14
Apr
12

Higher ed subsidies?

Tyler Cowen likes them:

Postwar higher education has proven one of America’s most effective subsidies, and it has paid for itself many times over.  It is also one of the more significant successes of federalism.

Sort of:

It’s not about blaming the critics or defunders of state universities, or the critics of public subsidies to private universities.  The real problems are a few.  First, successful state programs tend to stultify and decline over time, and if nothing else the danger is that health care costs will eat up state budgets.  Second, the absolute returns to higher education (as opposed to the wage for not going) are not currently high enough to maintain the current fiscal structure of those institutions, furthermore those fiscal structures do not have so much “give,” due to tenure and various self-imposed cost inflexibilities.  Third, although most state universities have relatively little explicit debt, they are implicitly massively leveraged through reliance on ongoing tuition boosts, ongoing enrollment boosts, and timely retirements, none of which can be counted on in the future.

David Henderson isn’t so sure:

Consider the phrase “many times over.” To have paid for itself, it would have had to generate a present value of returns equal to the present value of costs. “Many” must mean at least three. So that would be a present value of returns equal to at least three times the present value of costs.

Is that plausible? I think not. Ignore, for a minute, which Tyler appears to do, the strong case made by Bryan Caplan [the links for Bryan's posts are too numerous: just do a search, within Econlog, on "signaling"] that much of higher education is signaling. Even if that were completely false and none of it is signaling, a huge part of the gain from education is a private good captured by the person who is educated. To make Tyler’s case, one would have to make a case that a large part of the return from education is a public good. But he doesn’t make that case or even link to a case.

For myself, I find arguments from “post-war <policy>” in North America difficult to disentangle from the fact that, immediately post-war, nearly all of the rest of the world’s industrial base had been bombed to shit and most of its labour force was dead and/or starving.  (I’m shamefully neglecting South America and Australia/NZ here, but I don’t know shit about their 1950s history.)

Let’s assume for a minute that Tyler’s right.  Think about transaction costs.  In 1960, if you wanted to learn how to build a bridge or synthesize organic compounds or otherwise acquire specialized knowledge and skills, you more or less had to go to a campus and sit in a lecture hall to do it.  Transaction costs were high, and state-subsidized colleges reduced those costs dramatically.

Now we have the internet.  I think you see where I’m going with this.

Even if public subsidies to higher ed were all that and a bag of chips, it’s instructive to ask why.  I’m not convinced that a model developed in circumstances of  (a) high transaction costs and (b) a massive and artificial trade advantage remains applicable in the absence of both.


2 Responses to “Higher ed subsidies?”


  1. April 14, 2012 at 13:43

    I tend to think that college is NOT for everyone. I see nothing wrong with learning what used to be called a “Trade”, as in being an auto mechanic or plumber.
    I know far too many people who have a degree, and yet don’t know a damn thing about what their degree is in. “All book learnin’ and no common sense” as one of my mentors used to say.

  2. April 15, 2012 at 21:50

    (I’m shamefully neglecting South America and Australia/NZ here, but I don’t know shit about their 1950s history.)

    Australia is way richer than its geopolitics would indicate. When you said this, I mentally /facepalmed at myself. Duh, they didn’t hold a war.

    They’re smarter, too. Turns out a bunch of people dying is bad for the culture. Who’d a thunk it, eh? You know how growing up sans father is strictly worse than with? Now scale that to country-size…


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