Tag: college education

Higher Education Subsidies Wasted

A study from the American Institutes of Research finds that federal and state governments have wasted billions of dollars on subsidies for students who didn’t make it past their first year in college. The federal total for first-year college drop outs was $1.5 billion from 2003 to 2008.

Due to data limitations, the figures are only for first year, full-time students at four-year colleges and universities. Community colleges have even higher drop-out rates, and part-time students or students returning to college are more likely to drop out. Therefore, the numbers in the report are “only a fraction of the total costs of first-year attrition the nation and the states face.” Moreover, it doesn’t include the cost for students who drop out some time after their sophomore year.

Federal policymakers from both parties are fond of lavishing subsidies on college students. Proponents argue that without federal subsidies, an insufficient number of future workers will possess the skills necessary to compete in a global economy.

However, a Cato essay on federal higher education subsidies argues that students wishing to attend college already have plenty of incentive to save or borrow from private sources:

Supporters of student aid subsidies argue that higher education is a “public good” that would be underprovided in a free market. However, that is probably not the case. People have a strong incentive to invest in their own education because it will lead to higher earnings. Those with a college degree will earn, on average, 75 percent more during their lifetime than those with just high-school degrees. That is a big incentive for people to save or borrow in private markets to pay for their own college costs. There is no “market failure” here.

In fact, higher education subsidies drive up tuition prices:

It is matter of supply and demand. More and more Americans have sought a college education, which has pushed prices higher. Ordinarily, such upward pressure would be restrained by consumers’ willingness and ability to pay, but as government subsidies have helped absorb tuition increases, the public’s budget constraint has been lifted. Peter Wood, a professor at Boston University noted that federal subsidies “are seen by colleges and universities as money that is there for the taking … tuition is set high enough to capture those funds and whatever else we think can be extracted from parents.”

But isn’t it great that Uncle Sam is helping put more young folks in college? Not necessarily:

Many of those additional students may not have been ready, or suited, for college. As evidenced by the rising shares of college students who require remedial work. Further evidence of the problem is that institutions have lowered their standards to adapt to the rise in second-rate students. The American Academy of Arts and Sciences reported that from the mid-1960s to the mid-1990s, college grade point averages grew steadily but Scholastic Aptitude Test scores declined. The share of entering college students who complete degrees has also fallen over the decades. In addition, while college attendance is up, overall adult literacy has barely budged over the last 15 years.

The essay also notes that college students devote 3.2 hours to education on an average weekday, versus 3.9 hours to “leisure and sports,” and that the six-year graduation rate for bachelor’s students is only about 56 percent, indicating that many students are not very serious about education.

Just as housing subsidies incentivized people to purchase homes that they otherwise shouldn’t have, higher education subsidies have incentivized people to go to college who weren’t ready or suited for it. In both cases, the cost to taxpayers has been substantial while the alleged benefits have proven illusory.

Is an Education Free Market Really ‘Totally Insane’

Matt Yglesias thinks my assertion that we would be better off economically if education money stayed with taxpayers rather than going to public schools and universities is “totally insane.” Ouch!

Now, I can actually understand this, because many people have difficulty envisioning things other than what they’ve always known. But have I really gone all Crazy Eddie? If government didn’t spend taxpayer dough on education, would the poor be much worse off than they are today? Can we never over-invest in schooling because education is just so important? Does the college wage premium mean we should never ratchet down subsidies for college education? And is it at least possible that spending more and more public dough doesn’t lead to more or better education – by which I mean actual, valuable learning – as much as more waste?

Unfortunately, it seems Ygelsias didn’t follow any of the links I provided in the post containing the line he objected to, which furnished some valuable data answering these important questions. And, by the way, it really was just one line he seemed to dislike – the point of the post was to argue against spending yet more taxpayer dough on an education-centered stimulus, not for complete separation of school and state. And, of course, tax-credit-based school choice leaves taxpayers in control of their money without eliminating support for education.

But let’s start answering our questions in more depth so that Mr. Yglesias and others can start to think outside of the “how we’ve always done it” box.

First, let’s hit one critical point: Spending taxpayer money on government schooling does not actually mean you get better education. Let’s look at that graphically:

Here you can see nearly four decades of precipitously increasing expenditures on K-12 education plotted against student performance. And what does it reveal? No correlation between the Death Valley of academic achievement and the Everest of spending. Ever-more taxpayer dollars have gone into the government education system, but the system hasn’t improved at all. Why? Because the educators receiving the money have no need to get better – they’ve gotten ever-more dough no matter what, in large part because many people simply assume that increased government spending on education equals better education. But if you spend hugely greater amounts and get no better results, that seems like it would be an economic drain, no? Which was exactly what I was arguing.

How about higher education?

On a per-pupil basis, over the last quarter-century spending on public colleges and universities has been steady overall, while aid per student at all schools has gone way up. And what do we have to show for that?

The first thing is  incredible tuition inflation – the bane of American higher education. On a per-pupil basis, since 1988 real aid per student has risen 144 percent, while prices have inflated 81 percent at four-year-private schools and 145 percent at four-year publics. It seems, at least in part, that colleges and universities raise their prices because, well, the aid makes sure they can.

Surely, though, the schools use that money to provide more people with ever-better educations? Maybe, but much of the new money seems to have gone just to hiring more administrators, freeing professors from teaching so they can conduct research, and erecting ever more fabulous amenities. Which brings us back to the economic point: Maybe taking money from taxpayers to subsidize all this empire-building and waste might be an economic loss because taxpayers would otherwise spend the money more wisely. Maybe they’d invest in companies that provide better, cheaper products; give money to charities; buy education from stripped-down – but more educationally effective –  schools; or use it for countless other things they need or want.

But what if all this subsidizing – even with its attendant waste – resulted in impressive educational outcomes? Then maybe, just maybe, it would be an economic net gain.  But things look pretty bad: The six-year graduation rate for bachelor’s degree seekers is just 57 percent; roughly one-third of first-year students need to take remedial courses; and literacy dropped (see p. 38) roughly ten percentage points for Americans with at least a bachelor’s degree between 1992 and 2003. Oh, and that wage premium? It could very well include massive credentialism: It might be that you now need a bachelor’s degree for jobs that require only skills or abilities you could have attained on the job or in relatively brief specialized training. But at this point even half-way decent prospective employees would be expected to have gone to a four-year college.

Enough conjecture, though. Let’s go to the videotape – an actual effort to isolate the effect of government higher-ed spending on economic growth. Economist Richard Vedder has done this, and what he has found is that the more a state spends on higher education, the lower its rate of economic growth. Why? Among other possible things, it seems that when education is largely funded by third parties – especially third parties who have no choice in the matter – it decreases schools’ and students’ motivation to act efficiently. So sure, build that on-campus water park – I ain’t really paying for it!

Looking at things this way – contemplating the myriad costs, not just the assumed benefits, of taxpayer funding of education – it seems maybe my ideas shouldn’t be assigned a cell between the Joker and the Riddler quite so quickly.

But what about the equalitarian argument? Forget about economic efficiency – what about justice for the poor?

First off, I’d note that freer, more efficient economic systems tend to be better for everyone, rich and poor alike. You can read all about that here. But we need look no further than American history to see that people – including the poor – will get educated without government help. Before there was widespread government schooling there was widespread education. Indeed, by 1840 – when Mann’s common-school movement was still in diapers – it is estimated that 90 percent of adult whites in America were literate, a very high level relative to Europe. And the nation was hardly the Monopoly Man at the time. In other words, poor people got educated on their own.

But how could this be? Certainly part of the answer was that many poor people emphasized education, and much education occurred in the home. It was also provided by religious institutions, as well as philanthropists. And, of course, poor communities sometimes got together to establish their own schools.

But that was then and this is now, right? Education is much more complex because the world is much more complex. How could poor people get an education today if government didn’t provide it?

Well, for one thing, education need not be nearly as complex and expensive as it is. All those computers and other bells and whistles? There is hardly overwhelming evidence that they do any good – they may just be a huge waste of money. Meanwhile, many relatively barebones private schools seem to do just as good a job or better at educating students. Oh, and there’s that charity thing again: Religious schools provide low-cost education to millions of kids, and it could be lower if they didn’t have to compete with “free” public schools. And despite massive government subsidies to higher ed, private philanthropists give tens-of-billions of dollars to colleges and universities every year – imagine how much they might give if government didn’t say it would do the job! In other words, there is absolutely no overwhelming argument – to say the least – that just because the world is  more complicated government must run schools and pay for education. Indeed, huge, bureaucratic, plodding government is about the least well-equipped entity to handle complication and fast change.

And guess what? There is a profit-motive to furnish education to poor students with demonstrated academic aptitude: If someone lends money to a poor student to go to college so she can get an education that enables her to increase her future earnings, both parties will end up profiting. And let’s not overlook India and numerous other developing countries, where many of the poorest people in the world, using their own money, attend for-profit schools that outperform the free public schools. And why is that? Because the parents whose valuable money is being spent have huge incentives to hold schools accountable, and schools have to respond to parents to stay in business.

But maybe all that’s not enough for Mr. Yglesias. Maybe he needs to also be reminded of what he himself noted:

The current state of schooling in America is already bad enough in terms of ill-serving poor people.

That’s for sure! Currently, wealthy people can choose schools: they do it by buying a house in a good district or paying for private schools. Meanwhile, poor parents are often trapped in awful schools because they can’t afford to buy a McMansion for tuition. In higher education, flagship public colleges and universities have disproportionately middle- and high-income student bodies. And student aid? With creation of tax credit programs you have to have sufficient taxable income to use, as well as loans like PLUS that have no income maximums, aid has been targeted higher and higher up income scales. Meanwhile, the tuition inflation that all that fuels appears likely to scare low-income people away from higher education more than any other group.

Finally, let’s not forget that it was government that for centuries prohibited millions of people – especially African-Americans – from receiving either an equal education, or any education at all.   Without question during those times many private Americans would have discriminated in the provision of education, but government required discrimination by both bigot and good man alike.

So the current education system — which tends to be bent toward the will of the large, voting, middle- and upper-income blocs – already massively underserves the poor, and quite possibly makes it much harder for low-income Americans to compete with rich people than if everyone paid for schooling themselves. The system also injects huge distortions and inefficiencies into education, hurting overall economic progress. Of course, this is not an open-and-shut case – few things are in public policy – but you sure need to do more than just call removing government from education “insane” to counter it. Unfortunately, that’s not something it seems too many people – including Mr. Yglesias – are prepared to do.

Obama Ringing the Pell

As part of his ill-considered credentialing-to-compete initiative, President Obama wants to greatly increase both the size and availablity of Pell Grants. Under his proposed FY 2011 budget, the total pot of Pell aid would rise from $28.2 billion in 2009 to $34.8 billion in 2011; the maximum award would go from $5,350 to $5,710; and the number of students served would rise by around 1 million.  

A critical question, of course, is whether increasing Pell will ultimately make college more affordable or self-defeatingly fuel further tuition inflation. The New York Times took that up in yesterday’s Room for Debate blog.

Economist Richard Vedder has long educated people about the inflationary effect of student aid, and does so again with great clarity. It’s higher-ed analyst Art Hauptman, however, whom I think best captures what likely occurs when Pell is combined with all the cheap loans and other aid furnished by Washington, states, and schools themselves:

The degree to which student aid affects what colleges and universities charge varies between the Pell Grant and student loans. The Pell Grant has not had much effect on tuition levels in part because the amount of the awards does not vary with where a student enrolls. Institutions cannot affect how much a student receives, and the institutions that charge the most enroll the fewest Pell Grant recipients.

By contrast…there are several good reasons to believe that student loans have been a factor in the rising cost of a college education. Tuition has increased by twice the inflation rate for the past three decades while annual loan volume has increased tenfold in constant dollars.

Unlike Pell Grants…colleges have some control over how much students borrow as loan amounts. Moreover, just as one couldn’t imagine house prices being as high as they now are if mortgage financing were not available, it is difficult to believe that colleges and universities could have increased their charges so rapidly over time without the ready availability of students’ ability to borrow.

[W]e should worry…that increases in Pell Grants may lead institutions to reduce the amount of discounts they would otherwise have provided to the recipients, who are from poor families, and move the aid these students would have received to others. This possibility…is supported by the data showing that public and private institutions are now more likely to provide more aid to more middle-income students than low-income students.

So what’s likely going on? Cheap federal loans – which are available to students of all income levels and vary according to a college’s price – are probably the main direct tuition inflator. More indirectly, Pell probably encourages schools to move other aid from poorer to wealthier students, enabling the latter to pay ever-higher “sticker” prices. In other words, student aid powers tuition inflation!

Which brings me to a quick comment about the submission from College Board economist Sandy Baum, who trots out the standard “declining state appropriations”  to explain our college-price pain.

How many more times do I need to disprove this? Apparently, at least once more:

(Source: State Higher Education Executive Officers)

Public funding is a roller coaster and tuition revenue an incline. Over the last quarter century, per-pupil state and local funding for public colleges and universities went up and down, but dropped overall by a mere $8 per year. In contrast, public colleges’ per-pupil revenue from tuition (net of state and local student aid) rose more or less unabated, growing by about $73 per year. 

This – as well as the fact that private colleges are also guilty of huge price inflation – clearly belies the notion that colleges raise prices because skinflinty governments make them. That might be part of the explanation, but an even bigger part is almost certainly that colleges raise prices because, thanks to ever-growing student aid, they can.

Rhodes Scholars and the Business World

On the weekend that next year’s Rhodes Scholars are announced, Elliot Gerson, American secretary of the Rhodes Trust and executive vice president of the Aspen Institute, writes in the Washington Post that he is greatly disappointed that a few Rhodes Scholars have gone into business.

Yes, you read that right. He’s disappointed that even a few Rhodes Scholars have chosen to go into business:

For more than a century Rhodes scholars have left Oxford with virtually any job available to them. For much of this time, they have overwhelmingly chosen paths in scholarship, teaching, writing, medicine, scientific research, law, the military and public service. They have reached the highest levels in virtually all fields.

In the 1980s, however, the pattern of career choices began to change. Until then, even though business ambitions and management degrees have not been disfavored in our competition, business careers attracted relatively few Rhodes scholars. No one suggested this was an unfit domain; it was simply the rare scholar who went to Wall Street, finance and general business management. Only three American Rhodes scholars in the 1970s (out of 320) went directly into business from Oxford; by the late 1980s the number grew to that many in a year. Recently, more than twice as many went into business in just one year than did in the entire 1970s.

Apparently Gerson believes that our best and brightest can accomplish more good for the world in such fields as writing, law, and bureaucracy than they can by creating, innovating, and improving lives in the world of business – the arena that not only provides all of us with more comfortable, more interesting lives, and has lifted billions of people out of the back-breaking labor and short lives that were the human condition for millennia, but also makes possible the luxuries of the Aspen Institute, which was founded by Walter Paepcke (1896-1960), chairman of the Container Corporation of America, and is supported by successful businesspeople and their heirs today.

Of course, it’s not clear that business needs Rhodes Scholars. Think of the businesspeople who have revolutionized our world in recent decades: Bill Gates and Paul Allen, Steve Jobs and Steve Wozniak, Larry Ellison, David Geffen, Ted Turner, and Malcom McLean, among others, either never attended or never finished college. Sam Walton, Bill McGowan, and Fred Smith did finish college but weren’t Rhodes Scholars. In the Washington Post Jay Mathews notes that the chief executives of the top 10 U.S.-based Fortune 500 companies attended Pittsburg (Kan.) State, Texas at Austin, University College Dublin, Texas Tech, Texas at Austin, Dartmouth, Kansas, Gannon, Georgia State and Central Oklahoma, not the usual sources of Rhodes Scholars.

But the elite hostility to business – a holdover from Europe, perhaps, where aristocrats looked down on “trade,” or an unconscious echo of Marxism – is unseemly and harmful to both general prosperity and the individuals who are influenced by it to avoid productive enterprise. It crops up in President Obama’s commencement addresses sneering at students who want to “take your diploma, walk off this stage, and chase only after the big house and the nice suits and all the other things that our money culture says you should buy” and in Michelle Obama’s urging hard-pressed women in Ohio, “Don’t go into corporate America.” It’s nice that some people, like senators’ wives, can make $300,000 a year in “the helping industry,” but it’s business that produces the wealth that allows such nonprofit generosity.

Gerson and the Obamas are disparaging the people who built America – the traders and entrepreneurs and manufacturers who gave us railroads and airplanes, housing and appliances, steam engines, electricity, telephones, computers and Starbucks. Ignored here is the work most Americans do, the work that gives us food, clothing, shelter and increasing comfort. That work deserves at least as much respect as “scholarship, teaching, writing, medicine, scientific research, law, the military and public service.”