Thursday, June 19, 2008

Incorrect Assumption

by Andrew Gillen

A blog posting over at "Economists for Obama" caught my eye. It concludes, that a new tuition tax credit would mainly affect enrollment, and that "the effect of the credit on tuition would be small."

Given the assumptions made, the analysis is correct. However, the assumptions are incorrect.

(I apologize in advance for the econ jargon) It assumes that the supply curve is elastic because "schools can always squeeze in a few extra students." While I don't doubt that any given school could squeeze in a few more students, a "few more" is not enough to make the supply curve elastic. In fact, in the short term, schools run into capacity constraints quickly, and in the long term, there are significant barriers to entry (i.e. start-up costs, accreditation) and it is not in many of their interests to expand enrollments (see the section "Why Subsidies for Higher Education Do Not Have the Same Effect as Other Subsidies" in our study on the Tuition Bubble for a detailed explanation).

What this means is that the supply curve is inelastic, not elastic. This is consistent with the findings of a new NBER paper by Susan Dynarski and Judith E. Scott-Clayton which finds "little compelling evidence" that increases in student aid are effective in increasing enrollment.

Bottom line: The graph they show with the correct supply curve (inelastic instead of elastic) would indicate that it would be primarily tuition, not enrollments, that would go up.

HT: Mark Thoma

1 comment:

Daniel said...

The academic literature that I have come across indicates that it is the demand for education that is inelastic. Put simply, students who are going to attend college will do so regardless of the price (aka tuition).

The price may influence where they decide to begin their studies, but it is not going to deter them from attending altogether. Talented and capable students from low-income families may not be able to attend the best private college, but hard work and motivation will earn them a degree. I know several students, myself included, who began their studies at a community college or branch campus and wound up with a degree from a respectable university. The combined financial aid available to the most needy students is more than enough to cover the tuition at most community colleges.

This is not to say that the student will not have to take out a loan or work a part-time job, but never has it been declared that a college education is a merit good. People seek a college education because their is a perceived reward (higher lifetime earnings, improved working conditions, etc).

I believe that access to higher education is already available to all American citizens. If a student is capable and willing to pursue an education, then it is possible via a combination of financial aid programs, loans, and part-time work. As a first generation college graduate, I know this is possible, as I am now near completion of my masters degree and have financed it through all of the previously mentioned.

The empirical evidence indicates that increases in financial aid do not increase enrollment. In addition to the Dynarski paper mentioned by Mr. Gillen, a NBER working paper by Kane (1995) indicates that the Federal Pell Grant Program has not increased the enrollment of low-income students and that the money has instead gone to students who already had planned to attend college. The proposed tuition tax credit will likely have the same effect.

The problem is not that low-income families cannot afford to send their children to college, as there is sufficient financial aid available. The problem is includes:

1) Information concerning financial aid availability and the process is not readily available to all students. High school guidance counselors across America are failing to adequately prepare first generation college-bound students.

2) Colleges and Universities need to be held accountable for controlling their expenses. To borrow a phrase from a friend, the "countryclubization" of universities is leading to higher tuition costs for students. If we as a country are really concerned about the cost of tuition, then let's begin maintenance at the root of the tree and not the leaves. We need to look at how universities are spending the funding and revenues that they recieve. The answer is not to spend more taxpayer money to support a frivalous spending machine.

3)Let's be honest, not all people should go to college. By opening the doors to everyone, the value of the education decreases due to what I like to call the 'dumbing down' effect of education. College courses are not supposed to be easy. Students who are not motivated or capable of learning the material should not be attending.

4) We need to do a better job of educating the youth from the elementary and secondary levels. This will help them be better prepared to face the challenges that will arise in college. Preliminary results from the research on education inequality that I am conducting indicates that spending at the elementary / secondary level has a significant effect on reducing inequality, while spending on college has a questionable effect, if one at all.

An increase in tax expenditures to fund higher education is not going to increase enrollment. It is going to put extra money in the pockets of middle and upper class families whose children are already in college. This is the portion of the population that has recently supported the generous tax cuts offered by the Republican. This policy is nothing more than a tainted political tool.