Wednesday, January 20, 2016


Counter-Cyclical Funding

Yesterday’s discussion in the New York Times about free community college is well worth checking out, if you haven’t seen it yet.  I was particularly taken by the contributions from Sara Goldrick-Rab and Nikki Edgecombe, who both recognize the key role of public higher education in providing opportunities for people who otherwise might not have them.  Though their preferred mechanisms differ, they share a sense -- that I share as well -- that the way forward as a society is through more and more accessible education, rather than less.

Still, a point made in passing by Andrew Kelly is nagging at me, probably because I’ve spent the last decade and a half working in community college administration.  I see the reality of this point every single day, and I’m concerned that proposals that don’t address it will backfire.

Public funding is cyclical, but enrollment is counter-cyclical.  

Put differently, states and counties are likeliest to reduce their support during recessions, when their tax revenues decline and other forms of spending increase.  Those are also the times when enrollments spike.  

Tuition offers a partial buffer for those funding cuts when recessions hit.  To the extent that enrollment increases cause increases in tuition revenue, that new revenue helps to mitigate the pain from state or local cuts.  It’s not enough -- only the for-profits charge more than the cost of production, by design -- but it helps.  Readers who are familiar with Keynesian economics will recognize here the key role of counter-cyclical spending.  In this case, the counter-cyclical spending comes from students.

If we make tuition zero, and move the entire revenue stream to appropriations, then recessions will sting much more than they already do.  We’ll lose the counter-cyclical funding source, making us more subject to the boom/bust cycle than we already are.  (Actually, it’s more of a “meh”/bust cycle.  I’d love to see a boom…)  The next recession would be devastating.  We’d have to resort to waitlists, turning students away at the precise moment when they need us the most.  If history is any guide, that will create an opening for for-profit or other providers.

I don’t think it was consciously designed this way, but splitting revenue sources between appropriations and tuition works like diversifying a portfolio.  It evens out the extremes.  Put everything on one side or the other, and the extremes won’t be buffered anymore.  As bad as the effects of the Great Recession were on campus, they would have been far worse without the buffer that tuition revenue provided.

States and localities generally can’t do counter-cyclical spending.  They (usually) don’t have the legal option of running deficits, so when revenues crater, spending has to crater with it.  They can play some games on the margins -- some people build entire careers doing that -- but in broad strokes, they have to follow the economy when it goes down.  When it goes up, they have more room for choices.

The Federal government can deficit-spend, but until now, its connection to operating budgets has been almost entirely through the conduit of students, in the form of financial aid for tuition.  It’s theoretically possible to rely on Keynesians at the Federal level, but the sequestrations of recent years don’t inspire confidence.  

If we sever the direct connection between enrollments and revenues, then we’ll need another reliable source of counter-cyclical funding.  And a source that relies on the wisdom of congressional leaders making a conscious choice during a time of crisis…


In the absence of tuition, we’d need some sort of national endowment to cover a per-student or per-credit voucher.  It would need relative autonomy from Congress, so they couldn’t just raid it when it seems convenient, and it would need a dedicated revenue stream of its own.  That way, colleges would still have counter-cyclical balancing funds when demand is highest and appropriations are lowest.  

How hard could that possibly be?...

You don't have to imagine what would happen in that model because California showed the effect during the Great Recession. They had nearly zero tuition compared to the cost of instruction and all funds were funneled through the state. Huge waitlists were the result. At least the tuition at my college is high enough so that a full class does cover the cost of adjunct instruction. That allowed us to react. I'm not sure about a future recession, however, because the state has now taken tuition increases out of our hands.
We had a version of the free tuition model for about a decade, although in our case, it was a lottery-funded scholarship that was given to everyone that met certain gpa and standardized test scores. In practice, to gain admittance to our school, you had to have made the grades to get the 100% scholarship. So in fact, nearly 100% of our in-state undergraduates got free tuition. Needless to say, this was rather popular with parents. The system worked OK for a few years, but there was a built-in incentive to keep tuition at very low levels (since the state was effectively billing itself). This starved the universities with predictable results (overcrowded classrooms, closed sections, waitlists, etc.). Eventually, the "100% scholarship" was capped at a specific dollar amount, and if that amount is less than the currently-charged tuition, students have to make up the difference. We are now making slow progress from those problems since we have a bit more tuition money coming in.

While the population and specifics are different, I suspect that the broad picture would be similar if the first two years of college were made free.
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