Demos: Denominators Don’t Matter for Subsidies to Public Universities

Last week Demos published a paper that carefully apportions the causes of tuition cost hikes at public universities over the last decade (2001-2011). Authored by Robert Hitonsmith, it finds that 79 percent of the increases are due to cuts in state subsidies, about $3,000 on average at four-year public universities. Hiltonsmith is known for a paper ominously titled, “How Student Debt Reduces Lifetime Wealth,” which estimates the lost lifetime personal savings due to student loans.

Reconciling these two papers might cause confusion because it’s easy to misinterpret Hiltonsmith’s first paper as arguing against widespread college attendance. It plainly says otherwise: College pays off, but the costs should be socialized. I’m not fond of this line of reasoning as it showcases a large pecuniary loss for college education without explaining where the offsetting public benefits come from. It’s hard to see an adverse selection problem in higher education as with health care or national defense.

Something similar goes on in Demos’ more recent paper, “Pulling Up the Higher-Ed Ladder: Myth and Reality in the Crisis of College Affordability.” There’s no reason to dispute Hiltonsmith’s findings: State’s aren’t subsidizing higher education as much as they used to on a per student basis, hence the tuition cost increases.

However, a quick glance at Bureau of Economic Analysis data tells us that state government spending on higher education has risen overall:

S&L GCE and GI (Higher Ed., 2009 $)

(Table 3.15.16)

…And here’s a chart of state and local higher education expenditures as a share of state spending and receipts.

S&L Higher Ed. Expenditures Share of--

(Table 3.15.5 and Table 3.3)

In constant dollars, state and local governments spent 22 percent more on higher education in 2011 than they did in 2001, and states spend about the same percentage of their budgets on higher education, so why is tuition increasing?

Answer: Fractions have denominators. College attendance grew substantially in the 2000s.

Looking at Digest of Education Statistics data, in 2011 the number of public university students was 23.5 percent higher than in 2001 (Table 303.10). Meanwhile, the total U.S. population only grew 9.5 percent between those two years. (Speaking of fractions, that’s a blunt comparison, but it’ll do.)

This is the drawback of Demos’ per-student spending analysis (and of fractions generally): It misses the systemic shift in demand for college credentials and states’ responses to it. Demos sees no diminishing marginal return to sending more and more people to college, so everyone should be subsidized equally no matter the economic conditions. Therefore, any cuts are wrong irrespective of what goes on in the denominator aggregate. In reality, people treat public higher education like unemployment insurance, except there’s a big difference: At some point higher education becomes mostly about getting ahead of everyone else. At least with unemployment insurance, marginal recipients get to stay alive and are better off finding work when it’s available.

But Demos isn’t ready to reach that insight. Indeed, the paper’s opening sentence is, “In today’s competitive economy, nothing is more important than getting a college education.” On the contrary, today’s economy isn’t competitive. If it were, then employers would bid up workers’ wages. The kind of competition that goes on in today’s economy is zero-sum squabbling. Thus, rather than advocating for positive competition, Demos is promising everything to everyone, as though we can all get ahead of everyone else simultaneously.

I have a few more points worth making in passing. One, the average inflation-adjusted full tuition price at private four-year institutions rose 36 percent from 2001 to 2011 (Digest table 330.10). I am not studious enough to figure out what the net tuition is, but I’m skeptical that this increase hasn’t affected public universities in some way. If the big private research universities spend more money on superstar faculty, for example, I’d be surprised if their public counterparts did not try to keep up. This goes on in law schools all the time. Likewise, I would also not characterize this Demos article as falsifying the Bennett hypothesis just because state subsidies per student play a larger role for tuition price increases at public institutions. I don’t think anyone ever said that.

Two, there are other arguments in favor of public higher education I haven’t addressed. For example, running a large research university in a large metropolitan area can be a magnet for young people and supporting private sector innovation. The for-profit world isn’t all Thomas Edison stuff.

Finally, I’m a fan of the soft, lovey-dovey, bleeding-heart humanities. (They’re also super cheap to produce.) The point here is not that higher education is solely positional competition. It’s that when Demos decries rising public college prices when incomes are stagnant, it’s not seeing a causal relationship. Stagnant incomes are motivating people to go to college, which strains public higher education systems, and state and local governments don’t want to cover everyone. Much of this is undoubtedly due to ideological Scott-Walkerist anti-intellectual budget arsonism, but what’s important are the causes of stagnant incomes. Funding everyone’s college degrees will not create college jobs for everyone.

4 comments

  1. I have an article in the Atlantic, pointing out that total government subsidies (federal and state) are higher now than ever before on a per student basis. The federal subsidies aren’t broken down by public versus private, but there’s no reason to think public schools are getting a smaller per student cut of the federal money (which adds up to $80 billion per year in grants and tax credits, deductions, and exemptions).

    http://www.theatlantic.com/education/archive/2015/05/the-real-cost-of-college/393086/

  2. I have a basic question that maybe you can answer for me since you are kind enough to educate with this blog.

    I am actually serious in this question, it’s hard to find an answer:

    When we went to the ‘direct’, federal student lending model, where does the money come from that the Department of Education lends?

    Thanks!

      1. Do you mean to tell me that the Federal Reserve created some money ex nihilo that was used to buy US Treasury Bonds, then funneled to the DOE, and with fraud as the lubricant, also used to obtain a lien on my life?

        That’s very interesting. I thought we stopped buying and selling human beings circa 1863.

        Now I understand why my law school dean wanted to see if I had good teeth and a strong back!

        Well, I’ll be OK, I’ll just eat cake until the revolution starts.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s