Monday, May 28, 2012

The Wrong Question

It appears that Becker is not in any way concerned about the excessive increase in College Tuition. Posner makes a similar argument and I defer comment on that until later.

He begins his argument with:

Student loans have increased the supply of young persons who go to college. In a competitive higher education market-which describes the American situation where thousands of colleges compete for students- a greater number of college students induces increases in tuition. However, the increased supply of places for college students moderates the increases in tuition.

 Now this is a total nonsequitur. The increase in supply is really the result of "advertising" by Government and others to create a large pool of somewhat educated youth who can hopefully perform some useful function. For example, what good is a political science maj0or, none. Absolutely positively none. It can be said the same for an economics major, for as a "profession" they seem to all disagree with one another. Their field is more split than Greek theologians in the 4th century! Then how about a fine arts major, just where do we put them? You see it would be better to have trade schools, with electricians, plumbers, carpenters, and the like. You cannot outsource that, and there is a demand.

Now he continues:

Although students and their parents complain a lot about the rise in college tuition, since the early 1980s monetary and other benefits from college have risen even faster than tuition and other college costs. As a result, the rate of return on college education in the United States – benefits net of all costs- grew greatly during the past 30 years. The increased net return to college, despite the increase in tuition, explains why a larger, not smaller, fraction of young persons are going to college than did prior to the sustained rise in tuition.

 Benefits? What benefits. In the 60s engineers were in high demand. Now they are sourced with foreign nationals, even in defense programs. The benefits are de minimis if at all. Educational costs to starting salaries have exploded. In 1965 an engineer got $8.000-$10,000 per year salary, but tuition at MIT was $1,900. That was a 4:1 to 5:1 ratio. Now the starting may be $100,000 at the very best but tuition is $60,000. Not even 2:1! And that is for a real college educated person who can be put to work creating value. Not some English major who does not know where the bathroom is to be found. What is Becker basing his conclusions on. At least I have some facts.

Now the increase in costs are due to two factors; exploding Administrative costs and exploding maintenance costs.

Becker concludes with:

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.

 First, one can monetize a property with a mortgage, if one was prudent. Namely the $100,000 debt on a $150,000 property can be sold and paid off. One cannot so readily monetize an education. Especially if it is in Liberal Arts. Who wants a History major, a Philosopher, and especially an Arts major. Students, and I suppose their families, have a duty to look into the cash flow potential of a job based upon an education. Following your dream is utter nonsense unless you accept the costs, and with Federal loan guarantees the costs are on the rest of us. So go follow your dream some where else.

So what can one say of the Becker piece.

First it has no basis in reasonable economic thought. People make decisions, or should, based upon level of investment, risk and return. Take for example chemists. The field is collapsing. We really do not need more, due to technology. But does a student understand that? In my recent experience the answer is no.

Second, if there is a benefit to society for educated and productive people, note I combined the two attributes as one, then society may thus seek to invest in that. That is yet to be proven.

Third, what of the ever expanding bubble in higher education? Is there a too big to fail mentality there as well. Does the taxpayer have a duty to keep say the University of California system afloat, why not let if collapse. If the price equals the cost then the demand will drop.

Fourth, should there be truth in advertising. We force food companies to include calories. Should we force Universities to include average lifetime earnings for each degree?

Somehow Becker seems to be justifying the unjustifiable.

The question is not what value is there in an education, but why does it cost so much! Universities have been allowed free reign, assuming someone else would take up the tab. The problem is like so many other profligate usurpers of the public trust, we the taxpayers will bear the cost. It  ironically is that Quiet Generation, born before 1945, who paid their own way, then their children's and now their grandchildrens' way. The ones who are accused of getting too much Social Security and Medicare but who still work and pay into the system while taking what few pennies left to create a new generation of educated individuals. Those educated individuals may be able to then support the Baby Boomers who seem to be coming along now.