Thursday, March 06, 2008

Bribing Students To Stay In State

By Richard Vedder

Virtually every state university in the nation charges students residing within the state lower tuition than residents of other states or countries. The argument is that the state government subsidizes the university for the benefit of resident students, and that those subsidies should not be used to pay for freeloaders from outside the state. The economic and moral justification for a two tier tuition structure is reasonably sound, although I suspect in reality this practice tends to reduce somewhat interstate academic mobility, which is not a good thing.

As Michael LaFaive of the Mackinac Center in Midland, Michigan, pointed out to me in a recent email, however, now some states are thinking more about what happens to the students after they graduate --and whether there should be incentives for students to reside in-state (or, arguably, disincentives for students who move out of state). The carrot approach might be to have the state pay off some student loans for students agreeing to stay in-state after graduation, or perhaps give them a special income tax credit that effectively lowers their taxes. The stick approach would be to make all students sign a contract upon entering college that states that there will be deferred tuition charges (an amount that is less than or equal to the present value of the differential between in and out of state tuition rates) that students are liable to pay over X number of years after graduation.

As with the traditional geographic-based tuition differentials already existing, there are arguments both for and against these proposals. It can be argued that state subsides are human capital investments in college students, and if the investment vanishes (moves away), the state cannot earn a return on its investment. A migration "tax" or "subsidy" thus is a way of mitigating that phenomenon.

The arguments against such policies are also strong --and arguably even more compelling. Such schemes frustrate and distort the geogrpahic migration of people that is vital to the nation's dynamic economic change over time. It violates the spirit, if not the letter, of the interstate commerce clause of the U.S. Constitution. Moreover, it raises troubling issues relating to horizontal equity --treating people of similar circumstances differently for tax (or subsidy) purposes.

The problems of states like Michigan and my own Ohio are far more fundamental. Young people want to leave Michigan because of limited economic opportunities there. Globalization, unionization, perhaps high or perverse taxes, etc., all may contribute to the unwillingness of businesses to invest in the industrial Midwest, which, in turn, promotes migration of labor resources. The appropriate public policies to deal with these issues are probably not to distort the price and reward mechanism determined by markets that reflect human economic behavior.

At the same time, taxpayers do not like being ripped off. In Ohio, graduate students from, say, China, are subsidized the same amount as those from Ohio --even though few stay in the state after graduation. Many are outraged by the expensive form of "foreign aid." The state (and perhaps others as well) has already had some modest programs that force Ohio physicians to pay back medical school tuition fees if they practice in another state. It might be worth while to study the impact of these type programs on migration and employment opportunities before expanding the concept to huge numbers of undergraduates.

1 comment:

Cowboy said...

This is an interesting topic and I respect your views Rich. A lot of resident grads have lived most, if not their whole life in the state where they attend college and want to venture out to a different part of the country because “the grass is always greener”. That is human nature and it would take a very hefty incentive to overcome it. When I graduated from Ohio University, I couldn’t get a job in Ohio to save my life (excluding burger flipping). At that time Texas was booming and my roommate from my freshman year sent a resume to Houston and was hired immediately. I heard others were going to California to a little known place called the “Silicon Valley”. I wanted to stay in Cincinnati where my family was, but it was time to look beyond the horizon to the golden shores of California. I sent resumes to aerospace companies and had a job in no time. Off I went. So in my view, the state has to be in a growth mode to retain resident grads – not the other way around as you and CCAP have so ably proven.

However, our views part ways is in regard to out-of-state student tuition costs. Now I am shooting from the hip here because there is no peace in this household and peace and deep thinking is forever elusive. With that said, I have a different position on placing a surcharge, if you will, on a student because he or she crossed a state border. I believe this also could be a possible violation of the interstate commerce clause of the U.S. Constitution. Further, could this be considered “restraint of trade” in that an out-of-state student must agree to pay a surcharge to attend the college or university? I think this could be viewed as a contractual obligation not to trade which is an illegal agreement on public policy grounds unless they are reasonable in the interests of both contracting parties and of the public at large. I guess the question is: Is being forced to pay a surcharge because the student is not a resident of the state reasonable? For some, yes; and for others, no. For the public at large and considering state subsidies, I think their sentiments would not lie with the out-of-state student because of the way “the system” works today.

Enough of the mumbo jumbo. I’m not a lawyer, but I did stay at a Holiday Inn last night.

I must admit that I am not keen as to how state subsidies to colleges and universities are allocated and how the amounts of the subsidies are determined. However, from what I have read, subsidies are going to decline – or presumably taxes are going up; or both. But that is a political issue which I prefer to avoid, and therefore, will.

Do measures such as out-of-state tuition costs hinder competition? I believe so. When competition is hindered or restrained, do costs rise? In my opinion they can and probably will - to the extent that the market will bear. And when competition is restrained does productivity rise or fall? I believe it holds or falls. In the extreme, a monopoly has little incentive to innovate or improve productivity. Further, prices can rise without good reason or rationale. (That’s pretty cool, I get to ask and answer the questions.)

So if we were to drop preferential treatment for resident students, what might we expect to happen?

First and foremost, I believe tuition would rise for all students in the mid-term – 12 years or 3 rolls (assuming a 4 year graduation rate).

Next we have to consider capacity and utilization. At the present time, and for good reason, most colleges and universities have limits on enrollment. In fact, I wonder if they “over-enroll” to counterbalance attrition. Nonetheless, the demand for some colleges and universities (heretofore institutions) would exceed capacity (enrollment limit); and for other institutions capacity would exceed demand.

Here I must digress. The other day, I posted a comment that there were 2,618 institutions in the U.S., which is an average of 52 per state. Is this an indicator that there might be insufficient competition? I believe so. Now let us go back to the present thoughts.

We left off where I said that for some institutions, capacity would exceed demand. For those institutions, there would be incentive to cut costs, improve productivity, and thus reduce tuition. While they are cutting costs, the brand name universities would be motivated to raise tuition costs (due to demand) – but not necessarily improve productivity or reduce operating costs (SG&A).

Here I digress once again. In one of Rich’s blogs some time ago, he mentioned that productivity improvement must include a qualitative improvement as well. I concur and by inference include that thought when I cite “productivity improvement”. End of digression.

If I correctly understood my Economics Professors (who I hereby release from liability for errors in this epistle) the basic theory of supply and demand is a “tug of war” of sorts that ideally results in equilibrium. So over time, as some colleges become more affordable, one could argue that some demand would shift to the lower cost, more productive institutions – to the extent that it might be possible to offer 3 year Baccalaureates for capable students.

In fact, I know a guy Rich, which received his M.A. in two years and completed his PhD in two years! Is that even possible today?

Moving on. With market forces in play, and in the long term, the big business of Higher Ed is likely to become a competitive business where eventually demand is going to become spread out and the institutions that continue to operate as they do today will feel the bite of competition. Additionally, some schools will end up having fire sales and go out of business.

There will always be the prestigious schools that will be able to dictate a high price, but that doesn’t mean that competition won’t give them the incentive to reduce costs and improve productivity.

Today, the motivation for some schools such as Harvard and Yale to reduce tuition is purely political pressure. If we continue on the same path that we are on today, it will take a revolt to induce institutions to reduce costs, improve productivity, and reduce tuition. As has been said on this blog and in other forums by Rich and CCAP, the path we are on cannot be sustained. There are many valid reasons and good rationale to support such a statement. We have seen what excess credit can do to the economy – let alone hard working people. I think we can agree that at some point, the benefit of a college education will be outweighed by the cost to get it. And people are going to start looking at what they expect to make over the course of their career and ask: Is going to college going to be worth it?

The potential upside of people turning away from college is that we unintentionally create more entrepreneurs and innovation.

If we need to have a blood-letting, let’s get to it and get it over with or remove barriers to competition.