David R. Henderson  

Cowen on College Subsidies

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Tyler Cowen's latest blog post is rich with assertions. This one stood out:

Postwar higher education has proven one of America's most effective subsidies, and it has paid for itself many times over.

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.

Parenthetically, I found it ironic that one of Tyler's commenters, Gibbon, accused him of pretending that public goods don't matter and of denigrating "such key institutions" as state colleges. For Tyler's case to make sense he has to be arguing that there is a huge public good. Further, parenthetically, although I think the term "ad hominem" is thrown around way too frequently--most alleged claims of ad hominem arguments are actually not--in his last sentence, Gibbon gives a pretty clean example of an ad hominem argument when he writes, "I guess most libertarians are rich enough that this [eviscerating state colleges] doesn't bother you." Still further, the irony here is delicious: in a post in which Tyler is arguing for subsidies to state colleges, the obvious charge to make, if one were to make an ad hominem argument, would be to attack Tyler for arguing for subsidies for his employer, a state college. I hasten to add that that is not at all what I think motivates Tyler: I'm not making the ad hominem argument. My point is that Gibbon's ad hominem argument doesn't even work on its own terms: as an ad hominem argument.

Back to the issue. When one brings in Bryan Caplan's points about schooling as signaling, much of the subsidy to colleges is wasted and Tyler's case becomes even weaker.

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COMMENTS (15 to date)
Philo writes:

“When one brings in Bryan Caplan's points about schooling as signaling, [one sees that] much of the subsidy to colleges is wasted . . . .” Well, it’s a *transfer* to the college students; that doesn’t mean it is all wasted, or even that any of it is wasted.

Glen Smith writes:


I may be mixing this with some of Bryan's other positions. Those who could actually benefit from college degrees could afford it without subsidies through personal capital, low wage temporary jobs (an unsubsidized college system would be less expensive), the capital of others (scholarships, loans and charity) or some combination thereof (that's how I did it). Those who would not benefit in a subsidized system often go to college as an extension of the HS experience or because that is "what their supposed to do" thus wasting (and possibly eliminating) a portion of their contribution to their lifetime welfare. So while one could argue that not all is wasted (except now you would have to argue that the subsidization method is best alternative), some is definitely wasted.

Tyler Cowen writes:

Keep in mind R&D effects, the return to clusters of talent, and Bryan's first book, on how better educated citizens support better policies.

DThinker writes:

I wish it were possible for those who think that higher education is just signaling to have everything erased from their memories that was either learned in college or that was derived from what they learned in college. After which, they would be given complex cognitive tasks that they used to perform with full access to Google.

I think they would fail.

But I think this would be the experiment that would need to be performed. Basically, the Caplan thesis is that knowledge is basically useless and what matters is IQ. I cannot say that I agree. Both because knowledge is one input into IQ (in the sense that when you have seen many problems solved before, you become a better problem solver) and knowledge is valuable in its own right.

Not to say signaling is not the story in some situations. I just don't think a generalization that massively overemphasizes the signaling story is correct.

Let us think about cases where signaling is less important. For example, for medical doctors. The knowledge one learns in school is very important in its own right, and as a proper foundation for future learning.

On thing that cannot be denied is that education is more of a foundation for developing career related skills. One probably learns much more over the course of a 30-year career than they do over 4 years of college, for example. But the ability to learn in a given field can be greatly facilitated by a foundation that built in college. That foundation is more than just signaling.

In general, beware of those who think they have found the "answers," whether the answer is "signaling" or "socialism." The real world is usually much more complex.

David R. Henderson writes:

@Tyler Cowen,
All good points, but “many times over”?

D writes:

"how better educated citizens support better policies."

Bryan later wrote a paper showing IQ was the best predictor here, and that after controlling for IQ, the effect of education was basically zip.

Doug writes:


1) Most of the clusters of talent are centered around the very very cognitively elite. Education subsidies on the margin subsidize the marginal student. Consider Silicon Valley, even it its entirely due to Stanford and nothing like it would exist without it. I find it hard to believe that Stanford with a $16.5 billion endowment would not exist had it not been for post-war education subsidies. Or for that matter that Sergey Brin would be a metal welder without educational subsidies.

2) Is it that education produces better political opinion in people, or that education is positively correlated with intelligence and dilligence. Personality traits that make one a better voter. Besides for econ departments I see very few places in the modern university system where professors or grad students (highly educated people) hold better political positions that their private sector peers with equivalent IQs.

3) How much of the R&D would have been done by private sector researchers in the absence of government funding. First I see a crowding out effect. Bell Labs, Xerox Parc, IBM Research, Google Research, Celera prove that private R&D can be just as good if not better than public R&D. (Plus consider the lack of completely useless research like Africana studies, Marxist history and climate research) .

Second on a deeper level, it's funny you tout the modern academic research system as such an accomplishment when it's only recently to light just how corrupt and fraudulent most of it is. There are estimates that 50%+ of academic research contains non-reproducible results, statistically massaged data, or outright fraud. Even if not any of this, how much academic research is done simply to demonstrate the intelligence of the researcher rather than discover truth (think of unnecessarily complex macro/econometrics paper that have no grounding in reality).

It seems to me that this is a by-product of the publish-or-perish culture created by the huge subsidized university monster. Private sector research for all its faults has much better incentives for actual truth seeking (if not just for the selfish interest of the patron subsidizing and potentially using the research).

To the extent that public R&D crowds out private R&D society suffers a deleterious effect of lower and lower quality.

tom writes:

I haven't read Bryan's book/s on signalling, but couldn't signalling have become more important once an equilibrium was reached between people needing education and getting it? I'd say that equilibrium was probably reached around fifty years ago.

And how do you divide out the huge benefit given by top private universities, which educated so many of the elite, supplied so many of the professors for public schools, designed so many of the curricula used by public schools, wrote so many of the texts, etc..? Princeton, Harvard, Stanford, MIT, Yale, alone probably count for a huge percentage of the structure and main features of academic public colleges since 1945.

Avent and Cowen seem to be talking about public schools, but in many ways it's just public loan/grant programs to students of public and private schools that opened things up and then opened them up too much.

ajb writes:

Tyler is talking about the whole spectrum of higher education, especially with respect to the highest end research schools. Even if we count 50% of the lower tier colleges as total waste, Tyler's point seems to be that "relative" to the rest of the world the American system is enormously productive. And its ability to attract the best students from around the globe as well as the bulk of private donations suggests that the U.S. system is uniquely powerful. Nonetheless it is still wasteful and inefficient by any rational criteria. So why does no other country take up the slack? And why are the formerly great European universities so much worse than the U.S. now? THAT is the true puzzle.

Seth writes:

"... on how better educated citizens support better policies."
-Tyler Cowen

Like believing educational subsidies pay off many times over?

A writes:

@Seth Zing!

Costard writes:

To attend an American university is to develop an American network and gain an edge in an American-dominated world economy. It's not so much what you learn, as who you meet (and what languages you can speak). The quality of education could be poor and this sector would still be "competitive", so long as all roads lead to Rome.

"Keep in mind R&D effects, the return to clusters of talent, and Bryan's first book, on how better educated citizens support better policies."

Is any of this quantifiable? Would R&D be absent without a state university system? Mightn't it be better? Doesn't tenure and the peculiar incentives of "publish or perish" at times have a way of... blunting... brilliant minds, and channeling their energy into academic cul-de-sacs?

Clusters of talent? The Internet is a far more efficient way to congregate. Political virtues of education? Surely this depends upon the education. College life is as likely to educate the vices as it is the virtues. And then the 20th was better-educated than any previous century, and bloodier. As a point of discussion this is all fine, but as an argument it is cheesecloth.

Seth writes:

"Keep in mind R&D effects, the return to clusters of talent..."
-Tyler Cowen

You should also factor in the downsides. Hasn't the Great Stagnation taken place while the percent of educated population has risen?

What effects could explain that?

Perhaps growing up in an education bubble (where importance is placed on completing irrelevant assignments) where the real world feedbacks are poorly simulated (e.g. the soccer team manager probably learns more about the real world than the soccer team players) delays real world learning (being exposed to a more direct feedback environment).

Maybe it also contributes to credentialism and bureaucracy that retards meritocratic innovation. I've seen this first hand in the business world. Obviously good things are passed over and blocked out because the idea didn't come from a Harvard grad or from one of the elite in the firm.

Maybe the emphasis on education also keeps people from taking risks. Many innovators are people who don't have the choice of a stable, college-degree based career and they have to make something out of what they've got in front of them. And, now through the magic of a disconnected cost-benefit analysis, we have fewer of these people as a % of the population.

Finally, to elaborate on my previous one-line post, perhaps the education community, shielded from real-world market feedbacks by subsidies, educates people to support damaging policies. Maybe it's through direct indoctrination or poor reasoning (e.g. believing that aggregate good is better than the sum of individual good) or a combination of both, but through politics we have given people a channel to express their preferred cost-benefit analysis, without actually ever considering or feeling the real costs.

R Richard Schweitzer writes:

As an illustration of what happens to subsidies such as the "G I Bill," I list my experience at U. Va., which, as a long-term Va. resident, I had attended briefly before being called to active duty in WW II. When I was finally able to return in 1948, still a Va. resident, I was charged with out of state tuition rates - because "the government is paying." (I did question.)

The result was shortened benefits from the Bill for me (and for many others) but more revenue for the "Institution." Previous and periodic manual labor did the rest, and I am grateful for the benefits and two degrees I received.

Here you see some of the "progress" of the objectives of the operators of institutions superseding the functions for their "design" or intended purposes.

Here, read aloud the opening lines:
The Chambered Nautilus

R Richard Schweitzer writes:

In fairness to the topics, I should add that in my case and in that of many, many others (that I know of) the returns to the revenues of the U S Treasury not only repaid the outlays but accelerated generation of levels of economics activities that would not have occurred without those academic experiences (however you wish to label them).

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