College is a Subsidy to the Rich

T or F: Since their present incomes are low, college students are poor.

I’m stealing this question from Deirdre McCloskey’s excellent price theory textbook. I’m going back through the chapter on capital investments for teaching macroeconomics. College student income is not an important topic in macroeconomics, so why bring it up?

One of the key insights of modern macroeconomics is that we need to think about the dynamics of decisions. Investment decisions take time to pay off, and we need to take that complication seriously. I threw out my textbook when it started with a Keynesian consumption function that says today’s income determines today’s consumption. One’s expected income over their lifetime (or what Friedman called permanent income) is what matters.McCloskey’s chapter on capital investments leads us to that key idea and the T/F question above.

The answer is False since college students have a high expected lifetime income and so are, in an important sense, rich, not poor. They just happen to be investing at the moment, compared to consuming.

Now that we’re warmed up to the logic, McCloskey asks a question with a more unsettling answer.

T or F: In view of the question just answered, low tuition at state universities are subsidies of the rich (the students) by the poor (the taxpayers.)

If we followed the logic of the first question, we are forced to admit that low tuition is a subsidy to the rich from the poor. There are lots of complications when we dig specifics, but the basic result follows.

In reality, the problem is even worse. It is not just that college students have higher lifetime incomes going forward and so are rich in the appropriate sense of lifetime income. They have more resources even when entering college and so are current-period-rich.

For one proxy of current resources available to students, consider current parental income. If we imagine that, unlike students who are investing, parents with 18-year-olds are likely in their peak earning years, and their current income well approximates lifetime income, then higher parental current parental income also means higher lifetime income of the parents. A 50-year-old parent is not investing in their lifetime income. A high-income “rich” parent means higher current resources for the 18-year-old, not just expected lifetime income going forward.

A recent working paper by Cécile Bonneau and Sébastien Grobon (HT: Alex Tabarrok), highlighted on the World Inequality Database, looks at “access” to higher education. They define access as the percentage of people who are enrolled or were enrolled in higher education. They show that as parental income increases, the children are more likely to enter college.

We might expect that the result holds for the U.S. with its complicated system of state colleges and loan subsidies. After all, college is expensive! Of course, the rich are the ones that tend to go.

The surprising result is that the trend also holds for French universities, which rely on near-zero tuition rates. Given the argument above, the near-zero tuition for French universities is a subsidy to people who come from high-income families and also have a high income expected in the future. Their main figure is below.

When debating a policy around making education cheaper for the students (which is not the same thing as making it cheaper for society), the exact extent of the subsidy depends on the specifics. Is it a loan given to students? Is it tax dollars given to the university? Armen Alchian wrote a piece back in 1968 about the “free” tuition debate for the University of California system. His basic insight, which McCloskey cites in the question above, seems to hold in the French case, which has near free tuition. Free tuition is a subsidy from the poor to the rich.

In the U.S., the debate these days is not around free tuition but student loan forgiveness. I don’t have much to add to that debate. There’s room for a lot of subtlety in that debate. I’m sure someone will add it someday. I could imagine a form of loan forgiveness that you could call a subsidy to the poor. I’m skeptical.

But let’s not lose the forest for the trees on college education. College education as a whole is a subsidy to the rich from the poor. I say that as someone who (like McCloskey and Alchian) greatly benefits from the immense subsidy to higher education. But we follow the logic of price theory wherever it leads.