Thursday, January 15, 2015

When Free Tuition Meets the Next Recession

In reflecting some more on the free community college plan that President Obama has announced, I’m concerned about its when the next recession hits.  It’s structurally fragile.

Community college enrollments tend to be counter-cyclical to the economy.  When the economy goes down, enrollments go up, and vice versa.  That makes sense, if you think about it.  For traditional-age students, parental income is a major factor in choosing a college.  When that income is reduced or eliminated, Faraway State University becomes inaccessible, and the local community college suddenly looks pretty good.   For adults thinking about coming back to school, the opportunity cost of higher education is lowest when jobs are scarcest.  It’s one thing to choose between going back to school and working; it’s another to choose between going back to school and being unemployed.

But recessions affect the federal government differently than they affect the states.  The difference could make the proposed cost-sharing between the federal government and the states difficult to sustain.

The federal government is allowed to run deficits, so it can borrow money to spend more during recessions. (In policy speak, it can engage in Keynesian stimuli.)  But states mostly aren’t allowed to run deficits, so they can’t borrow to make up for lower tax revenues during recessions.  If states are required to pony up a set percentage of community college costs, and a recession hits, they’ll be caught in a double bind of expenses going up just as their ability to pay will go down.  

At that point, my crystal ball tells me, we’d start to see states fail to meet their commitments.  If that happens during the wrong federal administration, it could kill the plan.  At the very least, it suggests a basic instability.

I’m pointing this out in the spirit of wanting to make the plan sturdier.  It needs its own dedicated funding stream, and preferably one that doesn’t fluctuate too wildly from year to year or administration to administration.

That’s not to deny the possibility of some sort of performance funding, though it would have to be on top of a base sufficient to make incentives realistic.  If underperformance is caused by underfunding, then punishing it with more cuts just sets off a death spiral.  If you want to reward performance, you first have to enable it.  Otherwise you’re just punishing colleges for having already endured cuts.  

States may well need a role, but as long as they’re unable to do countercyclical spending, the feds may have to be flexible on the 75/25 split.  Otherwise, they’re setting up a pincer movement that will hit hard when the next recession happens.