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.

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I happen to think college would be more affordable if the Federal Govt. didn't subsidize it through grants and scholarships. Tuition continues to increase as federal subsidies do.