Saturday, September 15, 2012

Politics vs Economics (more on higher education)

In my last couple of posts, I wrote about the issue of financial aid and higher education, specifically referring to blog posts by Steve Landsburg and John Cochrane.  Both the content and contrast between the issues highlighted in their two posts was interesting, but there is a sense in which there are other issues (social and economic) at play when it comes to financial aid and higher education.

For some context, here is a sample of political soundbites (some controversial) on higher education and financial aid:
Obama: "Right now Americans owe more in tuition debt than they do in credit card debt. And that means Congress is going to have to stop the interest rates on student loans from going up. They're scheduled to go up in July right now. Colleges and universities are going to have to do their part. I've said to them -- and I've met with university and college presidents -- we're going to keep on helping students afford to go to college. You've got to do your job in terms of keeping tuition down, because taxpayers can't fund this stuff forever. Higher education can't be a luxury; it's an economic necessity, an economic imperative for every family in America. And they should be able to afford it. (Applause.)"
Romney: "It is very tempting as a politician to say, 'You know what, I will just give you some money. The government is just going to give you some money and pay back your loans for you,'” Romney said. "I am not going to tell you something that is not the truth, because you know, that is just taking money from your other pocket and giving it to the other pocket."
Santorum: "President Obama once said he wants everybody in America to go to college. What a snob. There are good, decent men and women who go out and work hard everyday and put their skills to test that aren't taught by some liberal college professor that [tries] to indoctrinate them."
As I see it, the political debate -- as framed by Obama -- is about whether students can afford to go to college.  To a layman, that perspective seems natural, but it's not the only reason to subsidize education.  And, it's not necessarily the primary reason we teach in introductory economics to subsidize things like education.

What's usually taught: A student's education has external benefits that he does not account for when deciding how much (and what type of) education to get.  Because I do not internalize all of the benefits that accrue to my education, there needs to be some way to encourage me to get the "right" amount of education.  A subsidy or making college more affordable through government financial aid assistance is one way to do it, and that's usually how students of economics come to understand the proper role for education subsidies.  That is, education subsidies can be about efficiency (which is usually what economists like to discuss), rather than being a social issue (which is how politicians talk about it).

On the other hand, there is reason to believe that student loan credit markets need some help.  In a post on the issue in May, Gary Becker points out that one reason for the government to intervene in providing loans to students is because it is impossible for students to put up their future earnings as collateral for student loans:
This inability to offer human capital investments- in particular, college education- as collateral for commercial loans on these investment even when the returns are excellent is the fundamental “externality” behind the case for government support of student loans. This externality could justify governmental provision of student loans, although whether the government should guarantee student loans is questionable.
In other words, maybe the government has a role in helping students get loans because loans for human capital are difficult to secure in an standard credit market.  Nevertheless, Becker offers this thought in the conclusion of his post.
Young families with mortgages that exceed $100,000 under normal circumstances are not considered to be in dire economic straits, even though their homes can be taken if they fail to meet their mortgage payments, and they are only investing in more comfortable living arrangements. Young couples that contracted a similar level of debt when they were students have invested in raising their earning power, usually by a lot. So I find it difficult to comprehend why sizable mortgages are accepted while there are political and media outcries over comparable student loans that are based on usually highly productive investments in human capital.
There is definitely some food for thought in the rest of Becker's post as well.

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