Two Issues with Megan McArdle's Piece on Higher Education

Sep 13, 2012Mike Konczal

Megan McArdle has a new cover story at Newsweek, "Is College a Lousy Investment?"  Is the benefit worth it with rising costs? Several people have addressed the benefit part, particularly Dylan Matthew here and Reihan Salam here.

I have a piece about higher education that I'm really excited about coming out in the next few weeks with Aaron Bady for Dissent, so I don't want to spoil it. But for now, I think there are two important things to engage with in McArdle's piece. The costs part is important, because this will likely be the center-right argument going forward, and I think it has problems in an important way. McArdle:

Vedder adds, “I look at the data, and I see college costs rising faster than inflation up to the mid-1980s by 1 percent a year. Now I see them rising 3 to 4 percent a year over inflation. What has happened? The federal government has started dropping money out of airplanes.” Aid has increased, subsidized loans have become available, and “the universities have gotten the money.” Economist Bryan Caplan, who is writing a book about education, agrees: “It’s a giant waste of resources that will continue as long as the subsidies continue.” [...]

In a normal market, prices would be constrained by the disposable income available to pay them. But we’ve bypassed those constraints by making subsidized student loans widely available. No, not only making them available: telling college students that those loans are “good debt” that will enable them to make much more money later.

This is based on something called the Bennett Hypothesis. In the 1980s Education Secretary William Bennett argued that increases in student aid largely just allowed colleges to raise their tuition, capturing all that money. If true, this would be the lowest hanging policy fruit imaginable: save money by not providing aid and lower tuition in the process.

Sadly, there's no evidence for this argument. And I mean "no evidence" not like "there's significant debate" or "reasonable people disagree," but like this has been extensively studied and the general consensus is that it is not true. I spent some time going through this research and couldn't find anything conclusive, and requests from others writing on this haven't been helpful. This could likely be true as it relates to for-profit schools -- there's a study somewhere that indicates this -- which shouldn't suprise us, as for-profits exist to suck up federal subsidies by business design. But it doesn't appear to be true for the vast majority of higher education, and to whatever extent it could be true it isn't a major driver.

 Here's a big post by David L. Warren, president of the National Association of Independent Colleges and Universities, listing all the institutions that have investigated this. Among other studies and experts quoted, here's:

“Regarding the relation between financial aid and tuition, the regression models found no associations between most of the aid packaging variables (federal grants, state grants, and loans) and changes in tuition in either the public or private not-for-profit sectors.”
 
– U.S. Department of Education National Center for Education Statistics, Dec. 2001, Study of College Costs and Prices 1988-89 to 1997-98, Vol. 1
 
“The Commission finds no evidence to suggest any relationship between the availability of Federal grants and the costs or prices in these institutions,” and “has found no conclusive evidence that loans have contributed to rising costs and prices.”
 
– National Comission on the Cost of Higher Education, February 1998, Straight Talk about College Costs & Prices
 
“After the change to the Stafford loan limits beginning in AY 2007-08, the price [of college] … increased at a rate generally consistent with prior years. [...] Overall, [previously conducted] analyses are descriptive and do not necessarily indicate a linkage between increases in the loan limits and changes in tuition or borrowing.”
 
– Government Accountability Office, May 2011, Federal Student Loans: Patterns in Tuition, Enrollment, and Federal Stafford Loan Borrowing Up to the 2007-08 Loan Limit Increase
This is important, because McArdle's argument allows her to make it seem like government action to provide for higher education is largely counterproductive. Rather than examining the decreasing support for higher education, the difficulty of finding "Baumol’s cost disease" in higher education, the growth of a "hybrid" design for our public education sector, the decrease in Pell grants relative to total college costs, the way that the for-profit industry is taking over for public institutions, or the issue of risk-shifting to the individuals and providing services out of fees instead of taxes - rather than it being a choice on how we provide the essential social good of higher education, and who benefits and who loses from those choices - McArdle can imply that if the government tried to make education more affordable it would backfire and just make the problem worse.
 
This becomes even more of a problem with the second issue, the likely transmission mechanism. Just because aid goes up doesn't mean that prices must go up - the increases in food stamps haven't caused an equivalent increase in food prices. In a follow-up post to her article, she alludes to the microeconomic issue at play: "Vedder’s theory is that, as he put it, universities are raising tuition 'because they can'."
 
In economics-speak, that means that the supply of higher education is inelastic relative to price. If that's the case, then the right course of action is for the government to provide more supply at a cheaper price; i.e., free higher education. JW Mason has argued that if supply is inelastic, "each dollar spent on grants to students reduces final tuition costs less than one for one, each dollar spent on subsidies to public institutions reduces tuition costs by more." Think of it as "the public option for higher education" argument, with the same motivations. This is not a new argument. in 1899, the president of Stanford argued that “if the State makes no provision for higher education there is no other agency on which we can depend to supply it.” That seems as relevant now, over 100 years later, as it did back then.
 

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