Friday, November 7, 2008

"Required" Service, Tax Credits, and Captured Surplus

Thoroughly addicted polijunkies like myself no doubt saw Obama's new site is now outlining his intent to require 50 hours of community service in middle and high school, and 100 hours per year in college. Before Godwin's Law strikes (too late!) Let us take a rational look at this:

First, he can't "require" college students to do a thing. Since universities are universally not federal institutions, he would have to "lean" on them in some fashion to implement his plan. How could he go about doing that?

-He can't pull a Commerce Clause magic trick and compel universities to adhere, since a very large chunk of college education comes from private universities and colleges.

-He can't revoke a university's accreditation, the accreditation associations are private entities with no government strings. (Go, free market, go!)

So all that's left (irony of ironies,) is a "market" solution. Like so many other things the federal government "mandates," what they actually do is threaten to withhold already existing funds for noncompliance. There are two angles he could take:

-Withhold federal funding to the university itself. This would be accomplished with something similar to the Solomon Amendment, which gives the Secretary of Defense discretion to withhold federal funding to schools that refuse to participate in the ROTC program. Private schools, at least, have already signaled their willingness to forgo the federal gravy train in defense of their principles. Public schools would likely cave, but it would nonetheless generate real animosity towards Obama in academic circles, which I don't think he'd want.

-Withhold federal funding from the students. The far more likely solution - it would look a whole lot like universal service without that "mandatory" thing hanging over it, never mind the government will be imposing a requirement upon you in order to obtain that which it had previously promised unconditionally. The real intent would likely be further muddled by implementing his other big change to higher education at the same time - a $4,000/year refundable tax credit (read: grant) to all full-time students. By tying the two together, it will look like he's giving students the opportunity to "earn" $40.00/hour doing some community service (again, hoping you ignore the fact that you would lose Stafford Loans and Pell Grants too if you opted out.)

So operating on that assumption, let's dust off that section of your long-term memory that's desperately trying to cling to your Econ professor's lectures. Given that there are no statutory restrictions on the price of college tuition, the price of tuition is primarily determined by market forces. (WARNING! Dry reading alert! Scroll down to the bolded sentence to get the bottom line up front.)

Suppose every citizen of the country is given $4,000 each year on the condition they attend college full-time. As the demand curve shifts rightward, the quantity supplied/demanded increases, and the price paid also increases. Since suppliers are not mindless automatons, however, they will set their price at the point where they can capture the greatest amount of real profit from the surplus. Translated, that means the colleges will balance the prospect of new students who couldn't/wouldn't attend college previously against raising the tuition by $4,000 on all students, and keeping the number of students the same. I think it's fair to say that anyone who *wants* to go to college, and is *qualified* to go to college, *will* go to college, unless they cannot/will not fit school in around their current work schedule. Since $4,000/year isn't even a double-digit percentage of the median American salary, we can safely assume nobody will be quitting their jobs to go to school full-time thanks to Obama's plan. As a result, the number of people who are actually willing to start going to school that would otherwise not have done so is very small. This is a classic example of inelastic demand - the quantity demanded will be roughly the same regardless of price. Adding the money will shift the demand curve rightward, but since it is inelastic, the quantity demanded shifts only slightly while the price increases dramatically. End result? The average full-time tuition goes up by just under $4,000, and the number of new college students as a result of this policy is a fraction of a percentage point of current enrollment.

And the students this is supposed to help? Let's say Joe American-Dream is a junior at a state university. Joe is from a low-income family. He's the first member of the American-Dream clan to see the inside of a college lecture hall. Ever. Joe gets about 90% of his money for school from Pell Grants, Subsidized Stafford Loans, and a few scholarships for disadvantaged students. Obama's plan goes into effect. Joe gets a $4,000 check from the government every year, but Joe's tuition goes up by $3,750 that same year. After these two events cancel out, Joe's left with $250 - about enough to buy two used textbooks. In exchange for that $250, Joe had to work 100 hours with no other compensation. Effectively, we've consigned Joe to working for his "community" at $2.50/hour. Furthermore, Joe can't say "take this job and stuff it," because if he *doesn't* take it, he loses almost all of the income he's using to pay for his education. He's "fined" by the government for noncompliance.

For viscous irony, let's contrast that to the case of Lance Fratboy. The Fratboy family may not be "filthy stinking rich," but they certainly exceed DoE's means test cutoff by a fair margin. Lance's Expected Family Contribution is exactly equal to the value his school tells the DoE is the expected cost of attendance. Lance has the option to take out about $2,000 in Subsidized Stafford Loans, which he does, because his parents refuse to buy his beer, pizza, and XBox 360 games. When Obama's plan goes into effect, Lance gets the same options: $2.50/hour job for a few weeks, or you lose your federal loans. The difference is Lance's family can afford to take the $6,000/year hit. They have the option to decide that Lance's schoolwork can't handle 100 hours of interruption. The Fratboys get "fined", too, but their penalty is a fraction of Joe's.

So whose policies, exactly, are going to help the "working class" again?

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