Tuesday, October 11, 2016

States and Cycles

Anyone remember Keynesianism?

Bueller?  Anyone?


At its core, Keynesianism was a branch of macroeconomics that assumed that recessions or depressions were caused by periodic and inevitable dips in demand, and that governments could deliberately adjust their spending to counteract those dips.  During recessions or depressions, governments could borrow money and spend it in ways that would stimulate demand.  That new demand would create jobs, which would stimulate demand among the newly employed, whose new spending would generate more demand, and so forth.  When the economy got going too fast, it could siphon off the excess in taxes to pay off what it had borrowed.  The idea was to make the cycles less extreme, and thereby prevent both suffering and revolution.

To put it in a single word, it’s about being countercyclical.  When the economy goes down, public spending should go up.  When the economy goes up, public spending should go down.  Having a counterweight would prevent the economy from tipping over.

Unemployment insurance is a Keynesian program.  Spending on unemployment goes up when the economy goes down.  That spending enables the unemployed to keep consuming, thereby preventing more people from losing their jobs.  Wars are sometimes Keynesian, though Keynes himself wasn’t a fan; military production helped pull us out of the Great Depression, for example.  President Obama’s “stimulus” spending (ARRA) was Keynesian, as has been the steady decline in deficits as the economy as recovered.

Community colleges are profoundly Keynesian, but most higher education policy proposals don’t account for that.  They should.

Community colleges rely primarily on variations of combinations of state, local, and student funding.  (There’s often some ancillary income from facility rentals, bookstores, summer camps, and the like, but it doesn’t come close to the big three sources.)  Student funding -- tuition and fees -- comes from a combination of private funds and financial aid, which is mostly federal.  

State and local governments generally aren’t allowed by law to run deficits.  That means that when tax revenues go down, as they do in recessions, state and local governments have to cut spending.  Their spending matches the economic cycle, albeit with a delay.

But community college enrollments are countercyclical.  They go up when the economy goes down, and they go down when the economy goes up.  

Cyclical funding and countercyclical enrollments go together like hot fudge and tunafish.

Any plan for “free community college” needs to take account of the function of tuition in the current system.  State and local aid are cyclical at best.  (Sometimes they don’t come back as the economy does; the cycle only moves in one direction.)  But the federal government has the borrowing authority to spend countercyclically.  That means that when enrollments go up and state and local funding go down, the only way for a college to make the numbers work is to shift more of the expenses to the feds, via tuition.  That happens both through pricing and through volume.  Tuition is the countercyclical stabilizer.  It’s the counterweight that keeps the institution from tipping over. Whatever replaces it would have to perform the same function.

New America is pushing a solution that it thinks would solve the federal/state problem, though it fails to address the Keynesian issue.  (Still, points for the Hamilton reference in the title.)  My concern with proposals like the one from New America is that they rely on the federal government nudging the states, often through “maintenance of effort” requirements.  That assumes several things.  First, it assumes that states are the most relevant actors.  That’s not always true; for example, at my own college the county’s allocation is much larger than the state’s.  (By contrast, the Massachusetts system has no local funding at all.)  Second, it assumes that states have the discretionary funding during recessions to meet maintenance of effort requirements.  Recent history suggests that they don’t, or won’t.  When tax revenues fall off a cliff, states aren’t going to increase discretionary spending.  Third, it doesn’t account for the sheer political spitefulness of states that will turn down free federal money to make a point.  The fate of Obamacare in red states should have taught us that.  

To its credit, the New America proposal ties federal support to enrollment, much like a tuition-based system does.  But then it adds a requirement for state funding to do the same.  In the context of a nasty recession, the odds of states doing that are close to zero.  As states fall short, one of several bad outcomes would happen: states that step away would be forgiven, thereby creating a race to the bottom; colleges would take brutal cuts; or states would opt out of the system altogether.  It’s too fragile.

Yes, federal-state relations matter.  But if you leave local funding out, you miss an important piece.  And if you leave recessions out, you’re setting it up to fail.  Depending on the results of the election, free community college may get some attention; let’s not waste our shot.