David R. Henderson  

UC Tuition: The Revolt of the Will-Haves

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Taxpayer funding of higher education is a forced transfer to the relatively wealthy

Socialist author Robert Kuttner once called Proposition 13, California's 1978 property-tax-cut initiative, the revolt of the haves. The latest opposition by UC students to a 32% increase in tuition is a revolt of the "will-haves."

Milton Friedman used to remark that the California government, with its state funding of higher education, taxed the residents of Watts to pay for the residents of Beverly Hills. I think Friedman exaggerated substantially. Even though the California's tax system relies heavily on sales taxes, which probably makes the state tax system on net somewhat regressive, it's still the case that a given Beverly Hills family pays much more in taxes than a given family in Watts. But Friedman also focused on family income of the student, and that's misleading.

What Friedman could have said, and Armen Alchian did say in a classic 1968 article, is that state subsidies to higher education are a subsidy to the relatively rich.

Here are three key paragraphs from Alchian's article:

The argument that the poor can not afford to pay for a profitable college education is deceptive. What is meant by a "poor" person. Is he a college calibre student? All college calibre students are rich in both a monetary and non-monetary sense. Their inherited superior mental talent--human capital--is great wealth. For example, the college calibre student is worth on the average about $200,000, and on the average, approximately $20,000-$50,000 of that has been estimated as the enhanced value derived from college training, depending upon his major field and profession. [Remember that these are 1968 data. The CPI has increased by 521% since then.]

Failure to perceive this inherent wealth of college calibre students reflects ignorance of two economic facts. One is the enormous human wealth in our society. Every good educator recognizes that inanimate capital goods are not the only forms of wealth. The second fact is the difference between current earnings and wealth. For example, a man with a million dollars worth of growing trees, or untapped oil is a rich man--though he is not now marketing any of his wealth or services. So it is with the college calibre student. Though his current market earnings are small, his wealth--the present wealth value of his future earnings--is larger than for the average person. This is true no matter what the current earnings or wealth of his parents. It is wealth, not current earnings nor parent's wealth, that is the measure of a student's richness. College calibre students with low current earnings are not poor. Subsidized higher education, whether by zero tuition, scholarships, or zero interest loans, grants the college student a second windfall--a subsidy to exploit his initial windfall inheritance of talent. This is equivalent to subsidizing drilling costs for owners of oil-bearing lands in Texas.

There remains an even more seriously deceptive ambiguity--that between the subsidization of college education and provision of educational opportunity. Educational opportunity is provided if any person who can benefit from attending college is enabled to do so despite smallness of current earnings. Nothing in the provision of full educational opportunity implies that students who are financed during college should not later repay out of their enhanced earnings those who financed that education. Not to ask for repayment is to grant students a gift of wealth at the expense of those who do not attend college or who attend tuition colleges and pay for themselves. This is true because, for one reason, our tax bills do not distinguish between those directly benefitted by having obtained a zero tuition educational subsidy and those not so benefitted. Alumni with higher incomes pay more taxes, but they do not pay more than people with equal incomes who financed their own education or never went to college.

And then the zinger:

When some zero tuition university alumni say that without zero tuition they could not have attended college, they should have a modest concern for the implications of that statement. One poor, "uneducated" resident of Watts, upon hearing Ralph Bunche say that he could not have had a college education unless tuition were free, opined, "Perhaps it's time he repay out of his higher income for that privilege granted him by taxes on us Negroes who never went to college." That reply spots the difference between educational opportunity and a redistribution of wealth.

Alchian also points out one big benefit to students of having to pay higher tuition:

WITH FULL COST tuition, competition among California colleges, and even among academic departments would change. Instead of competition for funds being negotiated among university committees, deans, regents, state college boards, and legislators, competition would rely more on classroom behavior of instructors who would be more dependent on student attendance vis-a-vis other departments and other colleges. This would enormously enhance the power of the student in the former zero tuition colleges. Giving students more attention and influence in the university would indeed occur, exactly as the customer exercises more power at the grocery--by his purchases and choice among competing products and stores, but not by leaping over the counter and insisting on power to run the store, as occurs with current protest.

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COMMENTS (10 to date)
david writes:

The assumption here seems to be that the wealth transfer between students who are poor now and their future rich selves is possible or reasonably achievable. Which may not be entirely true, depending on how student loans (i.e., borrowing from your future self) fit into the regulatory environment.

There are many countries and corporations that run successful scholarship or student-loan programs - Australia, Singapore, HSBC, etc. It's possible that the open-endedness of American higher education may be hindering the provision of student loans; a British/other Commonwealth national starting at university generally selects a major prior to first year, allowing a third party loan provider to judge the student's likely later income.

There are obvious informational and hazard problems here- if I fund some promising student one million dollars for higher education, and then s/he turns out to spend the rest of his/her life being a graduate TA and earning less than minimum wage, I'm not exactly going to get my loan back, am I? If everyone takes standardized A-levels in one country and another country depends on murky high-school transcripts, which one will have more expensive student loans? Add these problems to cultural factors and it may be that student loans are less effective in some countries than others. HSBC UK offers student loans while HSBC US does not; wonder why?

Anyway, governments have an obvious incentive here to subsidize higher education - particularly education that will enable people to earn more and thereby pay more tax! This is precisely a transfer to will-haves, of course, but it may be revenue-positive in the long run. See also: Singapore.

Steve Sailer writes:

At the commencement ceremony where I got my UCLA MBA degree in 1982, our valedictorian asked for, and received, an enthusiastic round of applause from the graduates thanking the California taxpayers for subsidizing us.

Ryan Vann writes:

How is Friedman's use of family income misleading? Is not the incomes of one's parents highly correlated with their expected future income?

Also, there is an assumption here that education necessarily increases earning potential. The value of an education is perhaps one of the most murky statistical bogs out there.

Ryan Vann writes:

Mind was in two places at once with the last post. I meant to say ..... highly correlated with college attendence and expected future income?

David Zetland writes:

Awesome. I am lecturing @ UCB and TOTALLY agree with the subsidy/no customer service equilibrium...

agnostic writes:

"inherited superior mental talent"

To say those four words in 1968 must have required balls of steel.

Time to finally crack open those collected works of Alchian -- sounds like my kind of writer.

Amaturus writes:

Is anyone else paying attention to the ongoing student sit-ins organized in Austria? A major lecture hall at the University if Vienna has been occupied by student demonstrators since late October, and many universities in and outside of the country are following suit. The students there were threatened with the creation of tuition fees, as they currently pay none. I understand the economic arguments as to how subsidies distort customer service, but the Austrian students seem to have a much greater voice than American ones. Also, they're not getting arrested left and right. Perhaps European students have a longer history of organized demonstrations, but I don't think students would suddenly have more control over their education if they paid more out of pocket. As the arrests mentioned above prove, we are a very authoritarian country. There'd be more sheep just borrowing more money to pay for education than demanding an increase in quality. In the end, students are just handed a bill and we pay it. Education isn't quantifiable or tangible good, so evaluating the value of it relative to its price is just one big gray area. Or maybe I misunderstood something?

Andrew Clancy writes:

I suppose every person uses their talents for "good" rather than "evil", so the matter, as most matters usually do, boils down to perspective and values.

Alchian's arguments reflect the short-sightedness that Hazlitt warned about in his book "Economics in One Lesson". Elitist word choices aside, who benefits when individuals "exploit" their "inherited" abilities? Certainly the individual, but also the State and society in general. Is there any doubt that educated individuals have played a substantial role in raising our standard of living specifically, and contributing to human and social progress generally? Is there any doubt that public education has paid dividends that far outweigh the public money that was spent to achieve it? Simply having "inherited potential" is not always (or may hardly ever be) enough to realize these benefits, and I would go further and suggest that the more potential a college-age person has the more society benefits by their education. Each person who falls through the cracks because they cannot afford an education is a potential loss to the State and to society. Every so often, the loss may be huge.

This leads me to opportunity cost. Those with high academic and intellectual potential have options, and for them it is more "expensive" to continue their education. The more education costs the less likely they are to do it, and providing low or no-interest loans keep more of them in school. In the end that benefits everyone. Higher tax revenue for the state and retaining human capital are significant issues for any state. Ask Kentucky or West Virginia how that's worked out for them...then ask Massachusetts and Georgia. There are plenty of incentives for the public to bear some of the cost of education, and they are not as abstract as many think - or would like us to think.

Regarding our system: On one end of moral hazard you have free education, where everyone (especially the poor without options) has an incentive to take advantage of free education. On the other hand you have very expensive tuition where only the wealthy and kids with the foresight to understand the implications of education and the ability to delay gratification, along with the ability to pay, will choose to do it. Neither one of these scenarios serves society best, but our current system is neither one of these options. Providing low or no-interest loans and subsidized grants provides the right mix of public interest and public expense. Debating the "mix" of public financing is responsible, but debating whether or not public money should go toward education at all is irresponsible and short-sighted.

It must be worthwhile for a person to delay earned income to attend college. Their education may lead to higher earnings in the future and it may not. Requiring them to pay more in the future will mean that some will choose not to attend college. I would say, again, that the benefit of college is not simply more earnings for the individual in the future - although this does increase tax revenue. If you told me that Dr. Martin Luther King's education was publicly subsidized I would suggest, with confidence, that it was money well spent. I may also go as far as to say that low-interest loans to tens or even hundreds of thousands of college students is worth it to society if there is one Martin Luther King..or Henry Clay...or Jonas Salk among them.

I would also suggest that the difference between the progress of nations, such as the US vs. China vs. Brazil vs. Mexico vs. Canada, etc., comes down to not only public policy and political system but education. How different would our lives be if China or Russia had landed on the moon first? What if they had developed their commercial aviation industries six months or a year before the US? How about the atomic bomb? The silicon chip? Steam engine? Combustion engine? Economic theory? Our lives and the world would likely be significantly different if we had not valued education enough to subsidize it after WWII. It was expensive then but there is no question that it benefited us tremendously - perhaps beyond measure.

How would one even begin to quantify how different our lives would be if the US had benefited from technological and social advancements exclusive to the Nation, if our companies and citizens did not hold patents for inventions key in cellular and molecular biology, energy production, space travel, and weapons manufacturing? What would our lives be like if the US had to beg for decades to be admitted to the United Nations but was repeatedly denied by "more advanced" and powerful countries like China, Russia, Brazil and Canada. Appealing to the lowest common denominator is a sure way to halt human progress and lower the standard of living for all. This, again, goes back to opportunity cost and rising standard of living. That poor resident of Watts - if he paid any taxes at all (33% of Americans pay no income taxes) - surely benefits from living in the US. His standard of living may be low by our standards, but a world away from the 5.5 billion who live in extreme poverty in developing nations. Perhaps he should take advantage of a low or no-income loan and enroll in college. Or, perhaps the low-income high school student with a 4.5 GPA and a knack for engineering who will go on to develop the energy source that will serve humanity for the next thousand years should just get a job at WalMart. Why should I pay for her education, right? Maybe China will develop (and benefit from) that technology first. I care about the State of CA, The country, the direction of our society, and the future of humanity.

I am a student now, but I worked for 20 years, ran my own successful business, owned a home, etc. before returning to school last fall. As a taxpayer I have always been and will continue to be willing to pay my share of her tuition. As a recipient of the benefits of the investments in education made by previous generations I do so gladly.

Regarding the individual attention and reclaimed power of high fee-paying students: Small class sizes and individual attention can be found in expensive private schools like Stanford and Harvard, for example. The problem is that there are an extremely limited number of people who can afford this high tuition, and public money rightfully makes up the difference. Without public money the quality of education would decline and perhaps the number of institutions would decline. UC Berkeley (which I attend) is a world-class research university. Public money and contributions from alumni have helped make this so. The State of California has chosen to fund the UC and CSU system because it benefits from the advancements that come from the intellectual and scientific achievements the money supports.

California is a failing state despite its rightful commitment to education, not because of it. Imagine if - during this time of economic and political challenges - the "potential human capital" decided to either leave the state for better academic opportunities or forego the opportunity altogether. Would that benefit the State? Hell no it wouldn't. I suggest that we deal with the root causes of our failures, recognize the factors that have led to our successes, and make the right decisions for once. California has a history of political bullshit and that - not the funding of public education - has led to its potential "demise". A desire to consume that-for-which-we-do-not-pay (prop 13) combined with shortsightedness (prop 13) helped create this financial fiasco, and the solution is most certainly not more of the same. I would consider a temporary funding reduction on an as-needed emergency basis, but Alchian's arguments promote bad-faith political opportunism, and I want no part of that.

Steve Sailer writes:

"Austrian students seem to have a much greater voice than American ones."

You'll notice that Continental universities, which once were the most prestigious in the world, are nowhere on the global rankings anymore. That's because they take their egalitarian ideology seriously, as opposed to, say, Harvard, which might occasionally fire a President for saying something politically incorrect, but sure continues to make careful use of SAT scores to keep out the riffraff.

Amaturus writes:

Steve,

I think you'd see more correlation between rankings and size of endowment than adherence to egalitarian ideology. Besides, Unveristät Wien, Technische Universität München and ETH Zürich and are all quality schools in continental Europe. The education systems in these countries groom future university students from an early age (most would probably say too early), so it's not as if any person off the street can enroll.

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