Subsidies Increase Tuition, Part XIV

by on December 21, 2015 at 7:20 am in Economics, Education | Permalink

In a new NBER paper, Accounting for the Rise in College Tuition, Grey Gordon and Aaron Hedlund create a sophisticated model of the college market and find that a large fraction of the increase in tuition can be explained by increases in subsidies.

With all factors present, net tuition increases from $6,100 to $12,559. As column 4 demonstrates, the demand shocks— which consist mostly of changes in financial aid—account for the lion’s share of the higher tuition. Specifically, with demand shocks alone, equilibrium tuition rises by 102%, almost fully matching the 106% from the benchmark. By contrast, with all factors present except the demand shocks (column 7), net tuition only rises by 16%.

These results accord strongly with the Bennett hypothesis, which asserts that colleges respond to expansions of financial aid by increasing tuition.

Remarkably, so much of the subsidy is translated into higher tuition that enrollment doesn’t increase! What does happen is that students take on more debt, which many of them can’t pay.

In fact, the tuition response completely crowds out any additional enrollment that the financial aid expansion would otherwise induce, resulting instead in an enrollment decline from 33% to 27% in the new equilibrium with only demand shocks. Furthermore, the students who do enroll take out $6,876 in loans compared to $4,663 in the initial steady state….Lastly, the model predicts that demand shocks in isolation generate a surge in the default rate from 17% to 32%. Essentially, demand shocks lead to higher college costs and more debt, and in the absence of higher labor market returns, more loan default inevitably occurs.

Sound familiar? Some of these results appear too large to me and the authors caution that they need to assume a lot of monopoly power to solve their model so the results should be taken as an upper bound. Nevertheless, the Econ 101 insight that subsidies increase prices (even net for those who are not fully subsidized) holds true.

I wonder where else (& here) we could apply this insight?

1 CO December 21, 2015 at 7:33 am

Politicians love subsidies, price controls plus reduced competition. It’s an easy fix that promises to leave everyone (consumers, producers and the politicians themselves) happy.

2 Dan in Euroland December 21, 2015 at 10:02 am

Indeed. Think of the political incentives of creating a large debtor class. Politics is about power and control, little else. Thrillary Clinton and her minions like Huma know exactly what they are doing, and how best to enslave the demos.

3 msgkings December 21, 2015 at 12:58 pm

LOL. Oy the partisan bullshit. Darth Cheney and his minions like W knew exactly what they were doing, and how best to kill as many people as possible while enriching Halliburton. Both sides are so stupid.

4 mulp December 21, 2015 at 11:50 pm

So, why have subsidies to higher education been dropping since the 70s?

With dropping subsidies and ending of price controls by State lrgislatures, why have college and university costs been increasing faster than inflation?

I was lucky enough to graduate from high school in 1966 in Indiana, back when conservative Democrats and Republicans provided lots of funding and State oversight and ownership of post high school education, including trade education, farm education directly to farmers and at universities, as well as full spectrum universities like Indiana University and Purdue, as well as Ball State with strong teacher training, among others. Plus local colleges.

I thought the legislature was really stingy when I heard about the California system which was basically free tuition. And the GIs were getting screwed by not getting the generous GI Bill tuition and living allowance benefits from service in Vietnam.

Not to mention all the DoD money funneled to universities for research via DARPA, NASA, with lots of funding for RAs and TAs to subsidies grad students, all part of the cold war effort to develop the most advanced scientific and industrial economy in the world.

Those were the days of government control and heavy subsidies…

Btw, I attended a private liberal arts school which was under pressure to keep tuition and living costs down to not be far more costly than government schools. As a top 5%? high school grad, I got a $1000 per year merit grant from the Indiana legislature.

And as far as debt, not only did students seldom run up much debt, neither did government, States balancing budgets and the US Treasury debt shrinking relative to gdp, tax revenue, spending, all while fighting a war 3-4 times to military in Vietnam compared to Afghanistan and Iraq, cold war space and nuclear race, massive infrastructure investment on the scale of China during its recent boom. The Interstates were for defense, built based on Ike’s experience mobilizing an Army in an exercise in the 10s.

5 Kronrod December 21, 2015 at 7:39 am

Whether subsidies increase prices or not depends on the design of the subsidy. If given to the consumers – for example in the form of subsidized student debt – it increases their purchasing power and leads indeed to a price increase. However, often subsidies are given to the producers, which usually leads to lower prices.

6 Alex Tabarrok December 21, 2015 at 8:42 am

Actually the incidence of a subsidy like the incidence of a tax does not depend on whether the tax or subsidy is given first to demanders or suppliers. See our MRUniversity video

http://www.mruniversity.com/courses/principles-economics-microeconomics/taxes-subsidies-definition-tax-wedge

It is true, however, that a subsidy to research or land costs or university buildings would have different effects on tuition than a subsidy to tuition.

7 Nathan W December 21, 2015 at 9:07 am

Your exact wording in one of the links was very good: “The more elastic side of the market can better escape a tax, leaving more of it to be paid by the inelastic side.” The analogy for a subsidy should be quite intuitive, once presented with the idea.

However, I think consumers and producers will have other behaviours which will impact the targeted production (amount of education provided) differently. For example, a larger student subsidy will have leakages to beer and pizza, while a larger subsidy to universities might see funds redirected to things like athletics or a flashier creativity-inducing zone in study areas. I think these behaviours are altogether separate from the question of elasticities of demand and supply where the production output is the number of available spaces at a given quality of education.

8 libert December 21, 2015 at 9:36 am

I never found the analogy for a subsidy very intuitive. Indeed, the inelastic factor gains the most from a subsidy (e.g., if supply is very inelastic, a demand shift will push up prices a lot, which mostly benefits supply).

But re-writing that sentence with “subsidy” in place of “tax” yields:

“The more elastic side of the market can better escape a subsidy, leaving more of it to be gained by the inelastic side.”

which doesn’t make much intuitive sense.

9 Lord Action December 21, 2015 at 11:54 am

“The more elastic side of the market can better capture a subsidy, leaving less of it to be gained by the inelastic side.”

You have to make the full change. And it’s pretty intuitive then, too.

A popular example of relative elasticities determining the impact of a subsidy is the mortgage interest deduction, which basically goes to home-builders and not home-owners.

10 libert December 21, 2015 at 5:15 pm

@Lord Action

But that’s actually incorrect, hence the un-intuitiveness of it. The more elastic side of the margin gets LESS of the subsidy.

This is easiest to see because increasing the subsidy by $1 has the same CS/PS effects as reducing a tax by $1 (it’s -dCS/d(tax)). If the inelastic factor bears more of the tax, that means it benefits most when taxes are reduced. Similarly, the inelastic factor gets more of the subsidy.

For example, suppose that demand is perfectly elastic (i.e. perfectly flat), and supply is upward sloping. Then price=MWTP on every unit. Hence, Consumer Surplus = 0. Now introduce a subsidy of $1, paid directly to consumers. Demand curve shifts up by $1. Since the demand curve is flat, prices go up by $1. Consumers are no better off, since they are subsidized $1 but costs go up by $1 as well. All of the benefit goes to the supply side–the relatively inelastic factor.

11 Lord Action December 22, 2015 at 10:21 am

Maybe I’m misunderstanding something, but doesn’t a flat demand curve signify a perfectly competitive market? I.e., the suppliers cannot raise prices – they compete exclusively on price, so the $1 subsidy goes to the (elastic) consumers who just keep it.

I could easily be misunderstanding something.

12 libert December 22, 2015 at 5:17 pm

You’re thinking of a flat supply curve. If the supply curve (i.e., marginal cost) is flat at, say, $20, then the price will always be $20 (since price=MC and MC is perfectly flat at MC=$20). This is true no matter how inelastic the demand curve is or what the size of the subsidy is. (By contrast, if the demand curve were flat, then a $1 subsidy would shift the demand curve up by $1, increasing pre-subsidy prices by exactly $1, meaning consumers are paying the exact same price post-subsidy)

In the flat supply case, the situation is exactly as you describe. Supply is perfectly elastic, firms compete exclusively on price, and the full $1 subsidy goes to the relatively inelastic consumers who keep it, while still paying a pre-subsidy price of $20). In short, with perfectly elastic supply, the (inelastic) demand side benefits exclusively from the subsidy. In general, the inelastic side of the market gets a majority of a subsidy and bears a majority of a tax.

Of course, with a tax levied on consumers, the pre-tax price is still fixed at $20 (=MC), and so the full cost of the tax is borne by the demand side.

In general, the inelastic side’s welfare is AFFECTED the most. Whether that effect is positive or negative for them depends on whether its a subsidy (+) or a tax (-).

13 John December 21, 2015 at 1:58 pm

Nathan, while I suspect what you say is true in one sense I’m wondering just how one separates that when a given production process supports mutliple supply curves? Analytically I see that the university choosing to redirect some of the subsidy to sports rather than academics is logically different frmo the elasticity of the adcademic supply curve for the university doesn’t the behavior produce the same results — espicallly if the total profit to the university is greater by shifting the subsidy?

I suppose what I’m asking is whether or not elasticiy to some technical aspect of supply or if it’s not also a behavioral aspect.

14 Nathan W December 21, 2015 at 11:00 pm

For the last sentence – yeah, I was kind of wondering something like that too, but wasn’t quite sure how to put it.

15 athEIst December 24, 2015 at 1:25 am

might see funds redirected to things like
subchancellors and deans, deans, deans and more deans.

16 mulp December 22, 2015 at 8:35 pm

What do you think the impact is if the State legislature sets a cap on tuition, paying a subsidies that is 90% of what the State universities claim they need in tuition hikes?

Too much demand and only one way to get more subsidies means the university increases the number of slots, taking market share away from the private colleges and universities and forcing the least cost-benefit private schools to shutdown?

Here in NH, the State legislature has limited tuition hikes in exchange for increased funding, mostly toward community colleges with pressure for the four year schools to provide seamless transfer. Several private profit aspiring colleges have closed since these State school efforts have begun and delivered some limited success, with good increases in community school attendance and courses taught.

This is setting the way back machine to the 60s in my experience in Indiana, and based on my conversations of retiring NH community tech instructors from the late 60s and 70s to the 00s.

17 Glenn December 21, 2015 at 9:45 am

Market interventions always have unintended consequences. American higher education is not only heavily subsidized but heavily regulated. Bigger interventions have bigger surprises to those who intervene.

What would higher education now look like if the government stayed out of it entirely?

What would taxpayers have done with all that college subsidy/regulation money if the government had left it in the taxpayers pockets?

18 Gochujang December 21, 2015 at 1:31 pm

Government is in higher education for two reasons. One, to support individual development, is independent of broader return. The other, to foster economic growth, is very much about return on investment.

The subtext of subsidy arguments is often between those looking for economic returns, and those who don’t care.

19 Ricardo December 21, 2015 at 4:45 pm

The public choice perspective would be: government is in higher education because… it can.

20 John December 21, 2015 at 7:51 am

Makes good sense. Aid helps colleges segment the demand curve.

I’m surprised schools like Harvard, Princeton, and Yale don’t just ratchet their headline tuition up to 100k+ and extract the maximum amount of flesh from those who can afford it.

21 Matt Waters December 21, 2015 at 9:16 am

Harvard and Yale are non-profit and couldn’t pay dividends from the 100k tuition. They would have to reinvest the 60k profits into more facilities or faculty.

22 Dan Weber December 21, 2015 at 9:41 am

They do “reinvest it” into the salaries of directors.

23 John Mansfield December 21, 2015 at 7:54 am

Any good breakdowns out there on how the increased tuition is spent?

24 Matt Waters December 21, 2015 at 9:04 am

One thing that surprised me looking into this. PRIVATE tuition since 2004 has matched CPI. CPI is up 25% and private, non-profit tuition is up 22%.

A lot of the discussion gets really confused, because public universities have seen STATE subsidies significantly cut. Also, you’ve got private, for-profit universities which really charged outrageous tuition before the government cracked down on them.

It also looks specifically at tuition. Room and board have probably increased more, but the quality of room and board has significantly increased in my own anecdotal experience. My freshmen dorm, in 2003, probably wouldn’t meet building codes. The college gutted everything but load-bearing walls recently.

Anyway, that’s “where the money is going.” Since 2004, it has been the reduction in state subsidies or the avarice of for-profit colleges. Where there has honestly been tuition increases, they’ve gone to:

1. More non-faculty positions for student support. There is more “customer service” today with colleges.

2. Facilities, including the rock-climbing walls.

Not teacher’s salaries. The professors seeing significant salary increases pay their way with grants.

25 Matt Waters December 21, 2015 at 9:12 am

I spoke too soon. Looking at the 22% figure, that was inflation-adjusted increase. It is less than the increase in public four-year college, which is 40%. Sorry, I was on my phone looking into it.

The reasons are what I said: more non-faculty positions and facilities. USN&WR heavily weights retention and selectivity. To be blunt, the most selective students may not really care if Harvard has the best professors. They definitely care about the gold-plated facilities and the non-faculty support.

So you have the increases in tuition without corresponding increase in teachers’ salaries. It suggests what books like “Academically Adrift” have said: students only go to college now for the experience and the imprimatur for employers.

26 Justin Kelly December 21, 2015 at 4:00 pm

I think we have flipped causality here. I hear lots of people point to different causes like dubai-esque architecture, increase in administrative overhear, and even tenure, but these are all critters that live in the ecosystem on increasing university revenue. slash that revenue, and the critters will go extinct.

27 Brian December 21, 2015 at 7:59 am

I am most interested in why an increase in cost has not raised supply. In a functioning marketplace, subsidies should only increase price by so much because more and more suppliers should jump in as the price increases. Obviously, you cannot create a new Harvard out of the ether, but you would think that at least some colleges would greatly increase enrollment with increasing tuition.

28 Hasdrubal December 21, 2015 at 1:19 pm

There are probably a lot of factors, but a couple that jump out to me offhand:

1.) Prestige: Colleges are ranked, in part, on how many applicants they _turn down,_ so adding slots isn’t going to be their highest priority. But increasing the number of applicants might be.

2.) Infrastructure: In order to add students, you’ve got to add dorm rooms, add classrooms, and add teachers, and then increase all the facilities that support them like dining facilities, gyms, counseling facilities, HR, etc. Those are massive, complicated projects that don’t really have much marginal impact by themselves, they all need to be completed before you can really increase enrollment. And then, if you’re in a city, you might not even have the option to grow, or you’ll have to tear down existing in order to replace it with new.

3.) I imagine the majority of college services are supplied by public universities. So, in order to grow enrollment, they need buy in from the legislature. I’m not all that well informed, but I remember hearing a lot about budget shortfalls and budget cutting from the MN and CA systems. It’s awful hard to ask for money to expand when you are having problems simply operating at your current level.

29 Andy December 21, 2015 at 4:46 pm

This is a salient point – it’s not so much that subsidies has increased, it’s that demand has increased while supply has not kept up. There is likely a much larger college going population now than 30 years or so ago, while supply has not increased by much (In California, I think we have one new UC and three new Cal States). As a nation, we do want more college educated citizens, so getting more demand (more college going students) is beneficial to the country. I think there is room for a company to put together a quality, reasonably priced educational facilities (and not the Corinthian College kind). If you put out a quality product that educates the customer, I think people will flock to it.

30 The Original D December 21, 2015 at 5:40 pm

What about alternative types of education? Several years ago I took a sales training course and was surprised to find I could get a student loan for it. I believe the code schools accept student loans as well.

31 Uninformed Observer December 21, 2015 at 8:12 am

Where did you think all that extra money was going to go?

Is there an example of a subsidy that has not raised prices (or kept them artificially high)?

32 babar December 21, 2015 at 9:33 am

agriculture in the united states, which is heavily subsidized and has the cheapest food in the history of the world?

33 AndrewL December 21, 2015 at 10:34 am

Tuition subsidies subsidize the consumer. Agriculture subsidies subsidize the producer, so they generate opposite effects.

34 Cooper December 21, 2015 at 7:03 pm

Agriculture is a highly competitive, commodity business.

If we paid every dairy farmer $10/gallon for producing milk, they’d be giving the stuff away for free.

If we pay every student to go to college, we’ll just end up with higher tuition because there’s no new supply of spots at top universities.

35 Dan Weber December 21, 2015 at 9:42 am

I’m not sure I’d go this far, but subsidizing a positional good is nuts.

36 ladderff December 21, 2015 at 11:01 am

Bingo.

37 andrew fischer lees December 23, 2015 at 12:07 am

upvote

38 Brian Donohue December 21, 2015 at 8:13 am

Yes, Econ 101.

Rebutting this requires an economics PhD and a flair for data-mining. I am confident there will be no shortage of rebuttals.

39 Apron December 21, 2015 at 8:20 am

Frustratingly, the instinct of the administration has been to fight the rising tuition problem (which is caused by subsidies) with yet more subsidies. In the last eight years, federal loan limits have dramatically increased, forgiveness programs have been broadened, and income-based repayment programs have been heavily marketed. All of these, of course, are forms of subsidy intended to help borrowers with the burden of student debt, but as this study shows they only intensify the problem.

On a related note, federal student lending is almost entirely a non-credit underwritten program. These are all NINJA (no income no job) loans, with the exception of the very small PLUS program which does a bit of underwriting, so no one should be surprised that they are heavily non-performing. The federal government is far and away the largest subprime lender at work today, with $1.2 trillion of this on its books and adding $120 billion each year paying off very slowly. The politicians cannot help themselves but to subsidize further, and they cannot afford to simply forgive existing loans (especially without having a plan for future borrowers).

Assuming a Clinton victory, my prediction would be that they turn, regrettably, to price caps at colleges. We have massively distorted the college marketplace and there are no easy answers.

40 BenK December 21, 2015 at 9:04 am

The headline rate is only a fraction of the rate at places that can make legacy admissions. For those who can afford legacy-style activity, the costs of college can include multi-generational customer loyalty, hiring other alumni into family businesses, and in many cases, charitable donations of varying amounts.

Politicians love the subsidies because they can make people seemingly dependent on a continue flow of money through the hands of the government… in education, transportation, housing, health care…

41 Brian Smith December 21, 2015 at 9:04 am

I am unclear why there is an implication that the raising of prices due to subsidy, cetirus paribus, is a problem. Prior to the subsidy, a particular amount of “education” was being produced. After the subsidy moves the demand curve, there is both an increased supply and an increased price. What am I missing? Indeed, the increase in tuition, and as referenced in other posts, the increase in salaries is a feature, not a bug. The increase in salaries is necessary to attract additional individuals into the field and resolve the perceived supply shortfall over time. Indeed, since training the individuals who supply the “education” is a long process, we would expect to see short-term spikes in salaries that would induce additional participants into that job category and thus lower the real price over time.

Furthermore, I am a bit confused by the statement that subsidy translated into students taking on more debt. The only way I can understand this is if the subsidy is structured as something to make debt more attractive to students. To be specific, what I am saying is that the state writing a check to a school to subsidize student enrollment should not induce a student to take on debt. Even if the entire amount the state pays is captured by the school, the student should be then presented with the same price as before the subsidy. Only the policy choice of offering the student loans-as-subsidy would have the effect of encouraging debt. However, this was a policy choice in the implementation of subsidies, not something that should be attributed to all subsidies.

42 static December 21, 2015 at 2:14 pm

Yeah, you are on the wrong track. The supply has not increased at particular schools, just the cost per unit. The cost is not in the form of larger salaries, but in schools ballooning ancillary costs. The subsidies are from government to students (and schools to students), not government to schools. The deal with debt is that only some students get subsidies, those that don’t get subsidies get higher debt.

43 Moreno Klaus December 21, 2015 at 9:10 am

Hmmmm….Why is this happening? : “Where, then, is all the taxpayers’ money going? Between 1993 and 2009, administrative positions increased at “ten times the rate of growth of tenured faculty positions.” A study of the California State University System finds that, while fulltime faculty members increased “from 11,614 to 12,019 between 1975 and 2008, the total number of administrators grew from 3,800 to 12,183—a 221 percent increase.” http://www.forbes.com/sites/tomlindsay/2015/05/11/the-future-of-an-illusion-the-higher-ed-funding-cuts-myth/2/

44 Jay December 21, 2015 at 12:50 pm

Need administrators to administrate “safe places”.

45 Justin Kelly December 21, 2015 at 9:18 am

> I wonder where else (& here) we could apply this insight?

Healthcare. Say it over and over, I spent enough time haggling in Asia to know the price I pay for things has nothing to do with what they cost to make and everything to do with how much the seller thinks I have in my pocket. The truth is we are no different.

If you walk into a hospital with a gold plated insurance policy, how much will that MRI cost? How many extra services and procedures will the hospital provide? As much as they think they can.

If you walk into a college admissions office and the evaluation shows you are eligible for full financial aid of say, 80,000, how much will your degree cost? $80,000.

My advice is if you ever need your car repaired, dress as poorly as possible when you go to the mechanic. I made the mistake of going to a Burke mechanic after work when I was dressed nicely, they wanted $2000 to change brake-pads. I had to to find a mechanic in a poor part of town and dress down to get a reasonable price.

46 David December 21, 2015 at 9:18 am

Let’s see if Noah Smith writes this up as a key empirical result that should dominate the public policy debate on this issue.

47 Ricardo December 21, 2015 at 9:42 am

This is not an empirical paper. It is a theory paper where the authors develop a model and use it to run counterfactual scenarios in order to attribute tuition increases to certain factors.

48 Nick December 21, 2015 at 9:20 am

And have we seen increased subsidies for students? As far as I was aware, subsidies were actually falling, which would tend to go against the trend of rising tuition prices if this result is true.

49 Slocum December 21, 2015 at 10:17 am

Loans combined with payment deferment, income-based repayment and then forgiveness of the remaining balance is the big new way of doing subsidies.

50 Justin Kelly December 21, 2015 at 11:45 am

Maybe payments from states are falling, but when have guaranteed federal loans fallen? That is a subsidy.

51 Nick December 21, 2015 at 2:15 pm

Perhaps I worded it badly. The paper suggests that *increasing* subsidies cause increasing tuition. If subsidies are falling *or* staying at the same level, that would mean subsidies don’t explain the trend of rising tuition we’ve seen.

52 The Original D December 21, 2015 at 5:43 pm

More students? Aren’t there even more millennials than baby boomers?

53 libert December 21, 2015 at 9:43 am

In basic theory, shouldn’t the increase in price be strictly less than the size of the subsidy (so long as the supply curve isn’t vertical)? If so, then the after-subsidy price must fall, making the demand side strictly better off.

54 Ricardo December 21, 2015 at 9:49 am

I think it would be more meaningful to separate the analysis between public, private non-profit and private for-profit colleges and universities. As was pointed out, public university tuition has been increasing but the simple explanation appears to be cuts rather than increases to subsidies.

55 Gochujang December 21, 2015 at 10:14 am

I first think of California public schools, and their funding is way down.

chart image from 2011 Cal Facts

They are way down, to 1970’s levels of spending per student, constant dollars. Of course student paid tuition has to rise!

Now whether the 1970-2000 subsidy increases were well considered, sustainable, and etc. .. that might have some relation to this study.

56 Bill December 21, 2015 at 10:18 am

Agreed. Other papers report a decline in public subsidy for public institutions, and, to the extent public institutions focus on research and desire to continue that at the cost of not increasing enrollment, students shift to more costly institutions. Furthermore, a sticker price is not actual price paid by students.

Colleges have become the outsourced R&D department for corporate America. Maybe we should look at how resources are allocated within public institutions.

57 Justin Kelly December 21, 2015 at 12:12 pm

This explanation depends on a fallacy that prices are decided based on the cost to provide them. That is prices are relatively fixed (how? why?) and a drop in one source of revenue requires an equal uptick in other sources, but raises in other sources can be followed by drops in others. Public institutions clearly are not providing services at cost, because they are all investing in expansion, nor do they have an incentive to because administrators are paid relative to the size of university revenues.

Public institutions, being non-profit may not be maximizing profit, but they certainly do maximize revenue. Why? Because the people making decisions, administrators are paid relative to the size of their institutions. There is plenty economic research to indicate that the larger the institution in terms of revenue, the larger CEOs are paid:

Hallock, K. (2011). The relationship between company size and CEO pay. Workspan: 10-11. https://author.ilr.cornell.edu/ICS/InsightsAndConvenings/upload/02-11-Research-for-the-real-world.pdf

Gabaix, X.; and Landier, A. (2008). Why has CEO Pay Increased So Much?
The Quarterly Journal of Economics 123 (1): 49-100. http://qje.oxfordjournals.org/content/123/1/49.abstract

There is a clear incentive for the decision makers of a university to grow the university, in turn growing their salary. In reality this is what we have seen, a huge growth in public institutions capacity, and huge growth in administrator pay (interestingly faculty pay has not gone up much, universities clearly have some monopsony power.)

If they were providing education at cost, how would they finance growth? Additionally why would they go against their incentive and not try to maximize tuition prices?

58 Ricardo December 21, 2015 at 3:04 pm

“This explanation depends on a fallacy that prices are decided based on the cost to provide them. That is prices are relatively fixed (how? why?) and a drop in one source of revenue requires an equal uptick in other sources, but raises in other sources can be followed by drops in others.”

I merely assumed that the state sets the price of tuition at public universities — which it does — and that this price is very likely to be inversely related to the amount of taxpayer subsidies it receives. The evidence for this proposition is lots of historical experience from around the world. My working class parents attended a 4-year public university in the 1960s for a pittance. I believe CUNY used to be completely free for New York City residents. Many countries around the world continue to charge little or nothing for public university tuition while some are starting to embrace the U.S. model more.

If you are recounting what you think are fundamental laws of public choice and organizational behavior, they don’t seem to explain the rest of the world or even the U.S. before the 1970s or 1980s very well. As for executive salaries, keep in mind that football coaches at many state universities earn more than the university president. University presidents usually do not stay in their positions for very long periods of time and many prominent ones have come from outside the administrative bureaucracy so it’s not clear your incentive-to-expand story works very well. The head of the behemoth that is the University of California system is a career lawyer and politician with no prior connection to UC administration.

59 Justin Kelly December 21, 2015 at 3:53 pm

I merely assumed that the state sets the price of tuition at public universities — which it does — and that this price is very likely to be inversely related to the amount of taxpayer subsidies it receives.

The board of each university sets tuition prices, see press releases from UVA and VCU as follows: https://news.virginia.edu/content/university-virginia-board-set-tuition-2014-15 https://news.vcu.edu/article/VCU_Board_of_Visitors_sets_20152016_tuition_and_fees

Also if you do a search you will see that the “board of visitors” is mainly successful business people and public servants from various levels of government, not necessarily state. Most likely they are aproving the hikes that the university president recomends. (I can post more links, but if I post too many I may be caught by the spam filter)

> The evidence for this proposition is lots of historical experience from around the world. My working class parents attended a 4-year public university in the 1960s for a pittance. I believe CUNY used to be completely free for New York City residents. Many countries around the world continue to charge little or nothing for public university tuition while some are starting to embrace the U.S. model more.

Forgive me, but this sounds anecdotal. I’m fairly well traveled myself, I can point to alternate examples, but I am not sure I need to. I don’t how it contradicts anything I said or proves any point you are making.

> If you are recounting what you think are fundamental laws of public choice and organizational behavior, they don’t seem to explain the rest of the world or even the U.S. before the 1970s or 1980s very well.

I’m not sure they need too. Before 1978 and the middle income student reinvestment act, the only people who could get student aid were legitimately poor students. Afterwards all middle class students could apply, and since then the vast majority of students were going to school on financial aid. Since then the growth in tuition has outpaced inflation.

> As for executive salaries, keep in mind that football coaches at many state universities earn more than the university president.

As one would expect. Performance in college sports is key to university name recognition, a key to attracting applicants, a key to growth, and a key to revenue. They should be paid more. This all goes to show that tuition is not set at the cost required to provide education, there is plenty left over, but instead of being distributed as dividends to shareholders it is reinvested into growth.

> University presidents usually do not stay in their positions for very long periods of time and many prominent ones have come from outside the administrative bureaucracy so it’s not clear your incentive-to-expand story works very well.

I just received a university wide email that the GMU Presidents 5-year contract was renewed… that sounds long enough. And what does thier origin have to do with anything? Incentives matter the same whereever you come from.

60 Ricardo December 21, 2015 at 4:48 pm

Ricardo, this is the other Ricardo.

I propose that we agree to change our monikers as follows. You can be Ricardo Uno, and I will be Ricardo One. (Or vice versa, if you wish.) What do you think?

61 rayward December 21, 2015 at 10:06 am

I believe it was Professor Mankiw who pointed out that there is no one tuition charged by a particular college but many different tuitions (almost as many as there are students), with financial aid and various scholarships. Hence, I would think it almost impossible to determine if subsidies actually increase tuition. Indeed, the better question (than the question whether subsidies increase tuition) is who pays the official tuition rate, and why? I’m reminded of the price charged by airlines for a particular flight: there are almost as many prices as there are passengers, with last minute travelers (i.e., business travelers) paying full price and subsidizing grandma on her flight to see the grandchildren. Who subsidizes who in college tuition?

62 Quantitative Sneezing December 21, 2015 at 4:21 pm

In the land grant public university, the full tuition-payer is the foreign national student.
We need to admit as many as possible to subsidize the in-state kids (who may even remain in-state after leaving with or without a degree), which leads to an existential crisis for the land grant public university…no one knows if we’re supposed to exist to educate the children of our state or just create an expensive day-care for 20-somethings connected to research labs to hopefully create new jobs for the state economy and increase the tax base. The former doesn’t work because we can’t charge the in-state kids enough to cover our ballooning costs, so I think we tend toward the latter while telling ourselves it’s really the former. Also, go football team!

63 Bill December 21, 2015 at 10:08 am

The demand increase in the paper does not control for the increase of foreign students attending colleges in the US.

64 Picador December 21, 2015 at 10:52 am

As a leftist, this is the single issue (along with its cousin, health care subsidies) where I feel the greatest alienation from the nominal left in the US. You can have a socialized system of [education / health care] like they have in most civilized countries; or you can have a free-market private system of [education / health care], which has its own strengths and weaknesses; but when you combine the two of them in a compromise that attempts to paper over the weaknesses of the free-market system (e.g. entrenchment of social inequality) you have to be VERY careful about how you structure your subsidies to avoid getting the worst of both worlds.

Education and health care subsidies in the US have, ahem, not been carefully structured to avoid this scenario. The results have been disastrous for everyone other than the providers of those services.

And yet you commonly hear self-described leftists talking about the need for further subsidies in these areas, as though that does anything other than line the pockets of the same people who have been sticking it to the proles under the current system. So, so dumb. Even intelligent people talk this way. It’s maddening.

65 C December 21, 2015 at 3:25 pm

I’m not a leftist but you’re exactly right. The way I’d put it is that changes to the system – be it the ACA or whatever Higher Ed reform is being enacted – tend to make the system more like itself no matter what the people making the changes say. I suppose it’s path dependence. In any case I don’t think any reform that tries to change the nature of the system – or even “put us on the road” to some sort of fundamental change will work. A good fix would make the current setup work against it’s own interests … What that would be however escapes me – beyond my own prejudices for a more free market orientated system but again – I’m not a leftist.

66 R Richard Schweitzer December 21, 2015 at 4:10 pm

Perhaps there needs be some qualifications based on the “nature” of demand which affects an inelastic or sticky supply.

The *nature* of demand from subsidies seems to have changed the *quality* of the supply (the shifts in instructional and “administrative” involvements) without a commensurate change the volume of demand.

67 Jon December 21, 2015 at 4:56 pm

Alex asks: “I wonder where else (& here) we could apply this insight? ”

Answer: As long as one does not know the magnitude of the effects, these results are useless.

The fact that subsidies increase prices is not useful if we don’t know how much; and even the brief part that Alex cites suggests the article is not sufficient to determine the “how much”. Even worse the article indicates that the model does not fit well–generates a 106% increase in tuition vs 78% actual.

68 Douglas Levene December 21, 2015 at 5:57 pm

What’s curious is that Greg Mankiw in his recent NYT column on rising college costs completely omits any contributing factor of rising demand fueled by subsidies and cheap loans.

69 Robb L December 21, 2015 at 9:43 pm

Why not make public colleges tuition free, as they used to be in California and Washington. That worked out pretty well as far as I can see. Giant tech sectors in the Bay Area and Seattle.

Plus we can just end this debate and go back to debating whether we should subsidize cars.

70 Larry December 22, 2015 at 12:23 am

Where is this in Mankiw’s deep think piece of last week. Not to mention the overall administration-bloat that answers the question: “where’s the money going?”

71 Ralph Gizzip December 22, 2015 at 6:48 am

I think this article falls under the category of “No shit, Sherlock.”
Make more money available and the price goes up. It’s nothing more than price inflation applied to a specific market segment.

72 Joe December 22, 2015 at 9:58 am

Did anyone read the report? I just finished it and couldn’t help but struggle to understand how they could effectively integrate a large for profit with a large state school. Of course, they knew this too and said so in the final sentence. I would wager that if they only modeled the 50 largest state schools the results would be completely different.

73 Tom G December 22, 2015 at 12:16 pm

What is needed is more college graduates, with lower debt.

Colleges that graduate students who then get jobs paying > $median taxpayer (~$50k) should get student subsidies directly.

The “market” works by supporting the “most successful”, usually the hard-working plus smart-working. Most gov’t programs try to increase the results of those who either don’t work as smartly, or as hard, or both. The “less lucky” … but once in college, it’s accurate to say “less deserving”.

74 jorod December 22, 2015 at 6:40 pm

Every time government allocates more money to education teacher unions vote themselves a raise.

75 Ed December 22, 2015 at 7:09 pm

Any student that scores below one standard deviation below the mean scores for SAT or ACT during a given year would be ineligible for student loans or grants from the Federal government. Time to end the farce.

Comments on this entry are closed.

Previous post:

Next post: