In a new mini-documentary released by the Center for Freedom and Prosperity, I explain several of the ways that government spending hinders economic growth.
In a new mini-documentary released by the Center for Freedom and Prosperity, I explain several of the ways that government spending hinders economic growth.
Kevin Carey has posted his response to my reply to him, and apparently he just won’t take it from a libertarian that we libertarians see no dilemma in the college-cost problem. At least, he can’t see how libertarians could “think seriously about restraining college costs” and still come to the conclusion that the best way to cut government spending on higher education is to, well, cut government spending. He still insists that the only way to “bend down the long-term higher education cost curve and thus reduce government spending is to increase government regulation.”
The mime who is boxing libertarians in must be one powerful illusionist, because Carey just can’t seem to not see a real box. But reading Carey’s post makes clear why this is: He wants desperately to believe that we must spend more on higher education, and that regulation is all that will work to keep colleges’ excesses under control.
What makes me say this? For one thing, Carey for all intents and purposes admits the spending part:
Just to be clear: I’d like to spend more public money on higher education, not less, albeit in a way that’s substantially more performance-sensitive and directed toward institutions that serve academically and economically at-risk students.
What about his obsession with regulation? Well, the whole point of his argument is that we must regulate higher ed more. Perhaps just as telling, though, is that he offers nothing to refute – or even acknowledge – what I wrote about government failure and the huge inefficiencies of regulation in my previous reply. You know, the hugely important cost side of the regulation ledger that most people whose first response to a problem is “regulate” typically ignore.
But let’s get to what Carey does offer in substantive response to my critiques, namely my argument that market forces, not regulation, best provide the information consumers need and most efficiently deliver goods and services.
I want to start by making one thing very clear: We absolutely do not have a free market in higher education! Far from it! State and local governments control the institutions attended by about 74 percent of students, and almost half of students receive federal aid in the form of grants, cheap loans, or work-study, (not to mention tax credits). In addition, governments fund billions of dollars of university-based research. Indeed, when you tally total revenues for public and private, not-for-profit institutions in the 2005-06 school year (the latest with available federal data), and then tally the amount that comes through government (directly to institutions and through student aid), it turns out that more than 52 percent of total postsecondary revenues come from taxpayers, making them the majority share holders in Ivory Tower, Inc.!
That shows clearly that higher education is absolutely not a free market! It also provides powerful insights into the principal/agent problem in higher education, the problem discussed at length by Robert Martin in the paper that touched off this whole debate, and the focus of Carey’s reply to me.
In general, the principal/agent problem boils down to the reality that everyone is self-interested, and the interests of, say, a company’s owners are not always aligned with those of the people they employ. At the most basic level, employers want employees to work as hard as they can for as little pay as possible, and employees want to work as little as possible for as much pay as they can get.
Carey believes – and is bolstered by Martin’s agreement – that the best way to mitigate this problem in higher education is regulation, because schools and their employees will not voluntarily reveal bad things about themselves:
In higher education, Martin argues, the principal / agent disconnect is less about risky profit-taking and more about status. Colleges are inherently status-maximizing institutions, even if the principals—taxpayers, donors, and students—would rather colleges focused on a different set of priorities, like giving every student a high-quality affordable education. As Martin writes,“senior administrators can persuade themselves that lavish offices, extensive building projects, expensive public relations events, luxury travel, and high compensation are in the institution’s interest. Board members may consider expensive social events to be in the institution’s interest.” The same could be said for giving too much weight to the research mission at the expense of teaching and lots of other things.
How do you get more status, particularly in an industry where reputations are seemingly as ancient and permanent as the stone buildings themselves? You buy it, by purchasing nicer buildings (old-looking stone is a popular choice of materials) and more prominent researchers and students with better SAT scores. Or you just let it accumulate in the endowment, also a major benchmark of prestige. All of this dovetails with Bowen’s revenue-to-cost-hypothesis: college spending is capped only by revenues and colleges have every incentive to spend, so they constantly build up fixed costs, raise more money, spend more money, raise more, spend more, and so on.
Martin’s solution? More information. To mitigate the principal / agent problem, give the principals more data so they know what’s really going on. And the government has to play a role
So how does the principal/agent problem get controlled – though it can never be totally eliminated – in the private sector? Yes, there is regulation, but as I made clear in my previous post, regulation has serious costs and often fails completely. I urge you to re-read my previous post for details, or, if you really want to get a feel for regulatory and government failure, consider the current economic mess, driven by government pushing risky mortgages; implied – and then very real – government bailout assurances for large financial institutions; and, if you’re inclined to think good regulation could have prevented our current woes, regulators failing in their duties. And no, unlike what Carey says, government requiring McDonald’s or Ruth’s Chris to publish nutrition information isn’t what makes them set consistent standards or deliver food people want – it’s the need to acquire and keep customers, who are highly motivated to spend their money on things that they think are worth it.
Wait. Customers? Of course! What forces high standards and constrains costs in true private markets is not regulation, but the need for firms to maximize revenue, which means competing with one another and, ultimately, serving customers as best they can. That is also what aligns the interests of principals and agents – if they don’t both focus primarily on satisfying customers, both will be out of jobs and money. Of course, principals help keep agents in line with performance bonuses and other tools, and there is the threat of legal prosecution if an agent outright steals from a principal, but mutual self-interest is the most powerful force keeping principals and agents aligned in the private sector.
The problem in higher education is that this alignment is all but nonexistent! With over half of the “business owners” involuntary shareholders with no power, the agents can run wild. Worse yet, the principals’ customers consume their product to a large extent on the principals’ dime, greatly inflating what the customers demand and are willing and able to pay.
Now, consider the very real-world, negative ramifications of this misalignment of interests. Because students are largely paying for their education with someone else’s money, they have greatly reduced interest in shopping for the most efficient education, and instead look for the swankiest rec facilities; celebrity professors who may teach few, if any, classes; and buildings made of “old-looking stone.” They also have reduced incentives to determine if higher education is really best for them to begin with, explaining such colossal waste as 34 percent of first-year students taking remedial courses; only 56 percent of students graduating within six years of entry; and 29 percent of Americans ages 25 and older having bachelor’s degrees, though only 25 percent of jobs require them. And, of course, there’s the rampant tuition inflation that ends up scaring away many of the truly poor people that government is supposed to be focused on helping.
But it doesn’t end with those things. Because college employees don’t have to provide a return to their “shareholders” – or anyone else, for that matter – to make their money, they can pursue their interests without much if any regard for how their interests align with those of principals or customers. And their interest is, often, to pursue the “prestige” that Carey (and certainly many others) laments is the coin of the realm in higher ed. Oh, and it doesn’t help that principals are often forced to directly fund things like research that adversely affect a college’s teaching mission but really build professors’ reputations.
What if we were to remove much of the forced, distorting, third-party money? Carey, in unfortunate, scaremonger fashion, warns that “massive public disinvestment in higher education…would cripple thousands of institutions and shut the doors to college for hundreds of thousands of students nationwide.”
If you think reducing the amount of money colleges spend on wasteful extravagances, or professors who teach very little, is “crippling” institutions, then you’ll think Carey is right. If you believe eliminating much of the aid that encourages people to pursue education they aren’t ready for, often don’t finish, and that seriously inflates college prices is shutting “the doors to college,” then you’ll think Carey is right again. But if you realize that by reducing aid many of the major distortions that drive up prices would also have to be reduced – the cheap, third-party money wouldn’t be there to fund them anymore – then you also realize that the new higher education market would still provide necessary education to most if not all of those people who could truly benefit from it. Indeed, even the poorest person would be able to get aid if he or she had strong, demonstrated earning potential, because both a private lender and the student would gain in the long run from agreeing to a loan. And there is such a thing as “charitable giving,” by the way.
Amazingly, Carey actually finds a way – though a very weak one – to blame the free market for the distortions in higher education. And by “free market” Carey means, simply, the much reviled U.S. News and World Report college rankings:
The free market has given us the U.S. News & World Report college rankings, which are all about status and spending. Fully 10 percent of each college’s score is based on a simple measure of spending per student — the more you spend, the higher you rank. Another 20 percent is based on things that cost money to buy — low class sizes, faculty salaries, etc. — and much of the rest flows from larger reputational and selectivity factors that are directly and indirectly enhanced by spending.
In other words, the free market has created an information environment that exacerbates the runaway college-cost problem that McCluskey is supposedly interested in trying to solve.
Where to start…
Yes, the U.S. News ranking probably relies too much on reputation and spending, but it also includes valuable output information, such as graduation and retention rates. And here’s the thing: Despite what Carey would lead you to believe, there are a lot more college guides out there than U.S. News! The Princeton Review gives you all kinds of insights into the atmosphere at numerous colleges. The Intercollegiate Studies Institute’s Choosing the Right College furnishes lots of insights into schools for conservatives. Forbes, in conjunction with Richard Vedder’s Center for College Affordability and Productivity, recently published rankings based on several college output measures. In other words, there seems to be almost a competitive rankings market burgeoning, a sign of market forces pushing their way into a non-market system, like shoots that somehow find a way through cracks in even the most concrete of jungles.
And rankings aren’t the only sign of market forces adapting as best they can to a government-distorted system. Indeed, in a system where everyone is artificially encouraged to pursue higher education, and employers are essentially banned from using the most straightforward way to assess applicants’ qualifications – direct testing – it makes sense to use the prestige of the schools that applicants attended as a proxy for their potential as employees. From an employer’s point of view, it is a relatively useful and inexpensive signal for what an applicant would bring to the job. Of course, it would be much better, especially for taxpayers, if employers were free to use more efficient and effective measures, and we didn’t push so many unqualified people to get increasingly watered-down degrees, but considering the restrictions and incentives government has imposed, market forces are doing the best they can.
With all that now said, I’m pretty sure I’m once again out of the mime’s box, hopefully this time to stay. Analyzing the principal/agent problem as it applies to higher education, as well as the numerous costs and failures of government regulation, point clearly not to regulation as the solution to what ails the ivory tower, but reducing or eliminating government spending. And please, don’t blame the free market for our higher ed problems. It’s doing all it can to fix them, but government failure is a heck of a tough thing to overcome.
Kevin Carey, policy director at the think tank Education Sector, asserts that when it comes to higher education libertarians are boxed in, unable to find a solution to out-of-control college costs that won’t violate at least one, basic libertarian principle:
This puts libertarians in somewhat of a box. On the one hand, they tend to be hostile toward the tens of billions of public dollars that flow into colleges every year. The more colleges cost, the greater the claim on the average citizen’s hard-earned money and thus reduction in their precious liberty etc., etc.
But the best way to bend down the long-term higher education cost curve and thus reduce government spending is to increase government regulation in the form of mandatory reporting. So it’s a pick your poison situation for the Cato folks — would you rather have Big Brother’s hand in your wallet or his eye on your business? You really can’t avoid both.
Now, I don’t want to seem obnoxious about this. After all, in the same piece that produced this quote, Carey notes that “while my politics are pretty far from Cato’s and I often think they’re wrong, they tend to be wrong in interesting ways.” I thank him for that (I think), though I should note that the impetus for his piece is a paper that comes from the John William Pope Center – the same paper I discuss here – not from Cato. So it might not even be Cato that Carey finds interesting. Regardless, here’s my potentially obnoxious-sounding reply:
Without even discussing the extremely dubious assumption that more regulation will lead to lower college costs, wouldn’t the best, most direct way to “reduce government spending” obviously be to, well, reduce, or even stop, government spending?
Of course it would, and that is the obvious solution for libertarians! It would get Big Brother out of our wallets and kill whatever justification subsidies might give him to gaze into our business. And it wouldn’t just make libertarians feel better – the benefits would accrue to almost everyone. If students and donors, rather than taxpayers, were to cover much more of colleges’ costs, taxpayers would save money, colleges would be unable to charge as much as they currently do, and schools would have to focus much more on their customers and patrons.
So there is no either-more-regulation-or-higher-costs box. Indeed, the only box that libertarians could possibly be trapped in is a mime’s box – a purely illusory one that someone has to really, really want to believe in for it to have any sort of existence at all.
Having broken free of the invisible, intangible box, let me address one other thing that Carey brought up both in the discussion held at Cato, and his latest commentary:
The problem is that colleges aren’t just going to unilaterally release lots of new information on their own. Nor would it help matters much if they did; for data to matter it has to be standardized in a way that allows for comparison. That’s why companies report one set of quarterly financial results to the SEC, not 50 different sets to each state. Given that higher education is a national market this leads to a similar national solution: The federal government should compel colleges to release much more information about success as a condition of receiving direct or indirect federal aid.
The idea that a market that happens to be national in scope somehow requires federal control is both very common, and very inaccurate, simply equating “national” with “federal” and moving on from there. Even worse, though, is the even more basic assumption that to get something good, or just standardized, government control is required.
Whether it’s McDonald’s or Ruth’s Chris, an item on the menu in Beverly Hills is going to be essentially the same as in New York City. Why? Not because Washington says it must be, but because that keeps the customers coming. Or consider the QWERTY keyboard: It became the national standard by free-market, not government, forces. And how about the Model T, which was driven by Americans from Maine to San Diego? It was standardized not because the federal government said “this is a national car, so we must make it the national standard,” but because one company produced it and it was freely chosen by customers from sea to shining sea. And how do we choose automobiles today? Not by going to some federal report on what a car should be (though perhaps that day is coming) but, often, by consulting such trade mags as Road and Track.
Clearly, we don’t need government to set standards or inform consumers – markets will do those things themselves. But that markets will set their own standards is just part of the story. Sometimes – indeed, almost all of the time – you simply don’t want a single standard: Vegetarians don’t want a great steak. Many people would rather click than type. The English major fascinated by Chaucer doesn’t need a cyclotron. The working mom often doesn’t want the same education as the parentally funded 18-year-old.
And then there is the gigantic – but usually ignored – problem of government failure: Government regulation and standardization is very costly. It can be used to crush the opponents of the politically well-connected rather than advance the common good. It can have crippling unintended consequences. And, as former Dickinson College president, Clinton-era Department of Education assistant secretary, and current George Mason University professor A. Lee Fritschler made clear at the discussion of the Pope Center’s paper, it also simply fails – a lot. Indeed, based on his experience at the Department of Education, Fritschler is adamant that the feds are simply incapable of effectively regulating higher education.
So once again, Carey sees a mime’s box. This time, though, it’s not one he imagines entrapping libertarians, but one he thinks Washington can drop on the ivory tower to make it work right. It’s a different box, but just as illusory.
Obama Considering Another Round of Stimulus
With unemployment continuing to climb and the economy struggling along, some lawmakers and pundits are raising the possibility of a second stimulus package at some point in the future. The Cato Institute was strongly opposed to the $787 billion package passed earlier this year, and would oppose additional stimulus packages on the same grounds.
“Once government expands beyond the level of providing core public goods such as the rule of law, there tends to be an inverse relationship between the size of government and economic growth,” argues Cato scholar Daniel J. Mitchell. “Doing more of a bad thing is not a recipe for growth.”
Mitchell narrated a video in January that punctures the myth that bigger government “stimulates” the economy. In short, the stimulus, and all big-spending programs are good for government, but will have negative effects on the economy.
Writing in Forbes, Cato scholar Alan Reynolds weighs in on the failures of stimulus packages at home and abroad:
In reality, the so-called stimulus package was actually just a deferred tax increase of $787 billion plus interest.
Whether we are talking about India, Japan or the U.S., all such unaffordable spending packages have repeatedly been shown to be effective only in severely depressing the value of stocks and bonds (private wealth). To call that result a “stimulus” is semantic double talk, and would be merely silly were it not so dangerous.
For more of Cato’s research on government spending, visit Cato.org/FiscalReality.
Sarah Palin Resigns as Governor of Alaska
Alaska Governor Sarah Palin resigned from office last week with 18 months left in her term, setting off weeklong speculation by pundits.
Cato Vice President Gene Healy comments:
Palin’s future remains uncertain, but it’s hard to see how her cryptic and poorly drafted resignation speech positions her for a presidential run. Nonetheless, her departure presents a good opportunity to reflect on the Right’s affinity for presidential contenders who - how to put this? - don’t exactly overwhelm you with their intellectual depth.
It’s one thing to reject liberal elitism. It’s another thing to become so consumed with annoying liberals that you cleave to anyone they mock, and make presidential virtues out of shallow policy knowledge and lack of intellectual curiosity.
Writing at Politico, Cato scholars David Boaz and Roger Pilon weigh in on what her resignation means for the former Vice-Presidential candidate’s political future:
Will we one day say that her presidency was ‘born on the Fourth of July’? I doubt it. This appears to be just the latest evidence that Sarah Palin is not ready for prime time. The day McCain chose her, I compared her unfavorably to Mark Sanford. Despite everything, I’d still stand by that analysis. At the time I noted that devout conservative Ramesh Ponnuru said ‘Palin has been governor for about two minutes.’ Now it’s three minutes.
Running for president after a single term as governor is a gamble. Running after quitting in the middle of your first term is something else again. If this is indeed a political move to clear the decks for a national campaign, then she needs adult supervision soon. But I can’t really believe that’s what’s going on here. I suspect we’re going to hear soon about a yet-unknown scandal that was about to make continuing in office untenable.
It seems that since her return to the state following the campaign, activist opponents and bloggers have bombarded the governor’s office with endless document requests. And she’s faced 16 ethics inquiries, with no end in sight. All but one have since been resolved, but the politics of personal destruction has cost the state millions, as Palin noted. Add to that the unrelenting, often vicious and gratuitous attacks on her and even on her family, and it’s no wonder that she would say ‘Enough.’ It has nothing to do with ‘quitting’ or with being ‘unable to take the heat.’ It has everything to do with stepping back and saying you’re not willing to put your family and your state through any more. She seems confident that history will judge her more thoughtless critics for what they are. I hope she’s right.
Honduras’ President Is Removed from Office
In reaction to Honduran President Manuel Zelaya’s attempt to stay in power despite term limits set by the nation’s Constitution, armed forces removed him, sending the Latin American nation into political turmoil.
Juan Carlos Hidalgo, an expert on Latin American affairs, comments:
The removal from office of Zelaya on Sunday by the armed forces is the result of his continuous attempts to promote a referendum that would allow for his reelection, a move that had been declared illegal by the Supreme Court and the Electoral Tribunal and condemned by the Honduran Congress and the attorney general. Unfortunately, the Honduran constitution does not provide an effective civilian mechanism for removing a president from office after repeated violations of the law, such as impeachment in the U.S. Constitution. Nonetheless, the armed forces acted under the order of the country’s Supreme Court, and the presidency has been promptly bestowed on the civilian figure — the president of Congress — specified by the constitution.
To be sure, Hidalgo writes, the military action in Honduras was not a coup:
What happened in Honduras on June 28 was not a military coup. It was the constitutional removal of a president who abused his powers and tried to subvert the country’s democratic institutions in order to stay in office.
The extent to which this episode has been misreported is truly remarkable.
You know all those promises that spending more taxpayers’ money on some program will actually result in taxpayer savings – eventually? Check out this story in Sunday’s Parade magazine:
Ten years ago, Congress created a new system of government credit cards for federal employees booking work-related travel. The cards were meant to curb waste and abuse. But since their introduction, charges have doubled—from $4.39 billion in 1999 to $8.28 billion last year.
Among the expenses flagged in a new report from the Congressional Research Service: $3700 for laser eye surgery, $4100 for a first-class trip to Hawaii, and $100 million in unclaimed refunds for airline tickets that were purchased but never used.
Of course, the doubled spending is not all waste, at least not in the narrow sense. In the past nine Bush-Obama years, total federal spending doubled from about $1.8 trillion to $3.6 trillion. But certainly it doesn’t look like the promised efficiencies have been realized.
The president may believe that he’s created thousands (or is that millions?) of jobs, but the public doesn’t believe him. In fact, according to Rasmussen Reports, a plurality of the public wants to drop the rest of the “stimulus” spending while keeping the tax cuts:
Forty-five percent (45%) of Americans say the rest of the new government spending authorized in the $787-billion economic stimulus plan should now be canceled. A new Rasmussen Reports national telephone survey found that just 36% disagree and 20% are not sure.
Just 20% of adults say the tax cuts included in the stimulus plan should be canceled while 55% disagree. The stimulus plan includes $288 billion in tax cuts.
While there is a wide partisan gap on the question of stimulus spending, there is little partisan disagreement on maintaining the tax cuts.
President Obama on Monday vowed to speed up the pace of stimulus spending and said the money will help “create or save” 600,000 more jobs this summer.
However, only 31% of Americans believe the new government spending in the stimulus package creates new jobs. Forty-eight percent (48%) say the stimulus spending does not create jobs, and 21% are not sure.
This is certainly a better approach for growing the economy. The people are proving to be a lot smarter than their governors in Washington.
In today’s Washington Post, Dana Milbank does a typically brilliant job deconstructing the activities of Congress. He looks at how members of the various defense committees put their energies into fighting for home-state hand-outs rather than focusing on broader defense issues from a national perspective.
The dominance of parochial interests over the general public interest is, of course, a long-standing problem in Congress. Members from cotton-growing states gravitate to the farm committees in order to defend cotton interests, while members from inner cities gravitate to committees overseeing urban affairs to defend programs that subsidize their constituents.
The result is that Congress spends a lot of money on items that don’t have broad public support, and it spends little time actually considering policies from a national perspective.
A partial solution to the problem would be mandatory committee rotations every two years in the House and Senate. All committee assignments would be made by random selection at the beginning of each Congress.
People will say: “You can’t do that because members on particular committees are often experts in their field.” That would be a good argument if members used their expertise to serve the general interest of the public. Rep. Jack Murtha is an expert on defense issues, and in theory he could be spending his and his staff’s time probing Pentagon operations, reviewing administration defense strategies, overseeing procurement programs to reduce waste, and other public-spirited activities.
But that is apparently not what Murtha and most other members of Congress spend their time doing. Anyone who watches congressional committee action on C-SPAN can see the pattern that Milbank describes–members use their brief time with important witnesses to get in on-the-record statements in support of favored special interests. And their staffs spend most of their time figuring out how to maximize the home-state grab from the budget, not examining big-picture policy issues.
We have a $3 trillion government because members of Congress love to spend money, as a sort of general proclivity. But they are particularly addicted to spending money on their home states. Random committee assignment would help to disrupt that addiction, and it would allow members to adopt a more neutral and critical eye on matters in front of the committees that they were assigned.
This work by Cato Institute is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License.