn't fly as a rational argument.

Roy, whooo boy don't get me

Roy, whooo boy don't get me started. If it were that simple and innocuous, who'd care, there would just be a few more useless english majors on welfare. my problem is i have to fund a festering filth-hole of seething socialism like SimonFraser in BC, that churns out THOUSANDS of soon to be government employees and the ones that are even too stupid to work for the government will get NGO jobs there by getting on my payroll through the backdoor. if you allude to that being wrong, in BC you are called a nazi or some other ironic socialist affiliate.

it still doesn?t answer the

it still doesn?t answer the question of why should i pay for someone elses education, if i don?t want to.
well, we might need another thread if wanna argue "taxation is theft."

Sorry if I offend anyone (well, maybe not really), but I see little to no benefit to the mass production of English majors. Vague handwaving about ?contributions? and ?intangibles? doesn?t fly as a rational argument.
well it's hard to measure, but intellectual development seems to me an important thing. Besides, I imagine that your argument is really based on the idea that Markets know best. i.e. That the absence of "state coercion" will allow market demand to dictate majors, and that such majors will maximize social welfare. I find this argument unconvincing. We're really talking about alternatives.

I'm not an english major though, so I'm not offended.

If it were that simple and innocuous, who?d care, there would just be a few more useless english majors on welfare.
you might consider a study. I haven't read of too many english majors on welfare.

Depends on how broad your

Depends on how broad your definition of welfare is.

that's a good point roy.

that's a good point roy. What I really should be saying is that everyone is on welfare, especially business. Some it just isn't as obvious. The real movement is to turn welfare into something that exists only for the rich, and poor people have nothing.

The real movement is to put

The real movement is to put EVERYONE on welfare, and have classes/groups that vote/beg/bribe politicians to shunt more benefits their way.

Education is just one such benefit.

Well, Matt may have a

Well, Matt may have a conflict of interest in that he is a philosophy major, which is on par with English in terms of financial uselessness. But, then again, I'm minoring in philosophy, so I don't think philosophy is entirely useless. ;)

I think an even stronger argument against Matt's "social benefit" claim is that it is ultimately damaging to many of the students who major in the humanities, especially in graduate school. There are simply not enough academic positions for these people, and unlike majors like business, economics, science, and engineering, there are few private sector jobs for people with graduate level degrees in English or history.

Private philanthropists donate millions upon millions of dollars each year to universities; this money helps fund research, endow chairs, defray the cost of tuition, and in many other ways encourage activities that would not be profitable on a purely for-profit basis. I don't see any reason to further subsidize universities with money taken from unwilling donors. Funding graduate-level work beyond what people are voluntarily willing to pay gives students the false impression that their studies are socially desirable in the eyes of society itself and will result in future employment. Too often, it does not.

Oh, and Matt, I'm curious if

Oh, and Matt, I'm curious if you think the fact that welfare tends to benefit the rich is a function of the structure of political systems in general or of the particular personalities of those in charge of running the government. One of the arguments that economists like David Friedman often use against welfare is that when the government has the power to redistribute wealth as it deems fit, it tends to redistribute money from politically weak groups to politically powerful groups. Politically powerful groups, unsurprisingly, tend to be wealthy. Notable examples: Social Security and Medicare.

matt, the demand curve does

matt,
the demand curve does not aggregate utility, though its more naive proponents will claim it does. What it does aggregate is willingness to pay, which is not the same thing.

Really and truly understanding the impossibility of Interpersonal Utility Comparisons (IPUC's) is essential for understanding why government meddling doesn't produce good results (among other things). The fact that you don't understand IPUC's, and persist in employing vacuous ideas like "social benefit", goes a long way in explaining why the entire Catallarchy commentariat can never get you to see our point of view.

Sorry if this comes off like a personal jab. I enjoy the challenge of arguing with you (after all it's boring to talk amongst people who all agree), but in the grand scheme of things I'd be happier if you understood.

Micha, as for your first

Micha, as for your first response the argument that getting liberal arts majors is a bad idea is interesting. For the individual it probably is, but for society at large I think it's beneficial. I know I'm glad that David Foster Wallace opted to study graduate level creative writing instead of working for the NSA. Obviously that's not an argument, but an illustration.

As for the second point which relies on the "taxation is theft" argument, I think that's a bigger can of worms than this thread is gonna contain.

I?m curious if you think the fact that welfare tends to benefit the rich is a function of the structure of political systems in general or of the particular personalities of those in charge of running the government.
well, I doubt very much that it has much to do with the personalities of the leaders. Welfare itself was a proposition that reflected:
a. the extraordinary prosperity of the time (high growth,etc.)
b. Keynesian ideas of demand stimulus aiding the economy
c. popular movements influential at the time (among them organized labor)
and
d. a certain "Nobless Oblige" mentality among the business leaders themselves. This less important.

Emminent historian Gabriel Kolko argues similarly in his "Triumph of Conservatism" about the origins of these various interested groups. He's covering the "populist" 1900-1918 years. "Right Turn" by political scientists Joel Rogers and Tom Ferguson covers the "great society programs" in much the same way. They were the result of an overlap of the interests of business and citizens, which occasionally happens.

My comment was not about the welfare program itself, but rather all important gov't spending (like Department of Energy funding.)

it tends to redistribute money from politically weak groups to politically powerful groups. Politically powerful groups, unsurprisingly, tend to be wealthy. Notable examples: Social Security and Medicare.
I agree that gov't tends to redistribute in this way (as does free trade, incidentally), but I think that's an argument against specific programs, not against all gov't programs. Social Security, for instance, can be alleviated of this "Friedman" effect by simply making the taxes more progressive. What did you have in mind?

by the way, I've switched to economics and political science as a double major and am now only minoring in philosophy and ethics (because I already have enough to do both.) Only 6 more years until graduation!


the demand curve does not aggregate utility, though its more naive proponents will claim it does. What it does aggregate is willingness to pay, which is not the same thing.

Taking a history of thought course would be illuminating for you if you haven't. The original demand curves and the "consumer indifference curves" off of which they're based are all Benthamite ideas. When economists rejected Bentham's rather quaint notions of objectively measuring social welfare, they retained curves that were based on just such a measurment. I'll likely be writing a guest blog on catallarchy about exactly this, so if you're interested we can discuss it there.

Sorry if this comes off like a personal jab. I enjoy the challenge of arguing with you (after all it?s boring to talk amongst people who all agree), but in the grand scheme of things I?d be happier if you understood.
I enjoy the challenge as well- as I've written before, Libertarians' passionate commitment to reasoned argument makes them ideal arguing buddies. Incidentally, I think I understand your point of view often, I just disagree.