College Subsidies Fuel Salaries

by on December 10, 2011 at 10:13 am in Economics, Education | Permalink

“Who pays a tax is determined not by the laws of Congress but by the law of supply and demand,” as Tyler and I say in Modern Principles. In particular, whether demanders or suppliers pay a tax is determined by the elasticities of demand and supply. The more elastic side of the market can better escape a tax, leaving more of it to be paid by the inelastic side. The same thing is true for a subsidy but in reverse, the inelastic side of the market gets the benefit of the subsidy. Virginia Postrel applies the idea to education and education subsidies.

If you offer people a subsidy to pursue some activity requiring an input that’s in more-or-less fixed supply, the price of that input goes up. Much of the value of the subsidy will go not to the intended recipients but to whoever owns the input. The classic example is farm subsidies, which increase the price of farmland.

A 1998 article in the American Economic Review explored another example: federal research and development subsidies. Like farmland, the supply of scientists and engineers is fairly fixed, at least in the short run. Unemployed journalists and mortgage brokers can’t suddenly turn into electrical engineers just because there’s money available, and even engineers and scientists are unlikely to switch specialties. So instead of spurring new activity, much of the money tends to go to increase the salaries of people already doing such work. From 1968 to 1994, a 10 percent increase in R&D spending led to about a 3 percent increase in incomes in the subsidized fields.

“A major component of government R&D spending is windfall gains to R&D workers,” the paper concluded. “Incomes rise significantly while hours rise little, and the increases are concentrated within the engineering and science professions in exactly the specialties heavily involved in federal research.”

The study’s author was Austan Goolsbee, then and now a professor at the University of Chicago but until recently the chairman of the president’s Council of Economic Advisers.

….Goolsbee declined a recent request to comment on the subject, but the parallels to higher education are hard to miss.

In the short-term, the number of slots at traditional colleges and universities is relatively fixed. A boost in student aid that increases demand is therefore likely to be reflected in prices rather than expanded enrollments. Over time, enrollments should rise, as they have in fact done. But many private schools in particular keep the size of their student bodies fairly stable to maintain their prestige or institutional character.

…On the whole, it seems that universities are like the companies making capital equipment. If the government hands their customers the equivalent of a discount coupon, the institutions can capture at least some of that amount by raising their prices

…This doesn’t mean that colleges capture all the aid in higher tuition charges, any more than capital-equipment companies get all the benefit of investment tax credits. But it does set up problems for two groups of students in particular. The first includes those who don’t qualify for aid and who therefore have to pay the full, aid-inflated list price. The second encompasses those who load up on loans to fill the gaps not covered by grants or tax credits only to discover that the financial value they expected from their education doesn’t materialize upon graduation.

Addendum: Long time readers may remember my rebuttal to Krugman on a similar point. Liberal Order has graphs and further discussion.

Andrew' December 10, 2011 at 10:17 am

As for medical insurance…

Andrew' December 10, 2011 at 10:31 am

WRT addendum: ah, Student, we hardly knew you. “Krugman already clarified that he was assuming that the long-run supply curve would be flat.” How could the long-run supply be flat? If it is, that means you took resources from somewhere else. Then Peter and Paul pay more for grapes or whatever.

libert December 10, 2011 at 12:08 pm

In microeconomics, the long-run is defined as the period over which the supply curve is infinitely elastic (i.e., “flat”).

That isn’t to say that the aggregate economy can produce infinitely, but it means that over the long run a particular industry can be perfectly phased out (because capital and labor are each, in the long run, perfectly substitutable across industries)

CBBB December 10, 2011 at 2:35 pm

And so ends that attempt at a Krugman bashing

Andrew' December 10, 2011 at 2:51 pm

Sigh, I was going to let it go. You aren’t right at all. He’s still absolutely wrong for the short run. He’s only right if his assumption is correct in the real world. He’s not correct because his assumption is that everything else adjusts around insurance in that example. Of course everything else can’t just adjust. The assumption must be that we are under-funding insurance. That is a special, not general case, and of course also happens to not be true in reality..

CBBB December 10, 2011 at 4:18 pm

But is any of that actually true? In countries with universal access to health care then shouldn’t doctor’s compensation be astronomical compared to the much less universal US health care system?

Jamie December 10, 2011 at 11:29 pm

So, in this real world you claim to live in, ibankers work for a buck or two above minimum wage?

Stuart December 10, 2011 at 3:06 pm

The long run is absolutely not defined as the period over which the supply curve is infinitely elastic. Completely wrong, just consult any textbook including Krugman’s own.

NS December 11, 2011 at 11:22 am

Really? Notice Krugman didn’t just say he disagreed with Bush’s analysis, he said “Again, wow. No economic analysis I’m aware of says that when Peter choose a good health plan, he raises Paul’s premium.” In other words, Krugman is saying he’s not even aware of how a supply curve could be anything but horizontal. Non-horizontal SCs simply don’t exist, or if they do Krugman has never heard of them. And he’s simply stunned that GWB would have been so economically illiterate as to suggest an effect that relied on an upward-sloping SC. Those are completely different statements.

And even if we did grant Krugman the argument that the LRSC is perfectly horizontal, was that part of GWB’s statement? Did he say anywhere he was talking about only the long run? Or does Krugman all of a sudden feel that short-term effects should be ignored? Would he have a problem with an economist saying that he or she was not aware of any economic analysis that says when you give money to oil companies that it will raise their profits? After all, the LR supply curve is perfectly horizontal, etc.

Krugman got caught making a blunder, but in typical Krugman fashion instead of admitting the mistake he just re-defined what he said until he could again claim victory.

CBBB December 11, 2011 at 11:31 am

You mean in typical economists fashion.

Horizontal supply curves or not I’m not buying that providing great access to health insurance or subsiding health insurance raises the costs of health care, unless you have some actual empirical data of this happening. It simply makes no sense at all if you look at the real world – the US has the most expensive health care sector with the most highly paid doctors while having one of the most limited access health care sectors in the developed world.

Tom December 11, 2011 at 3:42 pm

CBBB, so more people buying healthcare would not raise prices??
Krugman got caught in another blunder.

CBBB December 11, 2011 at 3:52 pm

Ah but that’s the point would giving people greater access to health care actually lead to people consuming more health care (in terms of cost). People don’t generally like getting sick or going to doctors or hospitals even if there is a low financial cost and most people aren’t hypochondriacs.
It could be argued that if people only have limited health care access then they only go to see a doctor when their symptoms are very severe – at the point where treatment is very expensive. On the other hand more access could mean people see a doctor early on for a check up and can avoid getting into a situation where they need expensive treatment.

You see this is the problem when you apply stupid Econ 101 logic everywhere – you can argue about supply curve slopes all day but the model is simply irrelevant. Healthcare is not like steak or wine or Armani suits and can’t be modeled as such.

rod December 10, 2011 at 10:49 am

does this mean that if we lower payroll tax paid by employees then gross wages will tend to decline, because the labor supply is less elastic than the employer side of the wage negotiation? And if we lower the payroll tax paid by employers, the employers will tend to keep the tax as extra profit and not hire more employees?

Barbara Alexander December 10, 2011 at 11:01 am

Yes, gross wages would decline, but net wages would rise. The general principle is often stated as “the more inelastic side of the market bears more of the burden of a tax.” So to the extent that labor supply is more inelastic, workers see more of a hit to net wages when a payroll tax is imposed, and more of a benefit when that tax is reduced. This applies to both the parts “paid for” by employer and employee. But note, there is lots of room for arguing about the elasticities, over time and across occupations.

NAME REDACTED December 11, 2011 at 6:58 am

+1

TallDave December 10, 2011 at 11:08 am

It’s really a very strange business model. There was an article the other day recommending kids take a “fun” course studying surfing, at a college where tuition and fees run 30K.

Housing, healthcare, education, all broken by well-intentioned gov’t meddling.

Glenn Reynolds advanced an excellent notion: make the university guarantee a portion of student loans. As it stands now, they have no skin in the game, and so the results are exactly what you’d expect..

http://washingtonexaminer.com/opinion/columnists/2011/12/sunday-reflection-higher-ed-bubble-bursting-so-what-comes-next/1969376

NAME REDACTED December 11, 2011 at 6:59 am

Its a really good idea.
It fixes a problem very akin to the one in the housing market.

dearieme December 10, 2011 at 11:10 am

“make the university guarantee a portion of student loans”: that could work only if you took examining out of the hands of the university.

derek December 10, 2011 at 12:20 pm

Not really. The repayment of the loans would depend on the marketplace determining that the education had value.

joshua December 10, 2011 at 1:10 pm

True. Until the university starts covering the missed loan payments of “graduated” students by increasing tuition on increasing students and then finally getting an underlying guarantee from the government bringing us back to where we started. But only if you’re extremely cynical. I think I like that idea. At least it’s a clever attempt to resolve some bad incentives of the status quo; we’re going to need clever options if this bubble ever collapses.

D December 11, 2011 at 2:36 pm

At a minimum it might make them improve their career counseling offices. Mine was not helpful at all, though I guess it’s partly my fault for not pursuing a STEM degree.

CBBB December 11, 2011 at 7:39 pm

Not really, STEM degrees are mostly wastes of time.

enoriverbend December 12, 2011 at 2:18 pm

“STEM degrees are mostly wastes of time.”

You keep saying things like that, and you keep being wrong.

http://www.payscale.com/best-colleges/degrees.asp
http://www9.georgetown.edu/grad/gppi/hpi/cew/pdfs/overview.pdf

Abe December 10, 2011 at 11:13 am

Casey Mulligan did a sort of Goolsbee-is-dead-wrong-but-I-don’t-want-to-totally-beat-up-my-colleague when this was a hot topic on the series of tubes a few years ago.

http://caseymulligan.blogspot.com/2009/04/goolsbee-vs-obama-on-research-subsidies.html?m=1

Could go either way. Still I definitely think Goolsbee is right in the short term.

Richard A. December 10, 2011 at 3:19 pm

This working paper by the late Professor Sherwin Rosen and Chicago alumnus Jaewoo Ryo puts the supply elasticity of new entrants to engineering relative to all college graduates at 2.5. (pg.3). However, I do suspect that the supply elasticity for engineers is somewhat inelastic in the short run.
http://research.chicagogsb.edu/economy/research/articles/83.pdf

Bill December 10, 2011 at 11:23 am

Perhaps you have this backwards.

The tuition to STUDENTS have been going up is that STATES have been CUTTING support to state sponsored colleges and RAISING tuition.

Students borrow money to pay for increased tuition and these non-dischargeable debts are on their backs.

Jay December 10, 2011 at 11:54 am

I call BS. Making assertions without data to back it up. In contrast, I will provide data showing that Real State & Local Government Consumption & Investment in Higher Education (excluding primary and secondary school) increased by 2.9% CAGR from 1995 to 2008. Since 2008 government spending on higher education has been cut in real terms. But excessively high education CPI growth began well before 2008.

http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1
Table 3.15.6. Real Government Consumption Expenditures and Gross Investment by Function, Chained Dollars
Line item 38

That smackdown had to hurt.

RDGP December 10, 2011 at 12:43 pm

Before you gloat perhaps you should consider real per student spending. Enrollment in degree-granting postsecondary institutions between 1999 and 2009 increased 38 percent, from 14.8 million to 20.4 million.

Jay December 10, 2011 at 12:59 pm

Should have clicked through one more link to break out the for-profit schools. Attendance at State, Local and Other public institutions of higher education was up 19% through 2008 and 26% through 2009. Most of the enrollment growth was in for-profits which tripled.

http://nces.ed.gov/programs/digest/d10/tables/dt10_205.asp

Good try sucker.

TallDave December 10, 2011 at 1:14 pm

I really think the for-profits are onto something. If we can make all schools guarantee some portion of loans there will be increased incentives on colleges to deliver employable graduates. I think it could be a sea change.

RDGP December 10, 2011 at 1:15 pm

Between 2000 and 2009 enrollment in public institutions increased 26% and real state and local spending increased 15.4%. Once again, before you gloat perhaps you should consider real per student spending.

Brian J December 10, 2011 at 1:44 pm

TallDave,

It’s an interesting notion, but how are students going to make students more employable in any significant way?

TallDave December 10, 2011 at 1:58 pm

I assume you mean “schools” — they can increase the focus on teaching students marketable skills that employers want. For instance, I remember a lot of complaining from CompSci students that they had to learn COBOL, which isn’t a very desirable skill. OTOH, in the B-school MIS Master’s program, you developed actual business applications and you could earn Oracle DBA certifications.

CBBB December 10, 2011 at 2:07 pm

There’s a number of ways schools could make students more employable. One big way would be to focus much much more of the student’s evaluation on major projects rather then tests and exams. An example from my garbage degree was I took a couple courses in operations research/mathematical optimization but they were purely theoretical – proving theorems about bounds on solutions, whether solutions exist for certain types of problems, developing abstract algorithms etc. and absolutely nothing about how to take a real world problem from industry and carry through a quantitative analysis using popular tools such as Matlab or R or SAS.
Now I actual had job interviews for internship positions in jobs related to OR and always the criticism in the interview was “why didn’t they teach you how to actually solve applied problems?”

Brian J December 10, 2011 at 2:10 pm

TallDave,

Ha, I did mean “schools.” My bad.

Anyway, it just seems like trying to rightly change the incentives could lead to a different, perhaps bigger set of problems. If there’s a certain number of skills that get a premium, and every school in the country is trying to teach such students the same marketable skills, what will the effect be?

In some ways, the current situation might be the best in the sense that it’s the least crappy of all possible ones. Nobody is forcing students to attend any particular institution, even if they even attend college at all. Hopefully, as terrible as the down turn is, it will people to consider their investments a little more.

Bill December 10, 2011 at 6:15 pm

“College costs are rising at the same time that state appropriations for aid are shrinking. This has led to debate over funding at both the state and local levels. From 2002 to 2004 alone, tuition rates at public schools increased over 14 percent, largely due to dwindling state funding. An increase of 6 percent occurred over the same period for private schools.[57] ”

Here is the link: http://en.wikipedia.org/wiki/Education_in_the_United_States#College_and_university

D December 11, 2011 at 2:44 pm

I think requiring coop for all students, not just engineers, would be a big plus. As a software entrepreneur, I’m not interested in hiring a freshly graduated English lit major. However, I would hire one as a cheap intern that I can show the ropes to.

Even though I’m in a technical industry, there is plenty of need for people with “non-quant” skills – writing, product management and especially people skills are very valuable. At my last company one of our best hires was a former teacher who was extremely good at communicating with customers. She had good technical instincts, but I would never call her a programmer. Her best “skill” was probably patience – solving thorny customer problems takes time and empathy.

TallDave December 11, 2011 at 4:10 pm

Now I actual had job interviews for internship positions in jobs related to OR and always the criticism in the interview was “why didn’t they teach you how to actually solve applied problems?”

Yes, exactly. I got three job offers when I graduated, and all three were because I demonstrated in the interview that I could actually write code to solve a problem.

I think freshman/sophomore years they can teach theory (and kids can take those at community college to save money) but once you’ve actually declared a major they should mostly be preparing you for the workplace. And then students should be able to discern from starting salaries and employment numbers whether a college is a good value for them.

CBBB December 11, 2011 at 6:45 pm

Well writing code is one thing, that’s not really a problem but there’s a pretty big difference between writing code and building a serious application where you have to put together user interface, backend software, database tools, etc. and schools don’t really teach this sort of thing (combining the pieces you learn into something practical). Now I was a Math major not a CS major but like I say when I did take more “applied” courses they weren’t actually applied at all. A bigger focus on projects rather then tests and exams would make graduates much more marketable. Learning some obscure existence theorem which you’ll probably forget a few semesters later isn’t as important as these schools think.

D December 11, 2011 at 7:51 pm

Agreed on more experience with projects, which is why I favor a coop program.

My degree was in music but I don’t feel like not studying comp sci has hurt me in the software biz.

CBBB December 11, 2011 at 10:30 pm

Actually I did Coop it’s usefulness REALLY depends on how your employer is. The good employers actually provide a good coop experience where you get a chance to work on real projects but many employers simply use the student as cheap work to do menial tasks like photocopying, filing, etc. and you ultimately don’t learn much – there’s no training program in place so it’s just whether or not your coworkers feel like mentoring you – and often they don’t.
I know Engineering degrees require a Capstone project – I think every degree should require this especially STM degrees, of course it means a lot more work for the university so it’ll never happen.

Jay December 10, 2011 at 1:03 pm
Jay December 10, 2011 at 1:30 pm

Please list all assumptions you are making next time you post numbers. First it was, enrollment up X% therefore public institution enrollment up X%. That assumption proved to be terribly wrong. Now the assumption is state and local government GDP up Y%, therefore state and local government GDP on higher education up Y%. Do you honestly think the ONLY thing that state and local government produce is higher education?

RDGP December 10, 2011 at 2:17 pm

It’s real simple, Jay. You are both sadly misinformed and ill tempered. Perhaps if state and local governments did not CUT real spending per FTE (full time equivalent) student in the decade ending in 2009 you would be neither.

Jay December 10, 2011 at 2:27 pm

@RDGP….

Given that you included for-profit college enrollment in your original calculation you easily discredited yourself as completely ignorant.

Tummler December 10, 2011 at 1:14 pm

When I was in graduate school at a large, public university, I was good friends with the student body president. Given his position, he had a somewhat inside view to the budgeting process. It was his opinion, that the university and law makers would collude to divert the state’s funding of the university’s general fund to funding specific capital improvement projects, such as buildings for new research labs and the like.

Brian J December 10, 2011 at 1:22 pm

Where’s the smack down?

Bill was speaking in relative cuts, not absolute cuts. Total spending has gone up, but public institutions, particularly community colleges, are trying to educate more and more students with less and less money. Here’s one finding:

The primary cause of tuition increases in public institutions is not increased spending, but rather cost shifting to replace losses in state appropriations and other revenues. In public research institutions, 92 percent of revenues from tuition increases since 2002 have resulted from shifts in costs. In other public institutions, costs are declining even as prices are increasing. Private institutions are both raising tuition and increasing
spending. Only about 30 percent of revenues from tuition increases in the private research
universities can be attributed to cost shifts, though in private master’s and bachelor’s institutions, about 85 percent of tuition are from cost shifts rather than spending increases.

http://www.deltacostproject.org/resources/pdf/trends_in_spending-report.pdf

Jay December 10, 2011 at 2:08 pm

Initially all I provided was the numerator GDP. Then RDGP thought they were going to outsmart me by sneaking for-profit college attendance in with public college attendance to make an apples to oranges comparison that favors their ideology.

If the metric is RGDP spending per capita, which is X in the base year and then the numerator and denominator grow by about the same amount the ratio will be near X in the end year.

G.L.Piggy December 10, 2011 at 2:42 pm

Bill,

I didn’t see that you had posted that same document. I posted it below as well. One thing from that document that we both link to:

On page 29 (figure 10) they show that in 1998 (but in 2008$) student-paid tuition was $5,195 while the average state and local subsidy was $8,726.

In 2008, student-paid tuition had increased to $7,583 while subsidies had decreased to $8,055. Subsidies decreased by only $671 while net tuition increased by $2,388.

Brian Donohue December 10, 2011 at 4:52 pm

Excellent comment. If you add these numbers, the total real cost of educating a student has crept up $1,717 during 1998-2008 (12.3%.)

Nice pricing power.

Bill December 10, 2011 at 6:44 pm

GL, I don’t understand the logic. Before states cut back on education, tuitions increased. Now tuitions are still increasing, and states are reducing their contribution, further increasing tuition.

G.L.Piggy December 11, 2011 at 1:02 am

Bill,

You are exactly right that before states cut back on funding colleges and universities that tuition was still increasing at a greater clip than inflation. Tuition has always outpaced inflation because the federal government subsidizes and guarantees student loans. A common rebuttal to this argument is that since states have suffered budget shortfalls they have also decreased their funding for higher education. While it seems that they have decreased funding on a per capita basis, this does not fully account for the increase in overall tuition. So what would? Market distorting subsidies and government-backed loans would probably do the trick.

Bill December 11, 2011 at 6:46 pm

GL, There is no reason that college tuition should a priori decline because state funding declines, so I don’t get your point. This is not Says law: where supply creates demand. Your point that state subsidies have declined does not support your point, but mine instead: that tuition increased as costs were shoved to the student and their families. That the state gave a non-dischargeable loan doesn’t decrease the real price, nor is it a subsidy to the institution: it is a burden to the purchaser.

Bill December 10, 2011 at 5:08 pm

Jay, If you do not control for increases in enrollment and only show the increase in spending, you qualify for the Fox award of statistical manipulation.

That had to hurt.

Ted Craig December 10, 2011 at 8:07 pm

Man, Bill, you are going for all the cheapest shots today, huh? My question is since the largest tuition increase happened in the first half of the decades, before states turned to austerity. why is austerity to blame?

Bill December 10, 2011 at 9:41 pm

Ted, Ever heard of supply and demand. You had the children of the baby boomers clamoring to get into schools. If you do not control for population and number of enrollees, you are missing the point: the states contributions declined on a proportional basis.

Jay December 11, 2011 at 2:17 pm

Which means since the baby boomer kids are leaving primary and secondary schools there is a need to downsize teaching staffs there. And once the baby boomer kids leave college we can cut some professors too right?

I forgot. Government only expands never to contract (all things politicians claim will be temporary become permanent).

Bill December 10, 2011 at 9:48 pm

Ted, Your statement that the states were not cutting their contributions to higher education in the earlier part of the decade is also wrong: “From 2002 to 2004 alone, tuition rates at public schools increased over 14 percent, largely due to dwindling state funding. An increase of 6 percent occurred over the same period for private schools.” Here is the link: http://en.wikipedia.org/wiki/Education_in_the_United_States#College_and_university

G.L.Piggy December 11, 2011 at 1:04 am

Bill,
As I’ve responded in other places on this thread, state funding on a per capita basis has not dwindled nearly as much as tuition per capita has increased.

Bill December 11, 2011 at 11:21 am

GL Piggy, As I have said before you statement is illogical. First, to say : “state funding on a per capita basis has not dwindled nearly as much as tuition per capita has increased.” is to say two things: state funding has decreased, but not as much as the rate of increase of tuition. So what. There has always been tuition increases, even when states maintained their proportion of contribution because states only fund part of tuition increases. What we are talking about is the proportionate share. If you do not understand this point, please let me know and I will illustrate it with some examples.

Ted Craig December 11, 2011 at 7:12 pm

The chart that goes with that article makes it look like per student revenue from state and local appropriations has been growing for the past few years, along with tuition.

Jay December 11, 2011 at 2:12 pm

Read all the responses above. RDGP did the work for me. Real Government Output increases matched the increase in public college enrollment up until 2008. I have sources like the BEA and NCES. You have wikipedia. You are a hackjob. You get the Huffington Post award for citing someone else that just made shit up.

Bill December 10, 2011 at 11:35 am

As with any market, you have to make distinctions between the differentiated products.

1. State supported college tuititions have been increasing because states have been cutting back on the proportion of college costs they are willing to pay, and there have been programs which have made it easier for states to “loan” money to students to cover this deficiency.

2. Private internet schools and 2 year private schools teaching you — how to be a guard, how to be a chef, how to play with photoshop or become a news announcer–have proliferated, overselling and underdisclosing the success prospects. Here is a case where disclosure would clean up a market.

3. Private prestige schools are capacity constrained, and they are acting like any differentiated product producer==raising prices in the face of demand.

This is an issue that has to be examined in each of the three segments of the market, or else you get simplistic answers (OMG, we are lending too much).

TallDave December 10, 2011 at 1:14 pm

3 is untrue. They don’t even try to increase capacity. They increase exclusivity instead.

Rahul December 10, 2011 at 2:04 pm

Why? What’s the motivation and incentive structure of the private school administrators? Student fees? Alumni donations?

CBBB December 10, 2011 at 2:25 pm

A more prestigious school can charge a lot more and there’s also a MUCH bigger ego boost to being President of Harvard then being President of the University of Iowa.

TallDave December 11, 2011 at 4:11 pm

Yep, CBBB nails it.

They don’t sell education, they sell prestige. Prestige is a function of exclusivity, and it’s what they focus on accruing in lieu of profit.

G.L.Piggy December 10, 2011 at 2:36 pm

I don’t see how 1 is true. You seem to be only looking post-recession. But tuition has been outpacing general inflation for the past several decades – including through periods where states were more flush and were spending money to subsidize public higher education institutions.

Even then, the recent shortfalls in state funding do not account for the full amount of increases in tuition.

Bill December 10, 2011 at 6:10 pm

GL, I do not understand the logic of the statement: “recent shortfalls in state funding do not account for the full amount of increases in tuition.” Since states never cover the full cost of education, this would always be a true statement. And, schools have increased tuitions with state support, so what’s the point. The proportion of state funding for state schools has declined and tuition has increased to cover the lost revenue.

JWatts December 11, 2011 at 1:06 am

You are ignoring the fact that tuition has increased more than the decline in funding. Decline’s in state funding may have exacerbated the effect, but tuition has been increasing substantially faster than inflation for decades.

Bill December 11, 2011 at 12:40 pm

JWatts, Relative (and negative) rates seems to be an issue for people, as does the word “proportion”.

athEIst December 10, 2011 at 12:34 pm

Can you clarify the following.

much of the money tends to go to increase the salaries of people already doing such work. From 1968 to 1994, a 10 percent increase in R&D spending led to about a 3 percent increase in incomes in the subsidized fields.

Seems like a contradiction to me. I must be missing something.

Mark December 10, 2011 at 12:37 pm

Alex,

Here is a little more analysis to go along with yours. http://bit.ly/uAfutN

JWill December 10, 2011 at 12:38 pm

As a scientist and taker of federal grant money, most of this post seems right to me, except that it is missing one crucial point that, I thought, should be obvious to economists like Alex. The more money the government will give me in grants, the more work I do. I take on extra projects, extra postdocs, extra students, and extra hourly employees, and the productivity of my lab goes up. Scientists salaries going up by 3% when subsidies go up by 10% is just as likely to be a sign the system is working as intended…

improbable December 10, 2011 at 1:46 pm

About R&D and salaries: I would expect that the supply of researchers is much more elastic than the supply of places at good universities.

The university would often have to build new buildings to house more students. Whereas more money can quite quickly result in fewer people leaving a field — it seems that most research fields have a narrowing stream, so if a few more students get postdoc places, and a few more postdocs get hired, then you get more people working on it, much much quicker than training them from scratch.

Anyway I haven’t read the paper, so I’m not precisely sure what they did show.

Andrew' December 10, 2011 at 2:30 pm

Ahem, taking on extra postdocs is not doing so much more work. Students maybe.

D December 11, 2011 at 2:47 pm

Managing post docs and especially managing the funding process is not trivial. For many “researchers,” this is their primary job.

Brian J December 10, 2011 at 12:55 pm

Does anyone have a good link to a comparison of public versus private tuition increases? Given the cutbacks in state budgets, particularly over the last few years, it’s an important question.

As far as Goolsbee goes, why did he recommend making the R&D credit permanent? Was it for the long-term effects? Did it have anything to do with other countries using similar things?

sdb December 11, 2011 at 6:17 pm

The Goldwater report on administrative bloat tallied the increase in expenditures/student at public and private schools. I don’t have it in front of me, but as I recall private schools increased expenditures by an average of 1.9%/yr/student relative to the CPI from 1994-2007. Public schools increased expenditures by 1.5%/yr/student.

Dan Weber December 10, 2011 at 1:22 pm

Just look at how colleges price their product: as much as the student (and family) can possibly afford.

No wonder giving the students more money doesn’t leave them any better off.

Brian J December 10, 2011 at 1:41 pm

No mention of the caps on borrowing by students each year? Is a disproportionately larger share of the loans being taken out by parents, who don’t face such caps? Also, do private loans face any such caps?

Rahul December 10, 2011 at 2:11 pm

a 10 percent increase in R&D spending led to about a 3 percent increase in incomes in the subsidized fields.

Why is this bad? Let’s assume salaries are, say, 20% of the total spending. Say, a professor’s research budget rose from $100k to $110k and technician salary rose from $20k to $20600. $9400 still went towards “productive” purposes.

Is this so bad?

Andrew' December 10, 2011 at 2:47 pm

No, it’s not so bad, but it’s at least 30% worse than we would probably be led to believe.

Rahul December 10, 2011 at 3:46 pm

Depends on what fraction salaries typically are of total funding.

G.L.Piggy December 10, 2011 at 2:33 pm

This analysis from the Delta Cost Project seems interesting.

http://www.deltacostproject.org/resources/pdf/Trends-in-College-Spending-98-08.pdf

It covers the years 1998 – 2008. They don’t include an analysis of third-party transfers i.e. subsidized student loans, but they look at other factors.

Some above argue – parroting the common argument from pro-statists on this issue – that state funding shortfalls have created the need for more student-paid tuition. But tuition inflation has outpaced general inflation by a generous clip every year for the past couple (few?) decades. Through flush times and bad, tuition has grown more than general prices.

From the link above:

For instance, total unadjusted revenues from state and local appropriations increased by 57 percent over the ten-year period in this report. Adjusted for inflation, the increase drops to 19 percent, and if adjusted again for increases in FTE enrollments, to just 6 percent. Understanding this helps explain why state appropriators may see higher education finance differently than institutional leaders: from their perspective, they are giving a lot more money to higher education each year—and in most states, this is true. But when inflation and enrollment increases are factored in, this seemingly generous increase whittles down very rapidly.

I read this to mean that, even after accounting for increases in student enrollment, state and local government appropriations still increased over the 11 year sample period. If this is the case, then the argument that decreases in state funding caused the large increases in tuition prices is unfounded.

Bill December 10, 2011 at 5:42 pm

I do not understand the logic of the statement that the shortfalls in state funding do not account for the full amount of the increase in tuition.

You would expect tuition to increase if state funding were cut back.

G.L.Piggy December 11, 2011 at 1:10 am

To be honest, I don’t understand what you don’t understand about the argument. You’re saying that decreases in state funding for education have forced colleges and universities to increase their tuition prices. I’m saying two things: a.) tuition prices have always exceeded inflation even when state budgets were flush and b.) even when states have cut funding for higher education the increases in tuition far outpaced the commensurate cuts made. The standard argument you are putting forth seems to be that there is some sort of 1-to-1 tradeoff between state funding and tuition from students. If tuition is always increasing far more than we would expect if your argument were true, then there is another factor causing the high tuition inflation rates i.e. government backed and subsidized student loans.

Bill December 11, 2011 at 11:22 am

See my reply above. The relative proportion of state contributions have declined. I assume you know the difference between relative rates of increase and decrease.

Bill December 10, 2011 at 5:45 pm

Also, states never do and never have funded the entire increased costs of education, so that argument doesn’t follow either. In other words state contributions can decline and tuition can increase by more than a cutback.

Eva Naive December 10, 2011 at 2:50 pm

Does this imply that it would be better to have a mandatory cap on tuition fees than a subsidy?
A related question: do housing subsidies push up rents? I’ve always thought they were better than rent controls.

Rahul December 10, 2011 at 3:49 pm

Why are we sure that the supply of scientists and engineers for research inelastic? One can steal them from non-research fields, or from those working in unrelated areas (e.g. finance?). Additionally, with international mobility it isn’t entirely unbelievable that the labor pool of other nations gets tapped.

CBBB December 10, 2011 at 4:27 pm

It’s pretty inelastic – if you have someone with a degree in engineering who’s been working in finance are they really just going to be able to walk into an actual engineering job? What if they never worked as an engineering outside of their education?

Jonathan December 10, 2011 at 10:00 pm

I disagree. Considering less than 25% of science PhD’s ever get a position where they could apply for government funded research grant (and less than 15% ever become Principal Investigators on a federal grant) and the reserve army of postdocs, adjuncts, and temporary faculty you could very rapidly increase the number of researchers with virtually no effort. Then for any specific field there are probably several closely related fields which you could draw from. It may not be elastic over a period of months, but you could probably increase the number of Principal Investigators in virtually any scientific or engineering field by 25% over a year just by accepting a little less experience in your hires. You may not be able to transform random people off the street into scientists or engineers, but every year you’re losing so many to non-STEM fields, because of the lack of academic/research positions, that you could fill any reasonable increase in positions.

CBBB December 11, 2011 at 11:32 am

“by accepting a little less experience in your hires”

That’ll happen when pigs fly.

Rahul December 10, 2011 at 11:37 pm

What about the international supply? Surely that is extremely elastic In the research sector, where at least 30% of post docs etc. are foreign born, why are we neglecting that reservoir which ought to quite quickly react to increased funding opportunities?

ezra abrams December 10, 2011 at 11:35 pm

quote
From 1968 to 1994, a 10 percent increase in R&D spending led to about a 3 percent increase in incomes
How does this compare to non subsidized fields, like corporate attorneys ?
as MR readers may know, a large number of researchers are concentrated in areas with high housing prices; the ratio of house/salary, here in the Boston area, is not favorable over this time period for ass professors and postdocs

following relates to biotech types fields
The supply of scientists is extremely elastic, because grad students are cheap; perversely, the very ease of creating a large number of scientists means there is a premium on the good ones “star” profs at mit harvard etc get very high salarys and huge amounts of power; others don’t

in any event, lets stipulate to the argument tht gov’t subsidys are unfairlyraising the wages of researchers
As a problem in our society, how does this compare to the subsidys given to CEOs and hedge fund managers ?

G.L.Piggy December 11, 2011 at 3:36 pm

Bill,

you’ll have to provide me a concrete example then because i’m not following you. you wrote:

“1. State supported college tuititions have been increasing because states have been cutting back on the proportion of college costs they are willing to pay, and there have been programs which have made it easier for states to “loan” money to students to cover this deficiency.”

if tuitions have increased more than the the cut backs at the state level then what accounts for the rest of the tuition increase? you say that “tuitions have been increasing *because*” of states cutting back. you are saying that X is the cause of Y. but X has fallen by a smaller amount than Y has risen. therefore, state budget cut backs aren’t fully explaining the tuition increases. and besides that, states have historically increased the amount of money they devote to education. tuitions outpaced inflation even then. so it seems clear to me that some other factor is contributing to high tuition inflation.

let me ask bluntly: do you or do you not believe that subsidized and guaranteed federal loans and grants have contributed to runaway tuition inflation?

sdb December 11, 2011 at 6:29 pm

The Goldwater report on administrative bloat tallied the increase in expenditures/student at public and private schools. I don’t have it in front of me, but as I recall private schools increased expenditures by an average of something like 1.9%/yr/student relative to the CPI from 1994-2007. Public schools increased expenditures by 1.5%/yr/student. This seems like it should be the figure of merit. This money comes from state appropriations, federal subsidies, tuition, and endowment earnings, so while direct appropriations from states may have decreased drastically (they certainly have in my state), funding from the other sources has obviously outpaced inflation. I suspect a non-negligible fraction of this increase was driven by endowment spending fueled by the tech and then housing boom.

Two questions I’ve had (but am too lazy to look up other than post them in comboxes):
1) How does 1.5%/yr relative to inflation compare to the salary benefit of having a BS/BA over the same period?
2) How does a 1.5%/yr increase for higher-ed compare to other highly educated service heavy sectors (e.g. financial planning, law, veterinary care) over the same period?

Bill December 11, 2011 at 6:48 pm

GL, I can’t help you. If you read your own questions you will see that you actually understand the effect of state cutbacks.

Bill December 11, 2011 at 7:30 pm

GL, Loan guarantees are a mechanism to shift the costs to the beneficiaries. As a cost, the beneficiary at the margin is making a decision based on the future interest costs he/she will have to pay relative to the benefits of education. In my mind, the state determines its level of support based on what it thinks the students will be willing to pay in terms of tuition. If the value of education increases, so will tuition, and so also will the state’s contribution decrease because the student will be paying the cost at the margin.

What is unfortunate is that parents contribute their taxes over their working careers to have the state provide a subsidy for education, and later they have the benefit withdrawn.

G.L.Piggy December 12, 2011 at 12:02 am

as teapartydoc touches on below, the “beneficiaries” are not patients or students – it is colleges/admin/professors and doctors/hospitals.

Adam December 13, 2011 at 9:46 am

Of course they contribute. To some extent, they’re supposed to. If it costs, say, $55,000 a year to educate a student at a state university, obviously, almost nobody that actually goes to a state university would be able to pay that, they’d all but cease to exist, and we’d be left with private research universities and liberal arts colleges educating the very well-to-do and anyone who could earn a hefty scholarship exclusively. Demand and supply may conceivably never intersect for state education since they cost a certain amount to provide and nobody, other than those willing to pay much more, would be able to pay that at all. That’s why subsidies exist. They’re meant to drive up demand to the point where equilibrium price is sufficient to cover the expenses of the providers and allow them to earn a living sufficient to draw them into a particular line of work.

teapartydoc December 11, 2011 at 8:13 pm

Postrel’s logic is directly applicable to Medicare and Medicaid. The subsidy goes directly to the holders of her “input”, doctors and hospitals, and the resulting inreases in cost are absorbed by the general public and the government to which they pay taxes.

Bill December 11, 2011 at 9:08 pm

Yeah, and the logic would say that if the money were withheld from the doctor, you would not get the service, and would die.

I like the way everyone says paying someone else’s bills for the services they received is a subsidy to the provider.

Why cut out the middleman. Everytime I pay a provider for services, I am subsidizing the provider.

Strange.

David December 12, 2011 at 4:51 am

Between 1962 and 1965, Michigan State University increased enrollment by more that 12,000 students (54%). This was a period of quite high subsidies. I am not so sure that the supply of university education is as inelastic as you state.

deragoo December 16, 2011 at 6:42 am

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