Feed on
Posts
Comments

The following thoughts were motivated by my colleague’s musings this morning.

When we discuss possible justifications for providing subsidies to students to attend college, aside from the possibility that educating young people in Universities might provide benefits to the rest of us that we do not pay for ourselves (you KNOW I am very skeptical of that argument since I’ve been employed here) we arrive at the argument that college is only a private good, but students are credit constrained. Since students, if they had the money, would pay $60,000 per year to attend, then we ought to provide loans to them. They’d be able to pay the loans back with no problem because we assume that college itself is a good investment.

That’s fine insofar as college goes. The premium in fact IS there, arguments about the quality and meaning of that aside. However, the credit constrained argument is one of those fancy scientistic arguments that can be used to justify all manner of intervention in the market. We see credit constrains justify home purchases for example. But let’s think about the implications of this. Have you ever heard someone use the idea that people are credit constrained in order to justify loans for things that they do not like? Seriously. Take the environment for example. We often think that there us some fundamental desire for environmental protection – and we say things like, “yes, I WOULD pay to preserve this piece of wetland if I actually had the money.” We know how to test whether this claim is true (e.g. give them the land and see if they sell it). But there is no particular reason that people are credit constrained only for this purpose. Take my neighbor Chester McGillucuddy, who also is credit constrained. “I would buy that wetland too if only I had the funds. I would instantly drain them and build a world-class school on the site, and then donate it to my local school district.” Or even better, “if I only had the funds, I would drain those wetlands and build a giant roller coaster there!” There is no reason to believe that folks are only credit constrained when it comes to things that “you” approve of. And once we recognize this fact, yes fact, then we are back to the point that I basically start all of these arguments with. You MUST justify, using a reasonable benefit-cost analysis, why the thing YOU propose is in fact a reasonable thing to do.

Similarly, we often lament the fact that some people are so rich that the only reason that they pay to do something is because they are fantastically rich. It’s not that they love the things they do any more than you do, it’s just that they are rich. For example, a rich man walking through the desert will outbid a poor man for the lemonade that may be there not because he is any thirstier, or would enjoy it more, but because his income allows him to do so. Fine. We know how to deal with this (real) problem, and perhaps we’ll discuss in the near future. But think about this sort of an argument. It is, once again, commonly employed in reference to some thing that folks find to be important fundamental rights that are “too important” to be sold on markets. So, we cannot have water sold in markets or health care because rich white dudes will buy it all up while the poor non-white masses will die of thirst and disease around them. Sure. Let’s go for it. I agree. But did you ever stop to think that the exact same argument applies to some things that don’t fit so neatly into this narrative? Think about Yellowstone National Park. Or think about “green” energy. Or think about preserving some nice coastal property. Perhaps the only reason those things exist and are preserved is because people don’t have anything better to do with their money. They are so rich that all they can do is outbid poor little ‘ol Wintercow for those valuable resources. Maybe dirty Wintercow really prefers those resources more than the wealthy “E”nvironmentalist, it’s just that I don’t have the money to do what I want with them, and so the resources (inefficiently) end up in the “E”nvironmental uses.

Again just as in the above there is no fundamental reason why this situation is wrong or any different than the standard narrative that “corporations” outbid environmental groups for valuable resources only because they are rich. And once you recognize this fact, yes fact, then again we have to get ourselves back to doing reasonable cost-benefit analysis to justify our positions. Else what “E”nvironmentalists are arguing yet again is that their preferences are superior to yours, and should be imposed on you. Few “E”nvironmentalists would of course admit this. I am not even sure they are aware that this is the implication of their views.

3 Responses to “Credit Constraints, College and the Environment”

  1. Michael says:

    Much of the information I read on energy efficient appliances lists the credit constraint as a reason for not installing, and there is a lot of debate about the “proper” discount rate on investment.

  2. Harry says:

    Sure, if students had the money, they might pay the tuition, if they found it a value.

    But think about it, if you are an enterprising student who has half a million in cash of his own money. I never knew anyone who had that much cash, but had I had it, I would have bought a $3,000,000 business, and would take care of paying for the $240,009 liberal education later.

    When I was a student, I and my friends bought donuts at the thrift store on Park Street for weekend nourishment, but it was not as bad as it might seem. We always managed to earn some money for pleasure.

    Had we had free Rameses rubbers, or more importantly, had our female guests had free birth control pills, perhaps the Towne House motel would have been affordable, if we had a subsidized government loan, which may have paid for a few bottles of wine and whiskey, and maybe a joint or two.

    This gets down to fundental rights.

  3. Jenna says:

    If we look at higher education as a purely private good (which I disagree with) I think one benefit of providing credit to students is the ability to price discriminate. If credit is not provided, then tuition at its current rate would attract a lower number of students. The partial tuition lost from those who are not able to afford the education would harm the bottom line of the university (again, assuming they are concerned about these things) and if the impact is large enough, would cause the university to downsize or stop offering certain services.
    But offering credit through loans and scholarships allows the school instead to price discriminate by ability to pay. Student A can pay $60,000 per year, but student B can only pay $30,000, for example. By providing credit, the university gains a total of $90,000 rather than just the $60,000. This strategy makes the most sense when fixed costs are high and variable costs are low. But administrators and professors are paid regardless of the number of students from year to year, and dorms and other buildings must have water and electricity whether there are 5 or 50 occupying the space.
    The reasoning of “if I had the money I would buy this” is factored in already into a student’s willingness to take out a loan in the first place – there is the expectation (whether well founded or not) that the university will provide them with a service to enable them to pay back that loan at a later point.
    Based on this premise (if it is in fact logically sound and is a reasonably if highly simplified example of what costs a university faces) then providing credit to some students makes good business sense as a strategy for the university.

Leave a Reply

immediate vortex