Want a better American work force? End federal subsidies to higher education

by Eric Shierman

The Obama campaign’s theme of the week was doubling down on federal student loan subsidies. At a cost of $6 billion a year, they want to prevent rates from doubling from the current rate of 3.4% to a still heavily subsidized 6.8% under current law. While the media is all awash in uncovering lavish parties thrown by the GSA and the Secret Service, not enough scrutiny gets applied to the five year party that such behavior distorting prices are financing at our institutions of higher “learning.” Sold to the public as an investment, subsidized student loans finance consumption.

That’s right I said CONSUMPTION. Higher education is primarily a consumption good not a capital good. College has become a form of recreation. Our highly subsidized campuses remain popular places to be, but remarkably little vocational training occurs there. Students are quick to complain about anything that robs them of their rights, but when a professor cancels class, where are the shouts of outrage? “Hey, I’m paying to learn valuable skills!”

Some training in knowledge our economy needs does take place, but these majors remain remarkably unpopular. Science, technology, engineering, and math (STEM) courses would go largely unfilled if our universities were not also engaging in a massive industry of education tourism where foreign students come to the United States to study the hard stuff while the Americans around them party. The universities get to charge the foreign students full tuition, but our immigration laws won’t let them work here. Lobbyists for our university industrial complex point to the critical knowledge that the 21st century economy needs without admitting how many of the few graduates who acquire it are then deported upon receiving their diploma. If we include all students foreign and domestic, total college enrollment has increased by 50% over the past 25 years but the number of students studying STEM subjects remains flat. In 2009 we graduated 37,994 computer science majors, a smaller cohort than the class of 1985!


Our labor market does indeed reward the few legal residents that pursue STEM majors even if our culture socializes young people into stigmatizing such hard work as the purview of geeks and losers like the cast of Big Bang Theory.


But how clear is the signaling mechanism of the labor market to college freshmen as they choose their majors? Young, overconfident undergraduates who pursue their college education with a sense of entitlement as to how much fun they are supposed to have in the “best years of their life” are prone to calculate a more short-term focus than the whole notion of “investing in higher education” implies. Take away the role of prices, and what should we expect? What 18 year old feels compelled to wrack his brain with organic chemistry, computer algorithms, and differential equations late into the night and all weekend long when for the same price he can skip all his assigned reading, show up for the exams, and BS his way to a BA in sociology? All things being equal, students prefer subjects where there are no wrong answers.

A conclusive body of literature has emerged to explain how increased spending on higher education not only fails to provide our labor market with the skills it needs, but is actually creating shortages of STEM graduates in critical fields. Increased subsidies to higher education contributes to grade inflation in the humanities and social sciences. Even students entering college with the intent to study a STEM discipline respond to the night and day variance in pressure by switching their major to something easier. The first published paper that rigorously addressed this matter was Richard Sabot and John Wakeman’s 1991 classic “Grade Inflation and Course Choice.” Observing this trend as it began to accelerate in the 1980s, they concluded:

The number of students graduating from American colleges and universities who had majored in the sciences declined from 1970-71 to 1984-85, both as a proportion of the steadily growing total and in absolute terms. Students make their course choices in response to a powerful set of incentives: grades. These incentives have been systematically distorted by the grade inflation of the past 25 years. As a consequence of this inflation, many universities have split into high- and low-grading departments. Economics, along with Chemistry and Math, tends to be low-grading. Art, English, Philosophy, Psychology, and Political Science tend to be high-grading.

The two decades of research that followed has confirmed their work. Kevin Rask has measured the effects of grade inflation over this past decade while Philip Babcock and Mindy Marks have applied a tried and true “hours worked” econometric formula to undergraduate studies to measure how the amount of studying required to earn a degree has dropped as subsidies have increased.

The effect of government subsidies on higher education has been to obscure the price signal that full tuition would otherwise have set. If students had to pay the full price for the cost of their education, they would make more rational decisions. The propensity to pay for things that do not enhance their marketability in the labor market would decline. The amount of students devoting four years of their lives to pursue a BA in art history or the like, only to join the ranks of the unskilled laborers upon graduation would once again be limited to the prerogative of the wealthy just like any other form of conspicuous consumption. Subsidizing the same opportunity for the children of the lower middle class actually limits their opportunity. When faced with the full cost of their education, scrutinizing costs with a focus on the actual return on their investment would become paramount.

This is particularly true when choosing where to study. A remarkable amount of student debt comes from room and board even when a suitable university in their hometown would have allowed substantial savings from living at home and packing a lunch. It boggles the mind how many public dollars are spent subsidizing an expensive dorm lifestyle that distracts from learning rather than enhances it.

If private lenders who want their money back rather than politicians who want votes were setting loan terms and interest rates, we would see a pricing mechanism in student loans that guided education dollars towards their more efficient use. Students entering fields that had better job prospects could enjoy lower rates, while students engaging in non-vocational studies would pay a risk premium. Lenders could also set terms based on grade inflation adjusted GPA. A 2.8 GPA in molecular biology at Reed College is not the same thing as a 2.8 GPA in outdoor adventure leadership at Southern Oregon State University. (Yes they offer a four year baccalaureate of science in such a challenging area of inquiry.)  Lenders could charge lower rates or penalizing rates for graduates of various schools in response to actuarial data on the history of its alumni’s default rate.

The advantages of saving a significant amount of federal tax dollars would be non-trivial, but the greatest economic advantages would come from the increase in STEM graduates and the increase in the labor supply as students who are not and never will be cut out for college no longer delay adulthood by avoiding the labor market for what is too often now five or more years. Our economy does not need college educated waiters, baristas, and security guards when we have been unable to fill our shortage of electricians, welders, and heavy equipment operators, skills that have been in high demand throughout this past recession as retiring baby boomers could not be replaced by high school grads in a country where increasingly only losers don’t go on to college. We now have an economy where liberal arts graduates, at great expense both to the public and themselves, are the real losers as employers naturally treat them like any other non-skilled workers.

There was a time when a college degree in any subject correlated strongly with higher pay. We can still see some of this today if you massage the aggregate data enough, but it is largely a thing of the past. Employers have simply been looking for the smartest job-seekers in the population. Forty years ago, a college degree served as a filtering mechanism so that employers could find these people.

By subsidizing greater access to higher education its signaling role has been diluted. This access has come in the form growing lower tiered institutions for lower tiered students. We can grow both the quantity and size of the Western Oregon States, Eastern Oregon States, and the like, but there will always be only one Princeton. At great public expense we have created an economy where finance majors at Portland State send their resumes to investment banks without any hope of getting a response but the same firms recruit on the campuses of Harvard and Yale, quickly signing up history and philosophy majors. Outside of the STEM fields, vocational training is easily done in house; finding smart college grads is hard. Because government financial aid is so focused on need rather than ability, it has been harming the prospects of the few bright kids that go to schools like PSU while making it difficult for employers to find them amongst the many classmates of theirs that never should have gone to college in the first place. Thus the greatest irony is that the more college graduates we produce the harder it is for employers to find the intelligent workers they are looking for.

Is this not exactly what happened to the high school diploma? There was a time when it signaled the ability to read and write. The pressure to produce higher graduation rates lowered the standards to the point that college became the new high school. Now the college diploma is losing its ability to guarantee effective reading, writing, and math skills. Here is an easy experiment. Walk into PSU’s library downtown. Go over to the computer lab’s trash can and try to read the garbled prose of papers with 400 level course numbers on their title. It’s remarkable what you find. Will graduate school now become the new high school? At what point will we cease the wasted time and money pushing kids through more school with lower and lower standards, keeping them out of the work force in longer pursuits of ever expanding credential inflation? If we want education to be about training our workforce for the skills the 21st century will demand, we need to end the behavior distorting effects of subsidies. Allowing Stafford Student Loans to rise to a mere 6.8% APR is a good place to start.

Eric Shierman lives in southwest Portland and is the author of A Brief History of Political Cultural Change, and also writes for The Oregonian’s My Oregon blog.

  • Rupert in Springfield

    Good article. It is right to question the value to society of subsidizing majors that turn college into little but a fun time half way house between living at home and living on your own.

    It’s amazing to me that there isn’t more criticism of colleges saddling kids with tens of thousands of dollars worth of debt for worthless degrees.

    This is one area where Obama is working on a solution. He is looking to cut the time to forgive student in half. That way students wont be saddled with the debt, we all will.

    Until we get it through our head that increased spending does not correlate to increased education we will get no where I am afraid.

  • Bob Clark

    Governor “Retread” Kitzhaber’s grand top down education plan only pushes this college party mentality and regime even further.  After all, it’s main measure of success is how many high school students are prepared to get into the college party system, not how many succeed at marketable skills with or without college.  And marketable skills is really key to launching our children onto a good life of their own.

    A true bold change in education would be to make parent and child’s public education dollars truly portable to private and non-profit educational learning endeavors; and not just the existing public monopoly school system.  This would allow parent and child to tailor the education to their child’s individual aptitudes, interests and passions with the parents underlying goal of raising a vibrant, self supporting son or daughter.

  • Ardbeg

    Eric, will your next article be “Ending the 20 billion a year Farm Subsidy”?

    • Rupert in Springfield

       I second that emotion. farm subsidies are one of the biggest forms of corporate welfare out there. Eliminate them.

  • scatcatpdx

    I agree with you in part, finical subsidy is a part but not
    the whole of the problem. I would say there are three areas that lead to this problem,
    financial as you explained, but also there are cultural and business policies
    at fault.  You explained the issue of inefficiencies
    subsidy, would say the seed were planted in the WWII GI bill.

    The second area is culturally. I am a black male and my
    father like many Black men of his generation constantly goaded me about going to
    college to the day he died; furthermore Remember a mind is a terrible thing to
    waste commercials? The message the both were go to college or one will not get
    ahead of life. Only my mother we sensible, know my learning disability she suggested
    I become a auto mechanic, If  I did  I would be making most engineer but I like
    electronics first.

    Finally there is the business. I had been in the electronics
    manufacturing and test business for 20 years and 12 years as an electronics
    tech in the military.  I have seen an increasing
    job requirement creep, where I see the job requirements increased to a bachelor
    STEM degree while the job skills needed and pay still    remains blue collar. For example I was being recruited
    what I found out was a assembler position at $14.00. I declined because it was capable
    of doing lot more. Latter I seen this job as  posted required a degree in electrical engineering
    or chemical engineering again $14.00 per hour starting pay.  I worked the gig in a service department; I was
    the only person without an engineering degree yet the job mainly of mechanical alignment
    and soldering, a job that can be done by a good assembler.  Does one need an engineering degree to spend
    all day building cable harnesses?

    • Oregon engineer

      smart man.  Learning disability does not prevent smart.

  • Guest

    Beware the Education Industrial Complex!

    • guest

       Spot on!

  • Hugger

    without higher ed there would be no art history majors. 

  • Earfboy

    Remember this. Without PSU there would be more people on unemployment, so we may as well subsidize them. Keeps them busy and off the streets.

  • valley person

    When I was in college, in the 1970s, a student could cover the costs of an in state tuition, room and board with a full ti me summer job and a part time school year job at near minimum wage. Very little or no debt was required to get a 4 year degree.

    Today, a full time summer job and part time school year job at around minimum wage would cover only about 50% of tuition plus room and board. What changed?

    State support for higher education has gone steadily down, AND the minimum wage was not indexed for inflation. A double whammy. So today’s 4 year graduate racks up about $30K in student loans.  This depresses their ability to buy cars, a home, raise a family, and otherwise support the American economy, which is 70% driven by consumer demand. This in turn helps depress economic growth, wage growth, and down the line.  

    Instead of blaming and punishing college grads for decisions their parents and grandparents made, how about we get back to the level of public support for education we used to have, and help the entire economy get better?

  • valley person

    Here are some numbers to consider:

    1975 minimum wage $2 per hour
    Average annual public tuition, room & board: $2500

    A student working a 40 hour summer job, and a 20 hour school year job, would earn about $2300 after taxes, almost equal to tuition room and board.

    In 2012, say the pay is $8 an hour (min wage varies among states)

    Working 40 hours a week in summer and 20 in school year nets about $8000.

    Average tuition room and board at a 4 year public university is now over $16,000 a year.

    Thus you get minus $8000 a year, leading to a $32,000 4 year debt.

    Todays young people, compared to their parents, are getting screwed. And Eric wants to blame them?


  • There are serious STEM students, and party-hard STEM students.  There are serious Sociology students and party-hard Sociology students.  One major may be more practical than the other in terms of finding a job, but that does not mean that other majors goof off all of the time.  Also, how long has it been since you were in college? I work two part time jobs and am a full-time student, and live very frugally, but I am graduating with $30,000 in debt. You glancingly address real concerns, but you failed completely to find the real causes or solutions. 

  • David Appell

    “If you think education is expensive, try ignorance”
    — Derek Bok 

    • scatcatpdx

       I say today   college education leads to a far greater ignorance.

      • valley person

         That says a lot more about you than about an education. 

    • guest

       DA might find Bo Derek more appetizing, d’oh!

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