Should we subsidize college educations?

“According to a national report by the State Higher Education Executive Officers Association (sheeo.org), high school graduates earn an average of almost $30,000 per year. Bachelor’s graduates earn an average of just over $50,000 a year. And those with a higher level degree (master’s, doctorate or professional) average nearly $70,000 per year. This translates to a significant earnings gap over the course of one’s life.” https://www.educationcorner.com/benefit-of-earning-a-college-degree.html “According to the SSA, the average wage in 2017 was $48,251.57.” https://wallethacks.com/average-median-income-in-america/  Moreover, college graduates generally have more interesting and secure jobs.

Who should pay for those advantages? The students themselves, or their families, have often borrowed the money to cover their educational expenses. Currently they owe $1.6 trillion  “Here’s-what-trillion-student-loan-debt-is-doing-US-economy”. Democratic party presidential candidate Bernie Sanders proposes to cancel all of it. He would also make all public colleges and community colleges tuition free.

Is that a good idea? Is it fair and does it encourage or enable a better use of our human resources? A proper evaluation requires indicating who would pay for it if not the students themselves. From the above data we see that college graduates make a lot more than everyone else on average—almost double the income of high school graduates.

If the $1.6 trillion in education debt is cancelled, the burden of repaying it (most of it was lent by banks, often guaranteed by the government) will be shifted from the better off (students who will receive higher incomes in the future because of their college educations) to tax payers. Total tax collections by the federal government in 2018 were $3.3 trillion, half of which was income tax, 35% was payroll tax (social security) and only 6% was corporate income tax.  https://www.pgpf.org/budget-basics/who-pays-taxes

Senator Sanders says he will cancel all student debt within six months. Does he plan to cut spending on other programs by $1.6 trillion, a 36% cut, or to increase taxes by $1.6 trillion (the deficit for FY 2019 is already forecast to be $0.9 trillion), or some mix of these?  According to Charles Lane: “Sanders and other left-leaning Democrats promise to pay for tuition-free college and Medicare-for-all with higher taxes on the top 1 percent of earners. Most Nordic countries, by contrast, have zero estate tax. They fund generous programs with the help of value-added taxes that heavily affect middle-class consumers…. The Nordic countries tried direct wealth taxes such as the one that figures prominently in the plans of Sen. Elizabeth Warren (D-Mass.); all but Norway abandoned them because of widespread implementation problems.”   “Democrats-use-Nordic-nations-as-models-of-socialism”

The Tax Policy Center “estimates that 69 percent of taxes collected for 2019 will come from those in the top quintile, or those earning an income above $157,900 annually. Within this group, the top one percent of income earners — those earning more than $783,300 in income per year — will contribute over a quarter of all federal revenues collected.”  Can we and should we try to squeeze even more out of them?

The effective federal tax rate for the top 1% income earners in 2018 was 29.6%, compared to 12.1% for the middle quartile of income earners and 2.9% for the bottom quartile (almost none of which was income tax). It is not obvious where the burden of this gift to the prospectively better off college grads will fall. But it seems to involve a lot of income transfers, which seem to sound nice to our new “socialists.”

 

My Political Platform for the Nation – 2017

For me, the ideal American government would deliver its important but limited functions efficiently and effectively and would raise the money to pay for these activities with efficient, minimally distorting (neutral), and fair taxes following a principle of maximum subsidiarity (decisions made and services performed at the most local levels possible). The government should do fewer things than it does now but should do them better and should fully pay for them with taxes and fees (cyclically balanced budgets).

My unrestrained, radical platform will be presented here at a high level of general principles. Details need to be refined by a political process involving public discussion and are likely to evolve somewhat over time. Links to earlier articles provide additional details. In the very broadest terms Americans should be self reliant and free to work and play as hard as they choose with the government supporting their choices by providing security, the legal foundation and framework of private property and contracts, and an efficient safety net when individual undertakings are not feasible or fail.

The limited functions of the Federal government are enumerated in Article 1 section 8 of the U.S. Constitution. Broadly these are to:

  1. Develop and maintain our relations with other countries and international bodies and to maintain an Army, Navy and Air Force for the purposes of defending and promoting the security of the United States;
  2. Establish and enforce the rights to property and contracts and to adjudicate related disputes;
  3. Provide for public safety;
  4. Provide an efficient and effective social safety net (welfare);
  5. “Regulate commerce with foreign Nations, and among the several States;”
  6. “Coin money, regulate the value thereof, and of foreign coin, and fix the Standard of Weights and Measures;”
  7. Arrange for the provision of roads and essential infrastructure; and
  8. Tax, borrow, and levy fees and tariffs to pay for these activities.

Our Social Contract

Sovereignty resides with each individual, who have collectively ceded limited powers to government for the general welfare. Each of us is free, within legal limits on doing harm to others, to lead our own lives and build or work at whatever we choose. Thus the government’s laws apply equally to each of us without regard to our race, religion, sex, or sexual orientation. From this environment of freedom and innovation, America has built the most successful economy in the world.

When building companies or developing products, many will fail and try again. The government provides the legal framework (bankruptcy) for resolving such failures. The implicit agreement between citizens and their government is that government will provide a floor—a safety net—whenever a person’s efforts fail or when, e.g., for health reasons, a person is unable to provide for him or herself. The level of the safety net should reflect the level of the country’s income and social consensus and should be designed to achieve its objective as efficiently as possible with careful consideration of the incentives it creates.

Income redistribution: taxation and a guaranteed minimum income

All income (personal and corporate) taxes should be replaced with a comprehensive, flat, consumption tax (Value Added Tax—VAT) and limited progressivity introduced by paying every legal man, woman and child resident a guaranteed minimum income. US federal tax policy, Cayman Financial Review July 2009 Each recipient of these monthly guaranteed income payments would be required to set aside a minimum amount for health insurance (chosen by each person or family in the competitive market place) and a minimum amount for retirement (invested in qualifying retirement funds in the competitive market place). Saving social security

As the guaranteed minimum income should be at a level sufficient to minimally support life’s basic needs, supplements such as unemployment or disability insurance would not be needed or provided. However, disabilities acquired from military or public safety service should receive additional income support.

Health care

Each person will be responsible for paying for at least part of routine medical care (the copay required by the insurance they have chosen) and will thus care about its cost. The cheapest insurance policies will be limited to major medical expenses (catastrophic health insurance). As everyone will be required to contribute monthly to a health savings account from their guaranteed minimum income, most people will chose to use such funds to buy health insurance, which would not be tied to employment or an employer.

Doctors and hospitals will be required to make medical service costs transparent. On that basis, patients, in consultation with their doctors, will decide the level of care and treatments to receive. These measures will introduce normal market competition into the provision of medical care that is currently absent, which will improve its quality and lower its cost.

Education

Equal access to quality education is a critical element in maximizing opportunity for all and the wealth of our society and each person in it. The public school system has often failed in this objective. While the wealthy can afford to put their children in private schools when the neighborhood school is of poor quality, lower income families generally cannot. Every K-12 aged child will receive a tuition voucher that covers the cost of state provided education. The amount will generally vary from state to state (or school district to school district). The voucher can be used to attend the local neighborhood public school with no additional cost, or any private school the family chooses, which might incur additional costs. Schools eligible to receive such vouchers must meet minimum education standards set by the state and must disclose the performance of their students on state administered achievement tests. This information must be available to the public. The learning progress of each child is more important than the average level of achievement of each school’s students as some schools might well specialize in slow or problem learners and performance data should reflect this distinction. The neighborhood school has the advantage of being easier to get to every day and will normally be chosen by families if it provides a good education. The argument for universal tuition vouchers goes beyond providing a level playing field to all. It also introduces the competition for students that is the basis for good quality, low cost goods and services in every other area of our economy.

Access to higher education raises different issues. Those with the aptitude and desire for a college or postgraduate degree can significantly increase their lifetime incomes as a result. It would hardly be fair to tax the general public to subsidize the higher education of those who will become wealthier as a result. However, the tuition loans that may be needed by those from lower income families to make this investment would be hard to get without insurance against default. Many states also provide community (or Jr.) colleges at public expense that provide training in various trade skills as well as four year college preparatory courses. These seem to have often been successful in leveling the playing field. The optimal structuring of higher education subsidies (e.g. between insurance guarantees and tuition subsidies) needs further examination.

Monetary and Financial Policies

Government policies that affect business should be as rule based and transparent as possible. Monetary policy stands out as a particularly important area in which clearer rules are needed. A currency with stable real value (purchasing power) is an important part of the foundation of efficient free markets. At the very minimum the Federal Reserve’s mandate should be tightened as provided in the very pragmatic Federal Reserve Accountability and Transparency Act of 2014. This act would require the Fed to chose an operational rule, from which it could depart only with an explanation to Congress of its reasons. A deeper review of options is proposed by the Centennial Monetary Commission Act of 2015. I have proposed a more radical reform in the spirit of the gold standard but with tighter rules and an anchor of a large number of goods rather than just gold. The supply of this currency, which ideally would become the global currency, would be regulated by the market using currency board rules and “indirect redeemability.” A hard anchor for the dollar.

The banking and financial sector are currently smothered with detailed regulations the compliance cost of which are driving smaller banks out of business. Under the Dodd Frank law adopted after the financial crisis of 2008, the largest five American banks have grown even larger (in absolute terms and as a share of the banking sector) than they were in 2008. Regulators, despite (or because of) their detailed banking regulations have failed to make banks safer and have slowed the competitive process of producing better and cheaper services. Bank owners and market preferences should regulate risk taking by banks.

Bank regulation by the government should focus on broad principles with strong owner accountability. Bank capital requirements should be raised and the no bail out rules strengthened. Bank owners and investors should absorb any bank losses. The payment services of banks should be isolated from the rest of its lending and investing business by adopting the Chicago Plan of one hundred percent reserve requirements against current account deposits, and virtually all other regulations (other than accounting and reporting standards) should be dropped. Larger banks will develop their own risk weighted capital requirements for their internal use, but the government’s capital requirements should state the minimum required leverage ratio (ratio of core capital to total assets) and set it at a high level. Changing direction on bank regulation, Cayman Financial Review April 2015. A bill now in congress moves in this direction: The Financial Choice Act

Business activities and regulation

The government should only provide services that that private sector can’t. It should provide the legal and regulatory framework for the private economy rather than compete with it. Though the approaches to providing “public goods” such as police, courts, prisons, firemen, parks, highways, airports, etc. have varied over time, they are almost always paid for by the government (i.e. collectively by tax payers) and should be provided efficiently at the level expected by the public. Publicly funded and privately produced goods and services are often sources of hard or soft corruption. Rather than over charging for services or paying bribes to win contracts (hard corruption), soft corruption exploits influence on government to obtain contract terms or regulations favorable to particular firms (“rent seeking”). The government’s purchases of goods and services from the private sector should be governed by transparent rules that promote competition among suppliers. This is easier said than done. Open the Books

While the government is involved in and trying to do far too many things, it doesn’t do many of them very well. Of those services the government needs to provide, states generally perform better than the federal government though performance varies across states. In Maryland, where I live, I was able to register my Limited Liability Company on line in about 30 minutes start to finish. Registering my car and updating my driver’s license is quick and easy. However, it took me months to obtain a statement of my residency from the U.S. Treasury and a personal trip to the State Department to have it certified to provide to the National Bank of Kazakhstan before they could pay me for my services. Getting a passport or green card is more complicated and takes longer than they should. The government should do much less and do it much better.

Those in the government who believe they can judge better than competitive private markets how best to allocate resources (what to invest in and produce) are generally wrong. Moreover, they establish an opportunity and thus incentive for corruption.

The government’s regulation of private businesses in the interest of public safety, environmental protection, and market competition should be limited and subject to very serious cost/benefit tests. Cost/benefit analysis unavoidably reflects subjective judgments but their role should be limited to the extent possible by full transparency of the basis of any assessment. Competitive capitalism vs. the other kinds.

Foreign policy and national security

The purpose of our foreign policy is to serve American security interests and the international rule of law under which American’s can explore the world and American businesses can compete globally on a level playing field. Our security requires a strong military, but it also requires the skillful use of diplomacy. Our military must be structured for defense, not offensive wars of our choosing. Our 2003 war in Iraq and subsequent developments in the Middle East have cost many lives (some American) and treasure, undermined our moral authority, and seriously damaged our security. Our foreign policy should be one of “restraint.”

Our relations with other countries should be based on shared interests consistent with our respect for individual dignity and the rule of law. We should support and, where appropriate, lead international bodies dedicated to developing, promoting, and overseeing compliance with the rule of law internationally. Our international leadership should rest, in addition to our economic and military strength, on our commitment to broadly shared values and standards of behavior. Just as we give up limited amounts of our individual sovereignty to our own government when it serves our individual and collective interests, so should we give up limited amounts of our national sovereignty to international bodies when it serves our national and international interests.

Our economic strength depends in part on providing for a sufficiently strong military in the most economical way possible. Money spent on tanks can be spent on building other businesses and producing goods that we enjoy. The very nature of the relationship between our military and the industries that supply it, what President Eisenhower called “the military industrial complex,” makes achieving this objective very difficult. As argued above, clear rules and transparency are important tools. Our unsupportable empire

Trade

Next to the right to personal property, nothing is as central to our liberty and well being as the right to trade. It is the basis of virtually all of our enormous increase in productivity and thus our standard of living. The government impedes our right to trade with a wide range of often unnecessary or excessive regulations. Restricting our freedom to trade across national borders is also a mistake that reduces our standard of living from its potential.

Trade has destroyed some jobs while creating others. “Since 1900, the portion of the U.S. workforce in agriculture has declined from 41 percent to less than 2 percent. Output per remaining farmer and per acre has soared since millions of agricultural workers made the modernization trek from farms to more productive employment in city factories…. Manufacturing’s postwar share of the labor force peaked at about 30 percent” in 1953 and has since declined to less than 9 percent while manufacturing output continued to climb. “Of the 5.6 million manufacturing jobs lost between 2000 and 2010, trade accounted for 13 percent of job losses and productivity improvements accounted for more than 85 percent.” George Will, Washington Post.

As with domestic, competitive trade, those out-performed in competitive markets suffer, at least temporarily. The safety net for “losers” in the competitive process discussed above is an important feature in our willingness to unleash the benefits of free trade. We must insure that they are adequate. We should support the World Trade Organization (WTO) as well as regional and bilateral agreements that reduce the barriers to trade and promote freer trade. Save trade. Globalization and nationalism-good and/or bad?. Trade and globalization

Conclusion

Our government should assume that each of us is capable of and has the right to make our own decisions and lead our own lives as we see fit. Its role is to protect those rights, in part by protecting us from others, foreign and domestic, who would violate them. We are, however, part of and best flourish within broader communities. Our government should develop legal frameworks to facilitate our interactions and relationships within and across societies both business and personal. Our successful flourishing will also depend greatly on a shared culture of mutual respect and comity.

Two approaches to American governance–The case of higher education financing

Hillary Clinton deserves credit for setting out her positions on individual policy issues so that we can have an intelligent discussion of their pros and cons. She is nothing if not a tireless policy wonk. Think of her exhaustive but failed effort to “fix the provision of health care in America” during her husband’s presidency. While the Clinton’s are Democratic Party centrist, they still embrace a top down government/regulatory approach to dealing with many of societies challenges/problems. Mrs. Clinton’s plans to make college affordable provide a recent example of this approach. It is thoughtful and balanced from a left of center, regulatory approach perspective. I prefer a difference, right of center, more market oriented approach.

I have not read Mrs. Clinton’s detailed proposal and rely completely on the following Washington Post summary: http://www.washingtonpost.com/news/wonkblog/wp/2015/08/10/clinton-proposes-a-350-billion-plan-to-make-college-affordable/

Background

Americans believe in equality of opportunity rather than equality of outcomes. We are not egalitarians. There is nothing we can do about the fact that each person is born with different predispositions and capabilities. But it has been a long-standing, broadly shared principle that everyone should have access to the education she is capable of. We have lived up to this goal very imperfectly. Tuition vouchers and school choice are moving us closer to this goal for K-12 by making the state’s financial contribution to education more equal for each student and subjecting schools to greater competition in producing good results. Unlike primary and secondary education, however, which in the United States is financed by the states (generally by municipalities), college is not for everyone. An important public policy issue is who should pay for higher education for those who do go.

When the government began to supplement private universities and colleges with state run, public ones, it generally funded the cost from tax payers charging only nominal tuitions, if any, to those attending. Milton Friedman and others pointed out that this resulted in a perverse redistribution of income from lower to higher income people. University graduates enjoy incomes two or three times the average of non-college graduates. In response to this criticism, state colleges and universities in recent decades have raised their tuitions in order to finance more of the cost of the education by its beneficiaries.

It is desirable for those from low-income families with the intelligence and desire to pursue careers requiring a college education to have that opportunity. This accords with our belief in providing an equal opportunity to all and increases our individual and national wealth by facilitating the maximum productivity of every citizen. But how can we best accomplish this goal without perversely redistributing taxpayers’ money to the better off? Along with higher tuitions, many universities offer financial assistance to such students in order to attract and graduate the best students. Having the best graduates enhances their reputations. A number of private organizations provide fellowship to promising low-income students. America is renowned for its extensive private charities. Many companies do the same, generally for the children of their employees. These have the substantial advantage over government bureaucrats of being closer to the beneficiaries of their largesse and thus better able to determine who in their communities will benefit the most from such assistance.

Determined students often work while studying and/or borrow from their families and friends (this was my approach). In business, future benefits from current investments are normally financed with borrowed money or by giving investors a stake in the outcome (selling shares in the hoped for profits). Unless they are family or friends, lending to someone with potential future human capital as collateral (i.e. lending to a student based on the expectation that she can repay out of higher future income) is a riskier proposition than, say lending to someone with a job to buy a car or a house (both of which can be use as collateral). So bank lending to college students was rather limited and expensive (interest rates high enough to cover the higher risks to the lender) until the government began to guarantee such loans.

Solutions

To address this problem, and building on the experience with financing college for veterans of World War II in the “GI Bill” of 1944, Congress adopted what became known as Pell Grants, financial aid to low-income students in undergraduate college programs, in the Higher Education Act of 1965. This Act also provided limited government loans, which over time expanded in various ways to include students from middle-income families (Middle Income Student Assistance Act of 1978) and studies at graduate and professional schools. Over time the scope and terms of government assistance continued to expand. Grad PLUS was added by that spend thrift George W Bush in 2006 to help finance graduate education. “For the first time, it gave professional and graduate-school students unlimited access to below-market-rate loans from the government, which, of course, borrows the money to begin with.”[1]

This has enabled more American’s to go to college– a potentially good thing. The increased demand for places in colleges is likely to increase the cost of supplying more (higher salaries for college professors in order to attract more into teaching), but hardly justifies what has happened. According to The Economist “Tuition fees have doubled in real terms in the past 20 years. Student debt has trebled in the past decade, to $1.2 trillion.” Seventeen percent of these loans are now in default or seriously delinquent. Many of these students have dropped out of school or not found the jobs they were trained for.

The government (Secretary of Education Arne Duncan) has established a number of programs to help and Hilary Clinton “proposes capping the repayment of college loans at a maximum of 10% of income over 20 years. If a loan is not paid off by then the government will pick up the tab. The estimated bill for her scheme…, comes to $350 billion over ten years.”[2] This may be sensible within the context of government aid. But this top down government approach suffers from a number of weaknesses. One is the propensity for such programs to grow as different special interests succeed in getting added to the list: “Despite all the talk about the government’s $1.1 trillion student loan portfolio, and the burden it represents for college students, some 40 percent of the money is owed by graduate and professional school students — who make up only 16 percent of all student-loan borrowers.”[3] Another is the inferior ability of government bureaucrats, with no financial stake in the outcome, to evaluate the appropriateness of each individual loan or grant. A third is the limited incentive for government to find new innovative ways to deal with the problems that invariably arise.

The policy challenge in my view is to bring more effective competitive pressure on colleges and universities to deliver more for less, to facilitate more careful and better informed decisions by potential students of what education they need and will benefit from and the best place for them to get it, and insuring at the same time that initial poverty does not prevent them from getting it.

Leaving the GI Bill aside as a special case, the arrangements for financing college and advanced degrees that existed prior to the Federal government’s involvement worked pretty well. Those of us needing financial assistance paid a great deal of attention to the cost and value of the educations we sought. We were also more careful about whether and what sort of higher education would benefit us. I have no doubt that the incipient revolution of on-line courses, perhaps supplemented with class room discussions, will dramatically reduce the cost of higher education without significantly sacrificing its quality. Everyone’s professors can be the best that exist. Universities will be forced by such competition to exploit these new technological tools to dramatically reduce the costs of their offerings. The very best students will still pay the premium to attend the University of Chicago’s of the world (pardon my bias). Hopefully they will be the best and not just the wealthiest.

Market based financing innovations are also more likely to come from basically private funding of education. The suggestion made by Milton Friedman in 1955[4] and repeated in Capitalism and Freedom in 1962 for sharing the risk of investing in higher education between the borrowing student and the lender is now being explored in the private sector. “Enter income-share agreements ( ISAs ), which are essentially equity instruments for human capital. Investors finance a student’s college education in return for a percentage of their future income over a fixed period. ISAs are not loans and there is no outstanding balance. If students earn more than expected, they will pay more, but they also will pay less—or nothing—if their earnings do not materialize.”[5] Sharing the risk in this way insures a financial interest by both borrowers and lenders that collage choices maximize the expected return to both. A lender, (especially loans made or guaranteed by the government) is not well placed to determine the career intentions of the borrower leading to what economists call adverse selection. Income sharing agreements overcome this problem because the student being financed has a large stake in making the best choices.

Government always has an important role to play. This issue is what the nature of that role should be. Private contracts such as loans or the ISAs described above require a legal framework of enforcement. Such framework for ISAs is currently rather unclear. Sen. Marco Rubio (R., Fla.) and Rep. Tom Petri (R., Wis.) recently introduced the Investing in Student Success Act, which would set basic standards for ISA contracts. In addition their bill would provide for the collection and publishing of information on the cost and average earnings of graduates of different colleges and fields, which would help students choose where and how to invest in their futures.

Clinton’s and Rubio’s approaches represent very different concepts of how government can most constructively contribute to our flourishing. I prefer the approach of a more limited, legal framework role for government.

[1] Charles Lane, Washington Post Aug 26, 2015 https://www.washingtonpost.com/opinions/how-student-loans-help-keep-expensive-schools-in-business/2015/08/26/e7d7f83a-4c11-11e5-902f-39e9219e574b_story.html

[2] The Economist, August 22, 2015.

[3] Charles Lane op. cit.

[4] Milton Friedman, “The Role of Government

in Education,” in Economics and the Public Interest ,

  1. Robert Solo, (Rutgers: Rutgers University

Press, 1955).

[5]   Miguel Palacios And Andrew P. Kelly, “A Better Way to Finance That College Degree” WSJ April 13, 2015, http://www.wsj.com/news/articles/SB10001424052702303456104579485801253355622

Liberal societies vs top down (centrally planned) societies

Michelle Obama is absolutely correct to criticize food served in many school cafeterias as contributing to an epidemic of obesity. I grew up knowing that white bread, especially enriched white bread, was bad for me. My mother, who like all mothers loved her children and wanted them to be healthy, had read every word of Adelle Davis three times over. Moreover, compared to whole wheat and multigrain breads, white bread has no taste. So why are some kids today—fat kids no doubt—throwing whole wheat bread and fruit in the trash? “Michelle Obama’s school lunch agenda faces backlash from some school nutrition officials” WP/2014/05/29/

I believe it is ignorance, which the First Lady wishes to help overcome, and rebellion. The ignorance is a bad thing to be over come, and the rebellion, if that is what it is, is fundamentally a good thing—resistance to being dictated to from above. If loving mothers and their children understood the importance of nutritious food to their well-being, do we really believe they would throw it in the trash? These are children we are talking about, who must be taught everything they know. If on the other hand, the government and school administrators simply try to impose healthier food on them, they will resent having their candy taken away from them and will rebel.

This all speaks directly to a frequent theme of mine—the sanctity of the individual vs. the power of the state. If the government thinks it knows better than Johnny and Betty what is good for them to eat, what should it do? The top down, central planning mentality calls for better food standards imposed on schools. After all, pizzas etc. are cheaper and easier to prepare as well as more fun to eat and the government shouldn’t allow these shortsighted considerations to dominate. Respect for individuals, even children, suggests a very different approach. It suggests improved education (the same arguments I have made against the war on drugs). If mothers, and through them their children, understood better what food was good for them and the implications of eating or not eating healthier food, most would choose it. The companies that make it are interested in selling their products and if there is demand for healthier food, then that is what they will make money producing.