Pleading poverty on Montlake

This article in the Seattle Times is about the hard financial times at the University of Washington, the state's flagship university. At this point I'll take a quick aside to point out that despite the university's woes, things are really looking up for the football team.

Anyway, the article is all about how there isn't as much state money as there used to be, so the UW is scrimping and saving to make ends meet. Frankly, I don't see what the problem is, but then I don't quite understand why higher education is publicly funded. I'm dense that way, I think. The externality argument gets more and more tenuous the farther you get from basic skills. By the time you get to college, you're talking about a transaction where the vast majority of the costs and benefits are borne by the parties - the student and the school. I see no need for the state at all.

Having a little trouble staying on track, here.

The article states that the UW is implementing an "activity-based budget system," which will allow them to earmark a student's tuition for the courses he takes, and identify which courses cost more than the revenue they bring. Bravo! The only thing lacking is a strong signal that the courses whose revenue is below their cost will be cut. Or the professors could agree to be paid less, that would be fine, too.

This reminds me of an old joke. The president of a university comes to the dean of the physics department and says, "We're having budget trouble, and your school is one of the most expensive, with all the lab equipment and so forth. Why can't you be more like the math department? All they ask for is pencils, paper, and wastepaper baskets. Or the philosophy department? All they ask for is pencils and paper."

By the way, you'll note that the positive externality argument goes in reverse order of cost in that joke. It's possible that you can argue that there's some societal benefit to another physics major. A math major might be break-even. But we'd be better off with fewer philosophy majors (along with communications, psychology, sociology, education, and of course American Ethnic Studies).

They also mention differential tuition, where students who want to take expensive courses can just pay more. This used to be called "lab fees." Again, I think this is a great idea. When some whip-smart 18-year-old sets out to go to college, he should consider all the costs and benefits of that decision at every step. There's no reason the rest of us should take some of those costs off the table. Why? Ana Marie Cauce, dean of the College of Arts and Sciences says, "You don't want a student deciding to be a psychology major instead of doing mechanical engineering just because psychology costs less." Why the hell not? This is why academics have such a bad reputation out in the real world. In real life, you have to consider the costs of every decision you make. Academics never do. The costs of every (professional) thing they do are picked up by taxpayers, students, donors, or various others. From my perspective, it would be a very good thing if students thought about the full cost of their college education when making a decision to go. They should consider their lost earnings. They should consider the cost of tuition. They should compare this with the possibility of earning more in the future and decide.

This is the part where somebody says, "Wait! What about the poor, who can't afford to go to college?" I have two replies to this. First, I think it's largely a red-herring. I don't think there are too many students who can get into college but can't afford to go to a state school one way or another. However, since I'm advocating drastically increasing the cost of college, I have to do better than that. The answer is that college education could easily be funded by corporations. If a student can't afford school, he could ask Boeing to pay for part of his college in exchange for agreeing to work for Boeing for some period of time. This model is currently being used by one of our largest companies: the United States Military. The benefit is that all the costs and all the benefits are captured by those who are party to the decision of whether to attend college and what to study. This is how you get economic efficiency.

It would work. It would work great. We just have to get over our misty-eyed sentimentality about education and treat it like any other good. In fact, the UW knows it would work, too, although they're not saying it. Why else would they be admitting more out-of-state students? Maybe we could arrange a trade: We'll send all the Washington college students to Oregon and Idaho, and they'll send theirs here. Everybody will pay out-of-state tuition, and the universities will be self-financing.

Finally, this property downtown. How can it simultaneously be a) worth $500 million and b) producing a return of $8 million? That return is about one third what it ought to be. The UW could triple its money by selling the property and investing the proceeds in the stock market.

Market failure: necessary but not sufficient

One justification for the heavy involvement of state and federal governments in education is market failure. Market failure is a micro-economic idea in which free exchange does not produce the theoretically optimal level of production and consumption. Usually this occurs because of an externality. An externality is a cost or benefit from an exchange that accrues to someone who is not a party to the exchange. Since the cost or benefit of this externality is not considered by the parties involved in the exchange, a free market might tend to under- or over-produce a particular good.

For example. I build a factory to make widgets. (All example economics problems involve widget manufacture. Did you know?) I produce widgets up to the point that the last widget I make is worth exactly as much to the purchaser as it cost me to me. For example, if widgets are worth $10 on the market, I'll make as many widgets as I can until the last, most expensive widget costs me ten dollars, and then I'll quit.

This is all well and good. I'm happy, my customers are happy. We're both benefiting from the surplus of trade. It's great! But what if there's an externality? Let's say my widget factory puts out a stream of noxious liquid that runs across my neighbor's yard. If that cost were borne by me, I'd have an incentive to make fewer widgets, since the cost of manufacture would be higher. If it were borne by my customers, they'd buy fewer widgets, since the cost of buying widgets would be higher. But since it's borne by a third party, not involved in the transaction, no one has any incentive to take the cost into account, and widgets are over-produced.

In the case of education, the externality is not a negative, it is a positive. The argument is that my education benefits others besides me. Those benefits are not taken into account when I decide how much education to buy or when the suppliers of education decide how much education to produce, so the market for education is smaller than it ought to be. Ideally.

This simple idea is the basis for billions of dollars of spending by governments on education. My own state of Washington has a constitutional clause stating that education is the state's highest priority. But is that right? Does that follow from the logic of externalities?

Let's remember that one of the options we are given is not perfection. We must compare options as they are actually available to us. Therefore, the "failed" free market for education does not have to compete with the idealized provision of education by the state, but rather by the provision of education by the state as it actually exists. Although it is possible that a free market in education would tend to under-supply, are we sure this is worse than the other alternatives? How do we know that the current system doesn't over-supply the education market? I have yet to hear anyone even raise this issue.

Education is important. But it's not infinitely important. Let's have some thought to return on investment in our spending decisions regarding education. Let's at least be sure that the benefits of the marginal dollar outweigh the costs.