Higher Education Funding Series: How the Wrong Assumption Drives the Wrong Policies

The affordability of college in tandem with the student loan debt crisis has been a hot topic at UCLA and a lot of other places for a long time now. The topic is important, because as a society we have chosen to provide federal support for education. The reasons for this choice are simple:

  • Education is a primary way through which individuals can increase their lifetime wealth and thus exercise income mobility. I call this the poverty prevention reason.
  • Education provides positive externalities to society, meaning that the benefits of education accrue not just to the student but also to those surrounding the student, and the US economy as a whole. This means that in a purely free market, one would expect education to be under demanded.

I am not going to argue with these, even though there is plenty to argue about. (I would imagine that the marginal benefit of each year of education beyond high school declines). Instead, I will take these as the primary goals of federal support of education. Over the course of several articles, I will discuss why current reform propositions will fail to advance these goals. In this first entry, I want to start with background and discuss a core wrong assumption.

Most reformers suggest one of several options:

  • Pegging the federal student loan interest rate at a lower level
  • Enacting a loan forgiveness program or easing the process of student loan bankruptcy.
  • A new, interesting idea: Giving tax breaks to companies that help students pay off their debt.

Although each one has different effects in terms of who it helps, the overall net effect is the same: making it easier to acquire money to go to college.

A large number of advocates who are currently in college start from the assumption that college is for everyone. This is an honest mistake, which is likely the result of generalizing their own experience (they chose college) onto everyone. It is also likely a result of those advocates mistakenly equating the idea that “education is good for everyone”, with college is good for everyone. The first phrase is almost certainly true. For the individual, education increases their marginal product of labor, that is it makes them able to produce things more efficiently, as they are able to use better tools with better skill. If you accept, at least loosely, that a person’s real wage is equal to their marginal product of labor, than this increase means they are unequivocally better off.

But education is a broad term, and college attending lobbyists assume that it only means a liberal arts education. In truth, a liberal arts education is only a small subset of the things that count as education. Technical schools, internships, jobs, military service, self-training, Khan Academy, and so many other things are sources of education. All of them can equip people to increase their own skills and therefore increase their wage. All of them enable people to increase American output. They are no more of less honorable or useful than a traditional college degree. And in many cases, they may be more useful.

This is because when someone decides how to increase their human capital through education, they not only consider benefits but also costs. And in a pure market, internships and apprenticeships, while perhaps lower in benefits, are also lower in cost. They do not require a person to give up working fulltime, and they rarely involve paying tuition. In our current market, the government has subsidized liberal arts degrees while disadvantaging internship and apprenticeship opportunities.

The subsidization of liberal arts degrees is through loan forgiveness, federal grants, and held down interest rates. The disadvantaging of internships is indirect. The mechanism is the national and state wide minimum wage laws. Such laws prevent a business from hiring someone in a training position for a low wage. In many cases they force young people to accept volunteer positions with some educational benefit, which at times requires college enrollment (in order to receive credit).

The true travesty of this situation plays out when one connects the dots. Since federal aid is spent mainly on liberal arts education, and federal aid is paid for with tax dollars from U.S. companies and working individuals, it means that we are making some of the working individuals pay for the degrees of those in college. Further, we are making companies pay for degrees, when that tax money could have been used by the company to hire paid interns.

So to return to the original proposition: The higher education funding discussion is premised on a narrow view of education. And, as I have argued, this is mainly because the lobbying movement is composed of people currently in college. This drives the conversation towards further subsidization of one type of education. As I will show in my next post, the current solutions are only more of what we are already doing. And what we are already doing is driving the inefficiency of modern universities.

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