As a public investment, free college tuition is a loser.
November 5, 2021.
This sequel to the preceding post targets the College for All plan hatched by Bernie and slightly modified by Hillary in 2016. The headline promise was free tuition for students at public 4-year institutions and community colleges. Even the richest students would qualify under Bernie's plan. Hillary was slightly less cavalier with taxpayers' money: qualification would end at the 80th percentile of the income distribution.
The last post concluded that College for All failed in terms of equity. Conveniently, there is another justification for free tuition. Today, the Democrats' favorite argument for spending other people's money is that "it's a good public investment," which means it generates enough social benefits to fully repay the taxpayers' investment as well as other social costs. Accordingly, free tuition is portrayed as an investment in human capital (or recently, human infrastructure) whose social benefits outweigh the social costs.
Given that free-tuition generates social benefits by increasing college graduation, is it worth the cost? Not by a long shot. If you are looking for the most extravagantly expensive way to boost the graduation rate, free tuition is it.
Social Benefits: Economic Productivity Ranks #1
A student who completes a BA degree by virtue of free tuition is rewarded with earnings that are 80% higher than a high school graduate. This is a major private benefit of free tuition.
Social benefits refer to benefits that automatically spillover onto people outside the graduate's private circle of family and friends. In other words, these "spillover benefits" make the larger society better-off, over and above the private enrichment of graduates. Of the many social benefits attributed to higher education, the only spillover that makes a huge difference is economic productivity.
The primary social benefit of higher education is productivity growth, especially the kind that is spurred by technical innovation. Labor productivity, or "output per worker," fundamentally determines a society's standard of living. So, the popular justification for free tuition goes something like this:
Free tuition will enable more students to complete college. This increase in the supply of advanced skills, when properly employed, will eventually boost productivity in the larger economy, either by making production more efficient or by innovating new and better products. This is called spillover productivity, and the innovation aspect is critical: the ten-fold increase in America's standard of living since the Civil War was driven by a torrent of innovations, from vaccines and antibiotics to air-conditioning and the compiler. So the productivity effect of a college education not only enables graduates to earn more money (a private benefit), but it raises the living standards of other people as well (a social benefit).
Huge Social Cost.
Unfortunately, by extending free tuition to those who don't need it, the Democrats' plan magnifies the cost without adding any benefit. That's because free-tuition boosts productivity by enabling more low income students to graduate, but will have no effect on on the wealthier majority who would graduate anyway without a discount.
Consequently, the cost of financing free tuition for all students will be astronomically greater than the productivity gained from a small increase in low income graduates. Here's the math:
Under Bernie's plan, qualifying students at 4-year public college would save about $5100 in net-tuition costs. Recent research suggests that cuts of this magnitude should increase bachelor's degrees by 6.6%, mostly by enabling lower income kids to persist once they get to college, but also by attracting more of them into the class of first time freshmen.
Since a full or partial tuition discount would be granted to at least 85% of in-state students, the six-year total cost of generating a 6.6% increase in bachelor's graduates is huge. It comes to $390,000* per additional graduate. That's right, the cost of graduating one additional student by means of free-tuition is at least $390,000. (And this is just the direct cost to taxpayers, not including the social costs discussed below).
So, to offset this cost, each of the additional graduates would have to generate more than $390,000 worth of spillover-productivity over their lifetime. In other words, on top of the extra $1,000,000 a typical graduate earns from having a degree, she would have to raise other people's living standards by $390,000.
Productivity Potential Varies by Major Field.
That estimate ($390,000) would be meaningful if it actually reflected the typical graduate's capacity to enhance productivity. But it doesn't. In fact, only a tiny percentage of graduates possess the potential to generate significant spillover-productivity. They are known as STEM majors.
STEM fields systematically cultivate the cognitive skills that underlie technical innovation and productivity growth. In tests of critical thinking and fluid reasoning, STEM majors rank at the top. Other research shows that competency in higher mathematics predicts high achievement on a variety of fronts.
The problem is, STEM majors account for only 16% of bachelor graduates. So, when free-tuition fuels a 6.6% increase in graduates, only 16% of them will possess the cognitive capital to stimulate productivity growth. That means each STEM graduate would have to engender $2,470,000 worth of spillover productivity to repay the taxpayers' investment in free tuition. This, of course, is preposterous.
In sum, the Democrats' scheme would squander a fortune on major fields that have no redeeming social benefit, and thereby steal funding from much more beneficial uses, like equal access to high quality day-care and early childhood education.
To appreciate the implications of this trade-off consider this: free tuition will undoubtedly increase the number of graduates in the likes of art history, gender studies, golf course management, and physical education, at a cost of $390,000 apiece. That's enough money to send 66 poor kids to a high quality pre-school for a full year. So it's fair to ask, which outcome is likely to produce greater social benefit: 66 additional pre-school graduates or one more fitness instructor?
Why are non-STEM graduates less likely to boost productivity?
Consider the 54% of graduates who major in Social Sciences, Humanities, Arts and Business, henceforth 'SHAB'. Most of the jobs typically landed by young SHAB graduates do NOT provide the opportunity to apply college level expertise to non-routine tasks, which implies weak demand for their peculiar skills in the world or work.
Only 31% percent of recent SHAB graduates report that their jobs are "closely related to my major," compared to 61% for engineering and computer majors. Even more telling is the fact that most of the jobs landed by recent SHAB grads are not college level, i.e., they do not require a bachelor's degree. This "underemployment" ranges from 50% for Ethnic Studies majors to 70% for Criminal Justice, with Business majors in the middle at 60%. By contrast, less than 20% of engineering majors take jobs that do not require a college degree.
Furthermore, underemployment has been rising over the past decade: SHAB grads are encroaching on the upper-echelon of high school jobs (e.g., office administration and sales). It's called "credential creep" or "credential inflation." As the concentration of college graduates in the labor market has risen (see chart), more employers are favoring, if not requiring, a bachelor's degree for jobs normally performed by less educated workers. In these jobs a graduate's major field is superfluous. The English major hired as an administrative assistant is not selected because she can recite Shakespeare.
So, why do employers favor a college degree for jobs that don't require college level expertise?
The answer is "credential-signaling," as discussed in a previous post. From the employer's perspective, a college degree is an efficient way to screen applicants for desirable qualities that happen to be strongly correlated with college success. A sheepskin from a reputable college is a reliable indicator, or "signal," of attributes that employers value, such as intelligence, literacy, conformity, and grit. For the most part, these are fruitful qualities that students bring to college, not the products of a college education.
A bachelor's degree is an awfully expensive screening test for IQ and grit. Spending five years of effort and money to secure a degree so that a graduate's preexisting traits can be signaled to prospective employers is a huge waste of resources with no redeeming social benefit. And there's a huge social cost: as free-tuition feeds credential-creep, the additional SHAB graduates will bump more of their high school counterparts down the occupational ladder. The notion that taxpayers should finance those degrees to the tune $390,000 apiece is absolute lunacy.
But wait: $390,000 is just the direct cost to taxpayers. It doesn't include the cost of adverse side effect associated with a 6.6% boost in college graduates, such as...
The Social Cost of College Level Malfeasance, Crime and Perverse Innovation
A much heralded social benefit of high school completion is its preventive effect on street crime. But at the postsecondary level this social benefit mutates into a significant social cost: college completion actually potentiates crime, albeit of a different sort.
A bachelor's degree is the gateway to lucrative opportunities in organized white collar malfeasance. Stealthy and complex corporate racketeering could not succeed without the intellectual skills of college graduates. The social cost is immense because the problem is systemic: Opioid Crisis, Financial Crisis, Wells Fargo, VW-emissions, Libor, WorldCom, Enron, and Love Canal are merely headline examples, the tip of the iceberg so to speak.
Millions of college graduates, wittingly or not, work in enterprises that thrive on duping customers, extracting "rents," rigging markets, evading liability, and the like. They cooperate in these endeavors partly because it's easy not to see the evil in the outcome. As a cog in a complex division of labor, the individual worker is provided with "plausible deniability" and diminished responsibility. For example...
The marketing majors who, as employees of Purdue Pharma, propagated the fiction that opioids are non-addicting when used to treat pain. By enabling doctors to prescribe opioids indiscriminately, they helped lay the groundwork for today's opioid epidemic, the cost of which is immeasurable.
The finance majors who, as employees of major banks, bundled risky mortgages in a way that made the securities appear safe to trusting customers. Meanwhile, their peers in the rating agencies contrived justifications for stamping "AAA" on those securities. Add credit default swaps to the mix and the result is what Warren Buffet called "financial weapons of mass destruction." So, by applying their advanced skills to the innovation of devious financial products and scams, college graduates were instrumental in collapsing the economy at a cumulative social cost of $1.7 trillion. That's trillion, with a "T."
And let's not forget the 800,000 college grads who ply their skills in Marketing & Advertising, an industry dedicated to the subversion of rational consumer choice.* This fosters a misallocation of resources that makes society poorer. Economists call it a "deadweight loss."
So now it comes down to this: If we had a full and honest accounting of the social benefits and costs of the free-tuition proposal, would the total benefit really be sufficient to offset the total cost?
*The fact that some advertising has positive economic effects does not justify the harm inflicted by ad campaigns for snake-oil such as Prevagen.
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