Wednesday, February 9, 2011

Thomas Sowell Explains Rising Tuition Costs

There's just one problem with his analysis. While it kind of sounds plausible as he spins it out of his head, it's completely divorced from reality and therefore completely wrong.

Sowell explains things in three installments. In the first he explains that since there is so much public subsidy the students are blind to the costs. If they bore the full brunt of the cost this would make things much better.

In the second installment he talks about how lots of students are slackers. This is further proof that what is needed is reduced public subsidy. Why should poor taxpayers have to pay for these people to party? Make them pay their own way. Maybe let them know if they want to go we could garnish their future wages. That will flush out those slackers, leaving only the ruling elite.

In the third we learn why college is so expensive. Since the government is so willing to throw so much public subsidy at colleges they have no incentive to reduce costs. So they just charge through the roof. A nameless college president he knows told him this. Professors teach fewer hours, spending more time doing research. Also they're spending money in lavish ways (bowling alley's, posh lounges, Wi-Fi, fancy dorms).

Well, that all sounds really plausible. The problem is public subsidy. If only we could have managed to reduce it we wouldn't be dealing with all these tough problems that seem to have emerged over the last 30 years.

The University of Michigan has a series of slides explaining their budget that you can view here. But let's take a look at one.

So guess what, Thomas. The very prescription you suggest is exactly what has been implemented over the last 30-40 years. Public subsidy has continuously declined just as you want. If you have a problem with what you are seeing in secondary education today and if you are suggesting things are getting worse, why would you suggest that we implement the very policies that have failed you so miserably?

Sowell in his third installment laments that professors today teach less so as to do research that brings in money. That is money from private sources. Isn't that exactly what we would expect to happen in a world where public subsidy is declining? These schools have no choice but to divert their energy away from training students and do the things the private endowments demand. Once again the very outcomes Sowell laments are a direct consequence of the policies he is now advocating.

Some of my readers (Darf and HP) may think the decline in public subsidy is a good thing. Maybe they'd rather live in a world where their out of pocket expenses will be 3-4 times higher for their children than they were for themselves. Maybe they are happy with the skyrocketing school loan debt. Fine. But what makes no sense at all is to complain about the present system and then prescribe the very policies that have created the present system.

If you are wealthy enough that you can sock away $250/mo from the time you have a newborn and then for the next 18 years I suppose it's not a big deal. If not your child will either not have a degree, in which case his job prospects are grim, or he'll graduate with a mountain of debt, and he'll be a slave to that for the next 30 years. If that's what you want in college education you should be happy with the reduction in public subsidy. Sowell should be happy about the present state of secondary education in the US. Strange that he is objecting.

23 comments:

Darf Ferrara said...

If education was anything other than an expensive signaling mechanism then everyone could have a world class education by watching MIT OCW and Berkeley courses. The fact that it is just an expensive signaling mechanism indicates that we shouldn't be subsidizing it.

Your post does three things

1) Mischaracterize what Sowell said. He didn't call students lazy slackers. He called some "Those who are not serious". Given the dropout rates in colleges this is accurate. I have known some students who weren't serious, and you probably did to.

2) Then misunderstood him.

"The president of a small college once told me that, if he charged tuition that was affordable, even an institution the size of his would lose millions of dollars of government money every year." How does this translate into "Since the government is so willing to throw so much public subsidy at colleges they have no incentive to reduce costs. So they just charge through the roof."

3) Then misuse data

That graph show data for a single school in a depressed state. The graph shows that the percentage of *State* support has dropped. It seems that the feds are picking up the slack, perhaps? And it doesn't say that state support has dropped in absolute value. I doubt that it has in general, and it certainly hasn't for UM over the last 40 years.

I'm having a hard time seeing much in Sowells articles to disagree with. His last column was a little thin on details, but it wasn't obviously wrong anywhere. You object to his creative ways to fund colleges, but your solution seems to be to use the same methods that have brought us to the point where college is too expensive for everyone. He even suggests means testing so that "the privileged elite" can't benefit at the expense of all taxpayers. What is wrong with that?

Can you point to an economic assumption that you object to? I'll give you some choices.

1. In many cases, the average taxpayer has lower income than the people on whom the government lavishes its financial favors.

2. Costs tell us something that is dangerous to ignore (costs carry information).

3. The real cost of anything consists of all the other things that could have been produced with those same resources.

4. Prices force people to economize. Subsidizing prices enables people to take more resources away from other uses without having to weigh the real cost.

5. When you pay the full cost -- that is, the full value of the resources in alternative uses -- you tend to economize. When you pay less than that, you tend to waste.

If you aren't willing to look at costs and benefits then you might as well legislate that everyone gets a unicorn and rainbow.

Jon said...

I don't think I've mischaracterized or misunderstood Sowell. It's a tongue in cheek but accurate description. If you don't like it, that's fine, but I don't think your clarifications alter the substance of the dispute here.

I use Michigan because the slides are better. I found the same results for other schools, including Michigan State and Oregon.

You ask if the feds are picking up the slack. Here's an idea. If you think the explanation is in an increase in federal funding why not look it up instead of offering plausible sounding theories with no basis in fact? As far as I can see federal funding is provided to schools, but it's not designated for student instruction. It's more for research or for a specific building, like a hospital.

Michigan lists their income sources. Click the link to the slides I provided. The General Fund monies come from tuition and fees, state support, and the smallest amount is what they call "Indirect Cost of Sponsored Research". That's 13% of the revenue for the General Fund, which is what is relevant to student instruction. It's not clear what that is entirely but it's obviously not large enough to overcome the drop in state funding even if it were largely federal.

Yeah, I wouldn't expect you to disagree with Sowell in terms of his criticisms. That's why I expect you to be happy with the present state of affairs. They've been following what you would suggest. I think the result is terrible. I presume you are happy with it.

My method is to use the same methods that have led to the present cost problems? Uhm...no. That's your method. The reduction in state subsidy is your prescribed method and Sowell's prescribed method, not mine. I thought I made that clear.

I don't object to any of your 5 assumptions. My point is in a system where the costs are more transparent with the reduction in public subsidy education becomes more and more of a financial burden and it's less accessible for the bottom 90% of the population generally speaking. Tuition should be expected to skyrocket. Slavish service to enormous student loans should be expected to increase. Teachers should be expected to spend less and less time with students to fulfill corporate requests for research. And the gap between rich and poor should be expected to increase. Do you disagree with any of those assumptions?

Because in my view what we gain in your system and Sowell's system is a greater awareness between buyer and seller. What you lose is the positive externalities. The whole country benefits when the citizenry is better educated. So the net effect of the pre 70's system despite the opaqueness of price information was a citizenry not saddled with debt and better able to educate itself.

You can disagree and I understand that mine is an assertion that needs to be more thoroughly demonstrated. The main thrust of my point here is that the last 30-40 years reflects an implementation of the policies you and Sowell would suggest. Are you happy about the results? Sowell seems to imply he is not. Then shouldn't he suggest a reversal of the policies that were implemented?

HispanicPundit said...

I'm curious Jon - are you arguing that public subsidies would make Universities cheaper?

If so, how do you explain the real-estate boom, we just experienced? Was that not because of government and regulatory subsidies (ie, cheap loans)?

I'm just trying to understand your reasoning.

Jon said...

No, that's not my claim.

My claim is that we've been following Sowell's prescriptions for the last few decades. The biggest complaints about college is the rising tuition and fees which have increased well ahead of inflation. Sowell also complains about the costs. He fails to mention that the prescriptions he's offered have been followed and are the cause of the cost increases.

Darf Ferrara said...

So you've looked at three schools, two in the same depressed state. This data does *not* show what you claim that it shows (that absolute funding by the state has decreased). And you completely ignored grants, scholarships, and federally backed loans that subsidize student costs. The research money that comes from "private sources" actually come primarily from the government in the form of NSF grants and others . From this you deduce that Sowell is deluded in believing in basic economics.

Like I said, if you want people educated let them watch MIT OCW, Berkeley, TED talks, and a million other things on the web. If you want to have people go through the motions to get a piece of paper, give everybody a billion dollar voucher to go to college.

Jon said...

There are two ways to respond to what I've said.

1-You've completely ignored grants!! Let me take your position to absurd and nonsensical extremes. I suppose you want to just give everyone a billion dollars!! The proof of my claims is somewhere on the internet. RAAHHH!!

2-When you consider publicly funded grants and scholarships for tuition you find that public subsidies are in fact up. Here are some sources to show this.

Every single state I looked at showed the same thing. Not just the two additional ones. I don't recall every one I saw. Every article I found in a variety of searches indicated the same thing. This doesn't mean I'm correct. I could be wrong. I seek constructive, non hostile criticism and would be grateful to learn I'm wrong.

To be constructive you also have have to read with an effort to understand. My point is related to the rising costs of out of pocket expenses to students. This means that public subsidy as it relates to these matters is down and tuition and fees are correspondingly up. There may be public subsidy for R&D. In fact that may be up. But those monies do not relieve the tuition burden because those monies can't be used for student instruction. They are designated for a specific purpose. Now, if that's not clear in what I wrote, write in a non-combative way. Say something like this.

"Total public expenditures towards universties are in fact up. Here is a source showing this." I could then look at the source and if what I've wrote before didn't clearly explain that I was referring to costs associated with tuition and schooling I could do it at that time.

And I did not completely ignore financial aid because my U of M source addresses it. Not to a thorough degree, but it's a springboard to understand what public subsidy in the form of grants might amount to. If you'd like to participate in the discussion and do something constructive why don't you look into that and see where it leads. Come back and inform me. I would be grateful. Pointing vaguely to a theoretical million places on the internet simply is not helpful.

Darf Ferrara said...

You made this very strong claim

"it's completely divorced from reality and therefore completely wrong."

Then you took one data point, misread it, ignored everything that contradicts what you already think, and claimed victory. I could spend a bunch of time finding data and articles that you won't read because it doesn't conform to your preconceptions, but I will content myself with pointing out that your analysis is lacking and leave it at that.

Jon said...

I looked at 1 data point? I thought I just said the opposite. I misread the data point thinking that the slide that says "Declining State Support Drives Up Tuition" meant that tuition rises are due to declining state support. What would a proper reading of this be? I don't look at contrary views? I thought this blog post was a response to a series of articles expressing a view contrary to my own.

Your method is to attribute actions and claims to me that are precisely the opposite of the truth, then act like an ass hole with condescension based on these false allegations. You don't bring anything useful to these discussions so stop posting here.

Darf Ferrara said...

You seem to get offended by people disagreeing with you, and pointing out where you're wrong. Well let me ask for one more clarification: What exactly did Sowell say that was wrong? Quoting a sentence or paragraph that he actually said would help. I don't think he said what you think he said.

Jon said...

I disagree with people every day without offense. The difference here is you constantly misrepresent both me and the facts. Act rudely based on the misrepresentation. Ask questions of me which I answer but refuse to answer my questions. I don't think most reasonable people are interested in participating in a discussion like that.

Darf Ferrara said...

You're thin skinned and pugnacious. That's a great combo.

Once again, you made this claim "it's completely divorced from reality and therefore completely wrong." It seems like you might like to point out where he is wrong. Like pointing at a sentence that he writes and saying "this is factually incorrect". I don't see anything that he actually wrote that you are refuting.

You seem to be claiming that somehow your data analysis shows that something Sowell said was wrong. Does Sowell ever make the claim that reducing the subsidies to education will decrease the costs over time? He does not. The reason is that it isn't necessarily true. For example, if the government were to subsidize the cost of postage for letters starting in 1990, should we expect the price of postage to go up? Well, the Internet took off in the '90s allowing for a cheaper communications. If email reduces the demand for written letters then it's possible that the price could come down, even with a subsidy. What might be legitimately claimed is that the price would be lower without the subsidy than with it. In most of these types of analysis, the operative phrase is caeteris paribus, or all else being equal. If this phrase isn't used, it is usually implied. This type of analysis doesn't depend on data analysis, it is an a priori result of supply and demand. (This isn't quite true, since we could be talking about a Giffen good, although many doubt that Giffen goods exist). Demand for education may legitimately higher than it was 40 years ago, in which case, subsidies or no, the cost would be up. But we can know a priori is that subsidies make it costlier.

Is there a question that you asked that you actually want me to answer? Most of them seemed like rhetorical questions, or else research questions that don't correspond to what Sowell actually said.

HispanicPundit said...

Okay - that makes more sense.

Then can I assume that you agree that subsidies increase costs...ie, government subsidizing University costs is likely to lead to higher tuition costs (just as easier/cheaper mortgage loans leads to higher real estate costs)...right?

You agree that more subsidies = higher tuition costs??

Jon said...

Well there's two separate costs that should be considered. One is the overall cost of education. It would be interesting to see if the overall cost is increasing. I don't know about that. And that's not what people typically complain about when they complain about the rising cost of an education.

Naturally what people are concerned about is the rising out of pocket cost, and that is the cost of tuition. That's been increasing rapidly and of course creates the surge in student loan debt and other problems. Rising public subsidy would naturally decrease that, right? I mean, we could just say that public subsidy will rise to where it covers 100% of the education. Tuition drops to zero. Maybe you mean the total cost of an education when you say tuition. Does that go up with subsudy? Is that what you are asking?

You'd think it would. I imagine K-12 costs go up pretty fast. Though that's another case where it would be useful to look at the data. How fast is the cost of K-12 education rising?

I'm not at home and can't spend too much time here but I'll try to look into this when I get a chance.

HispanicPundit said...

I've blogged a bit about this in the past. See here for the argument against government subsidies. See here for my preferred solution (it's alot like vouchers).

Regarding state government University subsidies in general, I've always liked Milton Friedman's characterization of it. He said that (paraphrasing here) 'Universities tax the citizens of Watts (one of the poorest areas in California) to pay for the education of the citizens of Beverly Hills (one of the richest areas in California)'. It makes sense if you think about it.

Many, many, people are just not made for college life. Either because they lack the desire, discipline, or plain ol IQ, they will never attend, much less graduate, no matter what anybody does to encourage them. Yet it is their tax dollars that are being used to primarily benefit the class of people that do attend college in high percentages: the upper and upper middle class. So the subsidies take from the primarily poor and give to the primarily rich. Thereby increasing income inequality and becoming one of the biggest forms of a regressive tax structure around.

That is not to deny that a University education is a desirable and noble goal. It's how to fund that without exasperating the regressive nature of government subsides that is the topic. And that is why my preferred solution: income targeted vouchers directed at the potential student (as opposed to the University), has my vote.

Jon said...

My point here, HP, is not just to have a general discussion about your own preferences but to hammer home the point that the policies of the last few decades reflect a shift towards your preferences. So for instance have a look at the University of Oregon. Same trend.

Darf asks if this is unique to Michigan. It is not. The trend is across the board and it's been through both recessions and growth periods. Here's a quote:

State tax appropriations in FY 2009 per full‐time equivalent student at public colleges and universities were 12% lower in constant dollars than 10 years ago. The decrease is not a one‐shot reaction to current recession, rather the share of public college and university budgets provided by the states dropped from a peak of about 50% in FY 1979 to about 36% in FY 2000.

Here's another source which indicating the same thing. Here's a quote:

The main reason tuition has been rising faster than college costs is that colleges had to make up for reductions in the per-student subsidy state taxpayers sent colleges. In 2006, the last year for which Wellman had data, state taxpayers sent $7,078 per student to the big public research universities. That's $1,270 less (after accounting for inflation) than they sent in 2002.

So what I find interesting is that conservatives like Sowell prescribe the very policies that have been in place for the last few decades. I think it would make sense for them rather to express happiness with the present state of affairs.

Darf asks me to quote Sowell showing why I believe he is saying that the cause of the tuition increases is the public subsidies themselves. Here are some citations from Sowell.

Why does college cost so much?

There are two basic reasons. The first is that people will pay what the colleges charge. The second is that there is little incentive for colleges to reduce the tuition they charge.

Those who want the government to provide subsidies to help meet the high cost of college seem not to consider whether government subsidies might have contributed to the high cost of college in the first place.

In any kind of economic transaction, it seldom makes sense to charge prices so high that very few people can afford to pay them. But, with the government ready to step in and help whenever tuition is "unaffordable," why not charge more than the traffic will bear and bring in Uncle Sam to make up the difference?

The president of a small college once told me that, if he charged tuition that was affordable, even an institution the size of his would lose millions of dollars of government money every year.


I think he's saying the subsidies are causing the cost increases. The fact is the subsidies are declining.

Darf Ferrara said...

According to this Michigan's total spending on tertiary education has more than doubled over the last 20 years. Most of the others that I looked at had substantial increases as well. The data might better be looked at by dividing by population, but I doubt that would change things for Michigan. You can argue that people are paying a higher percentage at some institutions, but State spending is definitely up.

Jon said...

It's showing less than 3% per year, so if that was the inflation rate the amount is dropping. With the added population (#'s enrolling in college are consistently rising) then amount per pupil would reduce once again. Looks like it's down.

Darf Ferrara said...

According to this inflation was around 56% for the period from '92 to '10, where the education spending increased by 127%. The population from 1990 to 2010 increased by 7%. This gives an increase per Michigan citizen of about 32%.

Jon said...

Do you disagree with what appears to be the unanimous reporting that per pupil public subsidy is down as corrected for inflation?

Keep in mind that the # of students being admitted to schools would affect things. It could go up higher than the general population rise. I'm inclined to accept the unanimous reporting from schools and media in light of the fact that we can't correct for these factors based on your sources.

Darf Ferrara said...

According to this total student enrollment nationally has increased by about 30% over the last 20 years(depending on which set of numbers you use). Since I've shown that per person spending (in Michigan at least) is greater than 30%, it appears that overall spending is up per student.

This doesn't mean that there isn't a way to parse the numbers that won't give a decrease in per pupil spending, but over the last twenty year it has almost certainly gone up.

john said...

Jon,
Your points are very interesting. However, I do not get the claim that "subsidy is declining." I suppose you a referring to federally allocated subsidy for public universities, which had been in decline for quite some time. However, federal aid per student has increased to about 58% of all enrolled students (enrolled in public universities); it should be noted that this number has increased from less than 16% in 1980 accruing to TCB estimates (you can take a look at a similar claim here: http://record.williams.edu/wp/?p=17581).

State-based subsidy has also increased over the last 10 years at a pace of about 8% per year avg (adj. For inflation, obviously).

However, let us assume that subsidy is actually declining overall. Could Sowell be right, still? Yes and no. He could very well be correct if we look at what previous subsidy has done to cultural ideals and labor markets. It could have facilitated continuously-driven consumption in the general market, which obviously shifts the demand curve out and so on and so on... (I mean, the Marxist take this position and it seems very plausible). The other side is credit avalibiltiy (Austrian side), credit has been subsidies by the federal government by Sally Mae for quite a time, this has opened up options of obtaining subsidized loans (which are given to about 55% of all students according to The N. College Foundation and Sally Mae). The accessibility of cheap credit pushes up prices as consumption augments. This point seems very very likely, in fact, given the housing bubble and now, a student loan repayment crises, it seems to at least be a serious factor that cannot be so quickly dismissed.

Even if subsidy is not the only factor, it surely has been a major one -if not the prime mover.

Rouger said...

This is an old post, but I find your big 'proof' of a graph that displays lower state subsidies and rising tuition very weak.

I have visited many universities in the past year. Looking at universities to attend. I am an older student that is attending college for its purpose.

Every university that I have visited, despite lowered subsidies, had a great time showing off their rock climbing wall or state of the art gym. When I walked around these campuses there is endless construction: new buildings, green windows, new recreational stuff, and the list goes on. Many of these projects have very little to do with the end result of a college degree. Who pays for this?



Jon said...

Rouger, as I recall I think this is explained in the UM slides. Monies are designated for certain purposes and the university is barred from using it to relieve tuition. So for instance they can get money from a donor that wants a building named after him. There can be money that comes in as a result of athletic events. This is totally separate from money that is used to cover tuition. The tuition money relies on funds from a certain fund, I think Michigan calls it the General Fund. Taxes source it as do student fees. The tax support has fallen, so tuition must rise.

A football ticket doesn't pay a professor's salary. Tuition and state subsidy do. If the state subsidy drops the tuition has to go up, even if you are seeing money spent at the university elsewhere.