David R. Henderson  

Good News on Tuition from the Conversable Economist

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One of my favorite blogs, both for its balance and for its focus on important facts and issues, is that of the Conversable Economist, written by Timothy Taylor, the managing editor of the Journal of Economic Perspectives.

I would have written my note below as a comment on his recent post on spending on higher ed, but his post does not accept comments.

Tim starts by writing:

"Everyone" knows that the future of the US economy depends on a well-educated workforce, and on a growing share of students achieving higher levels of education.

I know Timothy a little, mainly through email and partly by having attended a 3-day conference in Montana with him in 1985. In other words, I don't know him well enough to understand the reason he put "Everyone" in quotation marks. Is it irony, because he has my co-blogger Bryan Caplan's dissent in mind? Is it because he knows that when people say "everyone knows something," that's not really true but it's almost true because everyone who counts knows that thing? I don't know.

But what's striking is that in a well-researched piece on higher education (all Tim''s posts are well-researched), he doesn't even mention Bryan's book. It's a pity. Tim brings thoughtfulness to every issue he tackles, but he takes it as given that of course the government needs to spend more on higher ed.

Even, by the way, if one rejects Bryan's view that higher ed is 80% signaling and 20% learning, and holds to the view of my Hoover colleague Eric Hanushek that the numbers are reversed, one would still have to justify having government spend more on higher ed. Most of the gains from higher ed, whether they are from signaling or from learning, are captured by the person received the education. So it's hard to justify handing taxpayer money to people most of whom will, because of that expenditure, be in the top third of the income distribution.

In any case, although Tim sees the news on government expenditures and tuition as bad, from Bryan's and my viewpoint, it's good. Here's his key paragraph summarizing the point:

This figure clarifies a pattern that is apparent from the green bars in the above figure [DRH note: the figure with green bars is a figure he posts on his site--it is not the one above]: the share of spending on public higher education that comes from tuition has been rising. It was around 29-31% of total spending in the 1990s, up to about 35-36% in the middle of the first decade of the 2000s, and in recent years has been pushing 46-47%. That's a big shift in a couple of decades.

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COMMENTS (8 to date)
Floccina writes:

I wonder, if schooling really was 80% human capital 20% signaling could one do a rough estimate of the optimal number of years people grouped by talent level should spend in school? That is based on the value of their increased productivity.

I ask because "a little more" than we do now seems like too easy and answer even if you think it is 80% human capital 20% signaling. Maybe optimal is a lot more, maybe a lot less. We seem to be going on very little.

Floccina writes:

Florida Government per state University per student spending is among the lowest and tuition is among the lowest. The other states should copy Florida. It looks to me like the problem is spending and not Government funding.

Also if they wanted to help reduce the costs of higher education they might consider putting the schools close to were people live so that the students can live with there parents.

Vivian Darkbloom writes:

I'm not sure the trend is as good, or at least as good as Henderson seems to think, even from his apparent perspective about the value of higher education. Taylor's "well-researched piece" inexplicably omits one very important factor---how that tuition is being financed.

Here's the trend on outstanding student loans, per FRED:


Are students really going to end up paying for all that debt-financed "net tuition"? I seriously doubt it. So long as students have easy access to cheap credit they will use it, often indiscriminately, i.e., for degrees that offer them no realistic chance of repaying those loans. The bottom line is that this situation encourages states to rely more on tuition financed by federally subsidized student loans rather than go to the more difficult process of asking taxpayers to fund it, or the even more rational solutions of cutting back on unnecessary spending that does not lead to better learning, tightening admission standards and eliminating some fluffy degree programs. None of that seems to be happening.

The bottom line is that much of that increased "net tuition" is actually being ultimately borne by the federal government, especially if one considers fair-value accounting and the mountain of defaults on the horizon.

Vivian Darkbloom writes:

In my prior comment, I mentioned the effect of federally-subsidized student loans; however, outright federal grants are also important. If I understand the graph correctly, "net tuition" also includes tuition that is paid from funding provided by federal grants, such as Pell grants. Here's the trend on Pell grants:


I see a correlation between the rise of "net tuition" from 2006 and the rise of Pell grants that same year. I also see a correlation between the flattening of "net tuition" as a source of funding higher public education and the decrease of Pell grants around 2012.

Again, I see these trends explained more by which government pocket the "net tuition" is being paid out of, not a shift away from taxpayer funding.

"I'll just say that it doesn't seem like a coincidence that the tuition share of public higher education costs is rising at the same time that enrollment levels are flat or declining"

Taught My first Econ 101 class in 1966.
Spent 40 years as a teacher and admissions person and dean.

Was able to semi-retire in 1989.

Here is some thoughts from around the world on other areas that might affect enrollments beside state contributions to tuition.



Christophe Biocca writes:
SHEF’s net tuition revenue does not measure “net price,” but measures the revenue that institutions receive from tuition. It is a straightforward measure of the proportion of public institution instructional costs borne by students and families. SHEF does not deduct federal grant assistance (primarily from Pell Grants) from gross tuition revenue, since these are non-state funds that substitute, at least in part, for costs borne by students. Measures of net price for the student need to include non-tuition costs and all forms of aid.

Seems that Vivian is right here. This breakdown would be more appropriately labelled "State spending (including respending of Federal grants to states) vs. Individual spending (including respending of Federal grants to individuals) on higher education".

I recall, but unfortunately cannot find, an example of a law school (or other grad school?) which raised tuition by tens of thousands of dollars, but structured in a way that used the student as a conduit for federal government dollars. IIRC it involved a program designed to absorb tuition fees past a certain threshold, creating the perverse incentive to keep raising fees once the threshold was hit (since the customer doesn't pay for that increase out of pocket anymore). Seems like that'd end up showing up in this graph as "Net Tuition", which is very misleading.

David, If he's referring to Caplan, I hope you agree that's passive aggression.

"In other words, I don't know him well enough to understand the reason he put "Everyone" in quotation marks. Is it irony, because he has my co-blogger Bryan Caplan's dissent in mind? Is it because he knows that when people say "everyone knows something," that's not really true but it's almost true because everyone who counts knows that thing? I don't know."

David R Henderson writes:

Vivian Darkbloom and Christophe Biocca,
Good comments. Thanks.


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