David R. Henderson  

Are Government Subsidies to Higher "Education" Justified?

Two Bad Ideas... One-paragraph Macro...

This month's featured article on Econlib is George Leef's "Are Government 'Investments' in Higher Education Worthwhile?" In his article, Leef points out that one cannot use decades-old data on the private return to spending on higher education to draw conclusions about the current return today. His reason: higher "education" has become watered down and, therefore, little education occurs in many curricula.

Leef points out that a lot of higher education is in pursuit of a credential. Why would a company want to hire someone with a credential when there are more efficient means of testing aptitude? Leef cites economist Lowell Gallaway's argument about the effect of the Supreme Court's 1971 Griggs v. Duke Power Company decision, which held that employers can be liable for violating federal equal employment law if they use general aptitude testing that has a "disparate impact" on minority job seekers. This, say Gallaway and Leef, has caused many employers to abandon such tests in favor of using educational credentials. On its face, the Griggs decision seems to argue against credentialism. But read Gallaway's subtle reasoning to see why the unintended consequence is more credentialism.

Moreover, notes Leef, echoing Armen Alchian's argument in his 1968 classic, "The Economic and Social Impact of Free Tuition," subsidies to those who get higher education are a forced transfer of wealth from the relatively poor to the relatively rich.

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COMMENTS (8 to date)
Greg writes:

Leef uses Bill Gates as a data point to show that education is not causal for higher incomes, which is simply ridiculous.

On the other hand, it seems clear that many current college degrees are simply vocational programs in sheep's clothing. Leef's discussion of flight attendants with college degrees is on point.

However, I don't think Leef adequately addresses the impact of more hard-core educational programs. Would Silicon Valley (or similar technological activity in other parts of the US) exist without places like Stanford and Berkeley? There's no counterfactual, but I would argue that at the margin, a supply of high-quality education enlarges the size of the work force capable of doing truly innovative work.

frankcross writes:

This is not a very accurate understanding of the Griggs opinion. It involved obvious and blatant intentional discrimination, and the disparate impact theory under Title VII has been cut back in recent years, yet I don't see much downplaying of credentials.

Maniel writes:

It's pretty hard to argue against investments in students and colleges and universities. While it's true that college may not be for everyone - and certainly not directly following high school - college grads have had a large had in the economic success of this country from which we have all benefitted. Moreover, prominent, reasonably-priced colleges and universities have attracted high achievers from other countries. Compared to the massive investment we make in older people - Social Security, Medicare, Alzheimers research, etc - it's nice to see the younger generation getting a little from the trough.

ryan yin writes:

I think that if you are making an argument for education subsidies, you have to make the argument that college grads DON'T benefit from their education. After all, if education makes you richer, you already have an incentive to go to school. Estimating the returns to education, determining if there's an omitted variable bias or if the returns have changed over time, working out how much of the estimated return is human capital and how much is credentialing (i.e., signaling) -- these are all important questions, but not because they help us tell what the optimal education subsidy is. I think many of the arguments on education seem to miss this point.

David R. Henderson writes:

Both Greg and Ryan Yin, make good points. My responses:
1. Greg could well be right that Silicon Valley owes its existence and success in part to the presence of Stanford and Berkeley. But it's interesting that Greg uses the term "at the margin." That's the case he needs to make. But a strong case can be made that the people who emerged from their education and helped make Silicon Valley succeed were inframarginal. In other words, without subsidies, a very high percent of them may well have gotten education anyway.
2. Ryan is absolutely right that if the returns are private, there's no case for subsidies. Incidentally, Alchian handles this beautifully.

Mazingo writes:

If Silicon Valley owes its success to the presence of Stanford and Berkeley, then why aren't other places with similar colleges as successful? And, why is the Boston area, which has many more of the highest status colleges, not as successful as Silicon Valley?

I suspect that the biggest reason Silicon Valley and California have been successful is the excellent climate. I've met many Californians who stay solely for this reason, and would move to another state if the government were better and the weather as agreeable.

eccdogg writes:

I think Boston has benefited from its universities.

And the Raleigh-Durham-Chapel Hill NC area (the research triangle) has certainly benefited as well. Of course the climate is not too bad in NC either.

Not sure if either of those examples makes the case for subsidies though.

...subsidies to those who get higher education are a forced transfer of wealth from the relatively poor to the relatively rich...

...which is eventually repaid 100 fold through progressive taxation. In at least 1 example.

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