The peculiar case of higher education

Via a request from Ezra for topic coverage, here are some very good remarks from Ryan Avent.  Excerpt:

A sector dominated by the state—state-run in some cases, merely subsidised and regulated in others—is, I think most Americans would agree, both a major contributor to American prosperity and one of America’s most competitive industries on foreign markets, despite its glaring inefficiencies. What ought we to conclude based on this example?

Certainly, one could reasonably argue that the sector would be even better if state control were relaxed, monopolies broken up, subsidies curtailed, and market controls (like those on immigration) eliminated. But one also has to wrestle with how different the American economy would look if the state had never muscled public universities (including a broad network of technology-driven, extension-oriented schools) into existence.

This stuff is harder than we often pretend.

A few observations:

1. Postwar higher education has proven one of America’s most effective subsidies, and it has paid for itself many times over.  It is also one of the more significant successes of federalism.

2. We are fortunate that U.S. state universities are more or less autonomous, compared to the Continental model where professors and administrators are treated as part of the state civil service bureaucracy.  The latter system does not work well, and those countries have struggled to move closer to American models.

3. To refer back to a distinction from the David Brooks column, we should not be trying to squeeze the entire economy into the shoebox of the dynamic but risky “Economy I.”  For public choice reasons, as well understood by Karl Polanyi (an underrated public choice theorist if there ever was one), the polity requires some respite from Economy I, whether we like that or not.  Read also this analysis by Interfluidity, which is one of my favorite blog posts of all time.  Furthermore the more “sluggish” Economy II, by operating under different principles, often serves as a useful R&D lab for Economy I.  Think MIT and Stanford, or note that Adam Smith ended up as a customs commissioner, as his father had been.  Goethe and Bach worked for governments for much of their lives.  It’s about balance and synergy, though it is perfectly fair to see contemporary Western Europe, especially in the periphery, as a region which has far too much Economy II and too little Economy I.

4. Maintaining the truth of #1 will prove a significant challenge going forward.  It’s not about blaming the critics or defunders of state universities, or the critics of public subsidies to private universities.  The real problems are a few.  First, successful state programs tend to stultify and decline over time, and if nothing else the danger is that health care costs will eat up state budgets.  Second, the absolute returns to higher education (as opposed to the wage for not going) are not currently high enough to maintain the current fiscal structure of those institutions, furthermore those fiscal structures do not have so much “give,” due to tenure and various self-imposed cost inflexibilities.  Third, although most state universities have relatively little explicit debt, they are implicitly massively leveraged through reliance on ongoing tuition boosts, ongoing enrollment boosts, and timely retirements, none of which can be counted on in the future.

It will prove a daunting path forward.

Addendum: David Henderson comments.


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