Thursday, January 22, 2009

Financing higher education

An NYT piece on (smallish) upticks in the fraction of college costs covered by students and their parents directly through tuition rather than indirectly through taxes. that, of course, is not quite how the NYT frames it but for middle class parents that is largely the question. Is it better to have an implicit forced savings scheme (of the unfunded, pay-as-you-go social security sort) or to have people save on their own (perhaps via home equity) and then pay tuition when the time comes. The implicit savings scheme operates via the distortionary tax system and so creates a lot of costly little triangles of deadweight loss; as a result, the behavioral economics that leads to suboptimal college attendance needs to be pretty serious to make it the preferred option.

Also in the mix are implicit transfers from low income people, whose children are less likely to go to college and tend to attend cheaper (to the public), lower quality colleges when they do, as well as between childless middle class familes and middle class families whose children choose not to attend college to middle class families whose children do attend college. These sorts of transfers are not the kinds implied by most philosophical justifications for redistribution.

The present scheme hardly seems optimal, but the confused public discussion which ignores indirect payment via taxes, ignores the deadweight costs of tax finance, ignores possible effects of public subsidies on the prices of inputs, assumes spillovers that have not been shown to exist in any serious way (other than voting, and it is not clear that marginal voters add or detract from the process) and neglects the various (rather unattractive) implicit transfers in the present scheme does not inspire much confidence that any policy changes will improve the situation rather than worsening it.

Addendum: blogger is having trouble with the link, which is:

Hat tip: Dan Black