Are the Incentives of Colleges Aligned With Social Welfare? Becker

The over 4,000 American private and public colleges and universities compete fiercely for students, faculty, and grants, and constitute the most competitive system of higher education in the world that provides both high quality and low quality programs. American universities are a magnet for postgraduate, and increasingly also for undergraduate, students from other countries. These two facts suggest that American universities (like Posner I use the word university to stand also for colleges) are doing a very good job of catering to the interests of students the world over. More generally, American universities are pretty successful in producing higher education that contributes effectively to social welfare, given the public policies that impinge on their behavior.

American public, private non-profit, and increasingly for-profit institutions of higher education compete hard for students and faculty. As a result, they offer a variety of courses, programs, and qualities of colleges and universities that range from a bare minimum program at many public community colleges to elite education at universities like Harvard, Stanford, and Chicago. These programs cater to students of varying qualities and with different interests. Students vote with their feet by choosing some institutions and programs over others, and by traveling long distances from other countries to attend American universities. This “voting” has made American universities responsive to the interests of students, which on the whole is a very good thing since these interests reflect changing job prospects and other changes in society.

In addition, American universities conduct much of the basic research conducted in the US, with support from the federal government and private gifts. That many young and older scientists and scholars from abroad compete to spend significant time at American universities is a good indication of the leading edge quality of this research. Perhaps they do not do “enough” basic research, but they do much more than universities elsewhere, and they would do even more if the federal government increased its support of university research.

American universities have been criticized because many of them engage in high-level competitive sports that involve heavy recruitment of student athletes. Since students and alumni like rooting for their school’s teams, these are perfectly appropriate activities for universities, aside from a couple of major problems. One is the exemption that the Supreme Court has granted to the obvious cartel-like behavior of the NCAA that uses its power to severely restrict compensation to student athletes, especially those in football and basketball. Universities should be forced to pay competitive prices for these athletes, not the much lower cartelized prices that the NCAA enforces. A much higher cost of star football and basketball players would induce some universities to tone down their emphasis on these sports, but many universities would still compete in these and other sports.

I agree with Posner that the federally financed student loan program needs significant modifications. More market-based interest rates on these loans are desirable, but in addition students under various circumstances should be allowed to borrow more than the current maximum limits on these loans. Especially students who attend expensive private universities may want to borrow more than they can at present, but most of them also receive high enough earnings later on to finance the interest repayment burden on these loans. It is no harder for most families to carry $100, 000 or more in student loans than it is for them to repay mortgage loans of comparable size.

However, students who are fettered with loans that they cannot repay should be able to discharge all or part of their loans through personal bankruptcy. To be sure, unlike mortgages, student loans do not have collateral that can be taken over by lenders in case of defaults on the loans. This is not so different than home ownership in the many states that do not allow the individuals declaring personal bankruptcy to be sued, although lenders can foreclose their homes. Despite the absence of collateral, workers who cannot repay their student loans should have the option of reducing the burden through discharging some of the loans through personal bankruptcy, the way other debt can be dischargeable through bankruptcy. To limit the abuse of this privilege, universities (including the for-profits) that make many student loans that end up being in arrears or discharged through bankruptcy should have their ability to make further loans severely constrained. This is already done to some extent, but tightening these constraints would force schools to be more careful in who they qualify for loans and the amounts they qualify for.

Having taught for almost all my adult life at American universities I am well aware of their many limitations. These include faculty who cater to students by easy grading and telling jokes, faculty who engage in vicious battles over trivial issues, faculty and administrators who are afraid to take stands against political correctness and the latest education fads, alumni and other donors who are cultivated for large gifts that really do not help a university’s mission, and so forth. Nevertheless, on the whole, American universities do an excellent job of providing up to date and diversified education for students of varying abilities and interests. Many of their “failures” are the result of bad incentives provided by federal and state support and regulation of university programs. Students the world over have voted for decades with their feet in favor of American universities against what is available in other countries.

Comments

[Jimbino]

It seems to me that one of the hallmarks of communism is that it robbed the wealth and income of everybody and impoverished the people equally.

Our brand of socialism is characterized by theft from the everybody and distribution of the proceeds to the better-off among us.

The worst institutions to practice this transfer from the poor to the rich are the national parks and forests, paid for by all, but attended only by Whites, Asians and foreigners. But the universities, like our University of Texas, manage to tax everyone and support only those blessed by wealth, intelligence and cultural advantages.

The idea that a poor Black Austin kid can call on his parents for $100,000 loan, just like a home mortgage, is a cruel joke that shows the disconnect of some ivory-tower profs from the realities of the USSA.

[Ellen]

One way to make college affordable would be to exempt federal income taxes on the income of college graduates (assuming they can find jobs) until they have paid off their school loans. The minimum monthly payment on the loan would then be equivalent to the federal income taxes they would owe if they did not have a school loan to repay. When their college loans were repaid, then the employees would commence paying federal income taxes.

Students and colleges would benefit and the government and our society would more than make-up for the lost tax revenue after the school loan had been repaid. The colleges and states would not lose revenue, since it is the federal government that would forgo the federal income taxes while the student loan was repaid. Additionally, colleges could reduce tuition, since they would no longer have to provide financial aid. The government could use the money currently set aside for education grants, etc. to offset the loss in income tax revenue from loan repayments. Furthermore, we would have a more educated and productive society, which would create even more revenue, innovation, jobs, and taxes.

[A Facebook User]

Its frustrating to me that you don't examine the purpose of a university education, and hold ours against some ideal metric. As you more or less explicitly said, demonstrated preference dictates that our system is the best among the many of the world, but then you make the leap in declaring that it is therefore good.

But logically, all that dictates is that it does an "excellent job" vis-à-vis all other educational systems, the grand majority of which are even more tightly controlled and financed by government than our own. To use an extreme but illustrative example, if every country on Earth killed their citizens, by law, at age 30, but we killed our citizens at 40, people would swamp this place. Doesn't mean we could defend our system as "good". Simply because something is "better" does not make it "good" and you seem to conflate the two here.

[Terry Bennett]

Clever idea from Ellen. In a similar vein, the IRS allows a lawyer to deduct the cost of attending a seminar in law, on the grounds that it is a necessary business expense to keep one's skills up. However, a high school graduate enrolling in college cannot deduct those costs, because he or she is not yet in business and thus is not considered to be incurring a business expense.

This line of reasoning is out of touch. In 2012, the reason people buy education is to make more money, period. It's a cost of eventually doing business, a basis that should be amortizable over a career that would not be possible without this initial investment.

In point of fact, the last few years have seen a market revolt against the law school business. New graduates have complained loudly at having bought a degree that suddenly looks to them as if it may not pay for itself.

I have a client who bought a boat and some crab traps, and as a result of that investment he is able to harvest and sell crabs. The IRS lets him write off the cost of those business necessities, without which he would not be able to engage in his income-producing endeavor. In my racket, a bachelor's degree, a juris doctor, and the costs of licensure (usually including a mid-four-figure bar review course) are all sine qua non, yet we have to pay for those investments with after-tax dollars.

If Congress is really worried about it, they can designate that education costs are only deductible to those under 65, or exclude the retired who are taking up a foreign language for fun - although the savings in government health care costs for such individuals might offset the loss of letting them deduct college as well.

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[Anne Roberts]

American universities are a home to liberal education, of which many universities all over the world try to emulate. I wouldn't want to give up on these universities.

[John]

Yeah, the American universities definitely have a lot of limitations. I think you have a point about bad incentives resulting in most of their failures.

[Christopher Graves]

First, I see nothing wrong with humor in the classroom as long as it is used judiciously. But overall I think both Becker and Posner miss the boat in their discussion this week. Here is a link to a very insightful critique of American colleges and universities by economist Peter Morici who appeared today on C-Span discussing these issues:

http://www.c-span.org/Events/Washington-Journal-quotWhy-Johnny-Can39t-Pay-His-Pile-of-Student-Loansquot/10737430406-1/

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[TANSTAAFL]

Surprising that the last two weeks' subjects -- financing of colleges and their students, and government subsidies for manufacturing -- haven't spurred more debate on this blog (as distinguished from the ubiquitous idiotic spam posts). Are the leftists exhausted or preoccupied with moving "Forward" as directed by the White House incumbent? Seriously, do the slogan writers for the Obama campaign not recognize the parallel to Mao's failed Great Leap Forward?

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