Economics

Free College

Is free college a good idea? That is, is subsidized tuition-free college a good idea?

This excerpt is from “Teaching Economics to Bernie Sanders.”

Before I get into the subject of free college, I want to address this tweet from Bernie Sanders’ Twitter account (@SenSanders): “You have families out there paying 6, 8, 10 percent on student debt but you can refinance your homes at 3 percent. What sense is that?” At face value, it seems unfair for student loan interest rates to be so high. Does Bernie have a good point here? Well, no. It makes perfect sense that interest rates on student loans would be higher than interest rates on a home. Loans are money distributed by a firm to individuals who will then pay interest on the loan until the loan is paid off. The lender counts on the borrower to be able to make the interest payments and pay back the loan to make a profit. The borrower benefits by having access to money that the borrower didn’t have before, at the cost of paying interest.

It is not in the interest of a lender to give loans that have low likelihood of being paid back. Lenders secure their interests from loan defaults (failure by the borrower to pay back the loan) by requiring the borrower to put up collateral. If the borrower defaults on a home loan, the lender may use the collateral (the home in this case) to fulfill the borrower’s remaining balance on the loan. Lenders may also consider an individual’s financial history and even character when deciding on giving a loan. Lenders want their borrowers to be able to repay the loan, or at the very least put up collateral with value comparable to the loan.

Lenders can afford to offer lower rates where there is collateral to secure their stake in the transaction. The lender’s best hope when giving a student loan is that the student will eventually get a high-paying job, thus being able to pay the loan back in full. This uncertainty is what drives up interest rates for student loans. There isn’t collateral in the deal like there is with home financing. It’s more economical for lenders to demand high interest on the student loans as there is uncertainty over the long run as to repayment of the loan. Therefore, refinancing a home naturally comes at lower interest than student loans.

Government makes matters worse by offering guaranteed student loans.

These are loans backed by government funds. The backing by government funds enables these loans to be handed out with less discretion than a private lender acting in his or her own interest would. Rather than loans being given based on merit, the loans are guaranteed by government and backed by taxpayer dollars. This results in a higher number of people who can afford to go to college. An increase in demand for college without a corresponding increase in supply results in an increase in price. Yes, government guaranteed loans raise the price of college tuition as universities can charge more money because of the government created market distortion. As more diplomas are granted to people who may or may not be able to afford the diploma, the value of diplomas goes down. That forces college graduates to have to compete with more and more graduates, lowering graduates’ job market value.

I’ve explained some problems with the state subsidizing college tuition. The problems get much worse when we consider the effects of so-called free college. Of course, nothing is free. Professors, maintenance staff, campus security, campus infrastructure, etc. must be paid for. This money would come directly from taxpayers or borrowed to be a burdensome debt on future generations of taxpayers. This is problematic for many reasons. For one, the money must be paid back which means increasing taxes in the future or central banks printing money for the government to borrow. Printing money in this way causes inflation which devalues currency. Inflation caused by government is in its own way a tax on the people over time.

The federal and state governments are already very much involved in higher education.

Socializing the costs of college education would essentially make college an extension of high school. Free college would attract more applicants and further devalue diplomas as more and more are handed out. This could result in unemployed college graduates or college graduates taking jobs they are over-qualified for. We’ve already seen this effect as college tuition has been increasingly subsidized. As college graduates have been taking jobs that only require a high school diploma, high school graduates have had less opportunity to work in jobs that don’t necessarily require a college education. This has the effect of devaluing high school graduation. Graduating high school used to qualify one for jobs that are now only accessible with a college degree. Just as high school diplomas have lost value as there has been increased access to college, unlimited access to college would devalue a college diploma. College diplomas would be the baseline for employment rather than high school if college was free to all.

I believe there is reasonable justification to be suspicious of the intentions of the central planners and bureaucrats who operate the U.S. public education system. It is no stretch to imagine how a system controlled, operated, and funded by the state would act almost solely in the interest of the state. It is easy to see how teachers who are paid by the state would show bias in favor of the public sector. Administrators, central planners, and other bureaucrats within the public education system are very much incentivized to justify the necessity of their employment. Rather than find ways to cut costs and deliver education efficiently to students, bureaucrats are incentivized to demand ever more funding and resources to maintain their job security. Government programs are so hard to get rid of once they start because the livelihood of the state employees depends on the existence of that government program. Considering how education is and could be provided by markets, it isn’t unreasonable to conclude that public education is by and large a racket for state employment as well as state indoctrination and control of the people. These unavoidable problems with publicly funded education would be amplified and exacerbated if college education was to be provided for free by the state.

In an article titled, “Do Schools Really Need More Money?”, Kerry McDonald questions the idea that if only there were more funding in education, there would be better outcomes.
https://object.cato.org/sites/cato.org/files/pubs/pdf/pa746.pdf

She cites a U.S. Department of Education report that describes the results of the School Improvement Grants. These grants instituted by George W. Bush and then expanded by Barack Obama had a total cost of $7 billion of taxpayer money between the years 2010 and 2015. “According to The Washington Post,” says McDonald, “this block grant program was ‘the largest federal investment ever targeted to failing schools…’” Despite the drastic spending on education, “the DOE report found that… …there was no difference in test scores, graduation rates, or college enrollment between the schools that received the grants and those that did not,” claims McDonald. McDonald includes in the article a chart by the Cato Institute showing the increased cost of education over time as well as an increase in education employees while test scores and enrollment remain constant, relative to cost and test scores.

To better understand how these problems within public education come about, I’ll try to explain by drawing ideas from Hans-Hermann Hoppe’s article, “The Economics and Sociology of Taxation”, specifically part two on the sociology of taxation. Unlike institutions of the state such as public education, Hoppe explains, “The size of a productive enterprise is constrained on the one hand by consumer demand (which imposes a definite limit on the total revenue attainable), and on the other hand by the competition of other producers, which continuously forces each firm to operate with the lowest possible costs if it wishes to stay in business. For such an enterprise to grow in size the most urgent consumer wants must be served in the most efficient ways. Nothing but voluntary consumer purchases support its size.”

Hoppe continues by demonstrating that public institutions are not constrained by demand as they are funded by taxation which is coercive in nature, meaning the victim of taxation does not demand for his or her property to be confiscated.

To say tax-funded institutions are demanded in the same sense that private institutions are demanded is to say the victims of taxation demand the confiscation of their own property. “One can acquire property either through homesteading, production, and contracting, or else through the expropriation and exploitation of homesteaders, producers, or contractors. There are no other ways,” explains Hoppe. Therefore, growth of the public education system, for example, occurs in contradiction to demand.

State institutions aren’t constrained by competition like private institutions are. Hoppe explains, “The state is also not in the same way constrained by competition as is a productive firm. Unlike such a firm, the state must not keep its cost of operation at a minimum but can operate at above-minimum costs because it is able to shift its higher costs onto competitors by taxing or regulating their behavior.” Not only does the state regulate competitors in education through various means,
but it also mandates attendance in education of some sort. For most parents, public schooling is the most practical decision for their children’s education. After all, they are already supposedly paying for the education through their tax payments.

All of this means that if college were provided “for free” by the state, it would be a massive source of resource consumption.

As demonstrated earlier, throwing more money at education does not seem to have the desired effect of better results in terms of students’ education. Yet, calls by members of the public education system for more funding is quite common. I find it safe to conclude that funding allocated to state institutions such as education will not be utilized efficiently or effectively. With politicians’ own self-interest driving the motor, the public can be manipulated by politicians to demand more funding for public education, as we often see. Much of the resources allocated to public education and other state institutions are squandered through these bureaucratic systems constrained almost entirely by public opinion. One could imagine the amount of resources that would be squandered by creating a “free” college system as those institutions would tend to always perform sub-par and continue demanding more funding as the remedy (this is apparent when considering how public schools perform).

Let’s not forget this is all at the expense of the taxpayer. Every dollar taken from a taxpayer is a dollar that is not spent in the private sector, not saved, or not invested. Not only does taxation make the taxpayer worse off, but it also makes the overall economy worse off because there is less wealth to go around the private sector. The massive consumption of resources that would occur if college were provided by the state (indeed, there already are massive amounts of taxpayer dollars spent on public education) would negatively affect the economy as money is funneled out of the private sector to the education system where much of it is likely to be squandered.

All government-provided education is funded by taxation. As the libertarian saying goes, “taxation is theft.” Allowing government to take from your neighbor to provide for something you deem a “public good” is no more virtuous than directly forcing your neighbor to hand over some money. Agents of the government are using coercion to collect tax payments in the case of taxation, whereas in a robbery you take directly from another by your own means. The means are different,
but the result is the same. The result being depriving peaceful people of their property against their will and distributing it elsewhere.

Now, to address the common argument that college education should be considered a “public good” and that providing free college has the great benefit of educating people, allowing them to be more successful.

Many economists, sociologists, philosophers, etc. of the libertarian tradition have discredited the so-called “public goods theory” mainly on the basis that the concept has no grounding as far as legitimately defining a good or service a “public good.” Due to the natural forces of a free market such as profit motive and competition, there is nothing valuable or demanded by consumers that cannot be provided by the free market. So long as humans have wants and desires, there will be producers, entrepreneurs, creators, etc. gracious to fulfill those wants through mutually beneficial, voluntary exchange in which both sides of the transaction profit.

I explained earlier how creating more college graduates limits the available opportunities for those graduates, especially if they haven’t acquired skills that are truly valuable on the job market. I argue that education doesn’t necessarily have the outcome of the student being more valuable on the job market. State-provided education would attract more people to go down the path of higher education when those individuals may be personally better suited for some sort of skilled labor or other occupation that does not require formal education but may be learned on the job through entry level work or through apprenticeship, private training, internship, etc. It’s not hard to imagine that numbers of workers applying for manual labor employment would drop as more and more people receive diplomas that may or may not actually qualify them for jobs requiring higher education. The starry-eyed college graduate is more interested in using their newly acquired education and receiving a 5 or 6 figure salary than working manually for a wage.

This brings me to another tweet from Bernie which seems to imply that the exclusive outcomes for high school graduates or young adults in general is college or jail. What about the entrepreneurs, the shop apprentices, the skilled manual laborers, the builders, the manufactures, the producers, etc.? I find there to be a sentiment that, intentionally or not, is pervasive through the ranks of free college proponents. That is, a college education is necessary and essential for an individual to have a bright future. I disagree with this and believe that education needs to be separated from the state, just as religion is. When the state controls education, it very much instills statist and nationalistic beliefs that aren’t all that different from religious beliefs. This way of educating has the effect of confining thinking to the ways that are promoted within the educational system, and not those ways of thinking condemned by the educational system. In other words, the state education system has the effect of churning out very obedient potential bureaucrats, politicians, intellectuals, etc. that will support the state over the individual.

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