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February 5, 2013

Why Liberals Should Want Less Spending on Colleges

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By Richard Vedder

Let us look at the typical liberal/progressive American who supported President Obama in 2012, who enthusiastically favors raising taxes on the affluent, and who supports most federal programs designed to help economically disadvantaged Americans. My guess is this individual also probably supports vastly expanding federal financial aid to college students, favors increased state appropriations for universities, and likes giving tax advantages to them as well. He or she fervently believes that higher education is a means to achieving the cherished goal of a far more egalitarian society, with smaller gaps between the haves and the have-nots.

I would argue, however, that liberals for whom income equality is a paramount goal are making a big mistake by supporting the policies outlined above. Rather, they should support:

  • Ending or drastically reducing federal student financial assistance programs;
  • Ending favored federal tax status of universities;
  • Taxing, not subsidizing, universities, such as by making wealthy colleges pay capital gains taxes on investments and on endowment income, and  by restricting tax deductibility for gifts to colleges;
  • Promoting more affordable non-degree ways of certifying employment competency, such as national examinations such as a new College Equivalence Examination that mirrors the GRE used at the high school level.

Why do I suggest this? Because I increasingly believe that public support of American higher education on balance has increased income inequality in the United States. In the interest of full disclosure, I personally do not believe that inequality is one of this nation's top problems, and even believe that a healthy amount of it is necessary for a vibrant, growing economy. But I respect those who think differently.

Let me present a few facts that I think buttress my non-orthodox views on this topic:

  • Income inequality as conventionally measured by the Census Bureau has risen sharply in tandem with the growth in the percent of the American adult population with bachelor's degrees from 11 percent in 1970 to 30 percent today;
  • A huge proportion of recent college graduates have both substantial loan debts and lousy jobs, and they disproportionately almost certainly come from lower -income backgrounds;
  • Colleges that have predominately lower-income students have drop-out rates dramatically higher than those catering to students from more affluent backgrounds;
  • The gap in prestige between relatively costly private and less costly state universities has widened in recent decades; in 1988, eight of the top 25 US News national universities were public schools, while now only three are;
  • In 1970, 12 percent of recent college graduates came from the bottom quartile of the income distribution; 40 years later, the percentage was 7.3 percent;
  • The wealthiest one percent of schools participating in the 2012 NACUBO/Commonfund endowment study had 31 percent of the endowment wealth of the more than 800 U.S. participating U.S. universities; the top 5 percent had over 60 percent of the endowment wealth; university wealth is at least as concentrated as household wealth;
  • Applications are rising rapidly at the extremely elite, costly, and mostly higher income student top private schools, reflecting a correct perception that graduates of those schools do much better after graduation than those attending less selective and costly schools;
  • Top public universities ostensibly designed to provide access for lower-income students are increasingly emulating top private schools; a smaller proportion of Pell Grant recipients attended the University of Virginia, for example, in 2011 than attended Yale, Stanford or Duke universities, suggesting it is increasingly a "rich person's school;"
  • Counting federal research grants and the dollar value of tax advantages given, the rich private universities receive vastly more federal, state and local governmental support per cent than the so-called "state" schools.

This list, believe it or not, is not exhaustive. Much of the evidence is admittedly circumstantial and subject to criticism. For example, while inequality and college participation have grown in tandem, it is entirely possible that the rise in inequality occurred despite more higher education, not because of it. Nonetheless, some of the evidence, such as the decline in the proportion of recent graduates coming from low-income households, is pretty direct, compelling, and hard to refute.

Why is promoting higher education no longer a way of promoting the American Dream, greater intergenerational income mobility, and the like? I think two laws are at work: The Law of Diminishing Returns and the related Law of Unintended Consequences. The law of diminishing returns is one of the few "laws" of human behavior on which virtually all economists agree. If you add more of some input, you eventually get output increasing by diminishing amounts. In this context, a little higher education supports economic growth, income equality, good jobs for graduates, etc., etc., but too much higher education means the growth of these good things becomes smaller, or even absolutely declines.

The Law of Unintended Consequences arises from policy excesses. We intend college to support income equality by helping deserving and bright poor students move ahead, but when grants and subsidized loans are extended to less bright, less disciplined, less prepared students who are poor, the result often is academic and vocational failure as well as financial burden. Hence the federal loan default rate is north of 12 percent, and colleges are guilty of promoting this hardship by luring unqualified students with the promise of federal financial aid. And the colleges suffer absolutely no negative consequences for their selfish duplicity and fraudulent behavior. No effort is made to cut funds off to schools with four-year graduation rates in the single digits.

Aristotle talked about the "golden mean." But we are engaging in an educational bacchanal -an expensive orgy of college spending that, like most orgies, provides some gratification to participants at first, but which in the long run leads to decay, sadness, and spiritual as well as financial poverty.

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Richard Vedder directs the Center for College Affordability and Productivity, teaches economics at Ohio University, and is an adjunct scholar at the American Enterprise Institute.


Editor's note: A mistake, now corrected, appeared in this essay earlier today: the fourth bulleted point should have referred to the top 25 national universities in the US News rankings, not the top 50.




Comments (3)

Neo:

A rising tide only raises those boats that don't have holes

Jonathan Marks:

I am puzzled by this assertion: "in 1988, eight of the top 50 US News national universities were public schools, while now only three are." According to U.S. News, the following places are in the top 50: UMich-Ann Arbor, UVirginia, UCLA, UCBerkeley, UNC Chapel Hill, UC Davis, UC Santa Barbara,UWMadison, UCIrvine, PennState University Park, U of Illinois Urbana-Champaign, UTexas Austin, UC-SanDiego." I count 13.

CJ:

@the author: I believe you mean GED rather than GRE as the high school equivalence exam.

@Jonathan Marks: If he had said "of the top 10" he would have been correct.

The push to give everyone a college education is a demonstration of Reynolds' Law, I think, mistaking the signifier of success for its cause.

In his SF novel "Friday" Robert Heinlein mentions in passing that, in the future, the people of California were alarmed to find college graduates made more money than those without a college degree. Their solution was to automatically award a college degree to every citizen over 21. Its absurdity made me laugh at the time; now I only chuckle and shake my head.

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