Testimony, Joint Meeting on Higher Education, Feb. 16

My testimony today, following Chancellor Klaich's presentation on NSHE funding:

Testimony to Joint Committee on Education
February 16, 2011
Geoffrey Lawrence
Nevada Policy Research Institute

My name, for the record, is Geoffrey Lawrence and I am the deputy director of policy at the Nevada Policy Research Institute.

I wanted to speak to you because, as a lifelong student of Austrian economics, I have a unique perspective on some of these issues.

I believe the pursuit of academic achievement is certainly a worthwhile effort that can lay the foundation for a vibrant economy. However, I believe that there are several specific adverse impacts that can result from aggressive public subsidization for higher education, which I will highlight.

Acquiring a college degree entails significant costs. These include the direct financial costs of attendance as well as the opportunity costs that result when students contribute time and effort that could otherwise be spent pursuing other goals.

There are also a number of benefits that accrue to individuals who choose to pursue higher education. The most obvious is the increased earning potential that students hope to gain through the acquisition of a degree. There is also an implicit satisfaction that students might gain from their intellectual endeavors. My friends make fun of me, for instance, because I enjoy spending my leisure time reading textbooks. But there is a value to this type of satisfaction that is implicitly incorporated into the level of demand facing the higher education industry.

However, when students are not sensitive to the full cost of attaining a degree, they do not have to fully justify these costs by the benefits received. In strictly economic terms, this introduces an inefficiency because students’ cost-benefit analysis has been manipulated.

To the degree that the cost of a degree is publicly subsidized, individuals becoming less sensitive to these costs are more likely to undertake efforts that they would not otherwise engage in. Some students who only have a marginal interest in attending college might decide to attend but, as they do not face the full cost directly, they take the effort less seriously, using taxpayer resources ineffectively.

Others, who do not have to justify the financial cost based on an increased earning potential, may be more likely to pursue degrees for which there is not great demand on the labor market.

Thousands of students graduate at public universities in America every year with a four-year degree in history, for instance. This is not to pick on history majors, but that degree typically does not add much value to a student’s earning potential because there are not many employers on the market looking for this particular skill set. Had the student been more sensitive to the cost of attaining a degree, he or she would be more likely to pursue a degree that conveys a skill set for which there is higher demand, such as engineering or medical science.

Hence, I believe that a high degree of subsidization leads to a misdirected investment, wherein many students receive a skill set that is ill-suited to the true needs of society.

This is particularly relevant because, using any data source, Nevada’s four-year universities have the among the lowest in-state tuition rates in the nation.

Heavily-subsidized public universities also effect a statistically regressive wealth transfer. Numerous studies show that children from higher-income families are more likely to attend college than children from lower-income families – despite the fact that the poor are forced to pay the taxes that fund this subsidization. In fact, taxes on consumption, such as the sales tax imposed in Nevada have a statistically regressive impact – further exacerbating this phenomenon.

I certainly sympathize with the idealism displayed by lawmakers who want to increase access to higher education for children from lower-income families. However, I believe that the current method of subsidizing entire institutions is ill-suited to achieve this end, because of the regressive impact that I’ve just highlighted. I believe that a much more effective means of achieving this end would be to charge general tuition rates more closely reflecting market forces, but to perhaps offer need-based scholarships to qualified students whose family income falls below a given threshold.

Finally, I’d like to clarify one aspect of NSHE finances that I believe is often overlooked. State allocations to NSHE operating funds account for less than half of the system’s total operating budget. So, when we talk about funding “cuts,” we are generally only talking about the state appropriation and not the impact on the total operating budget, which skews the percentages and misrepresents what is occurring.

According to a report prepared by NSHE staff, the system’s total operating fund in FY 2010 was $1.724 billion while the state appropriation, including ARRA funds, account for only $800 million. In fact, NSHE’s total operating budget increased by $30 million between FY 2009 and FY 2010 – something that is often lost in these discussions.

I believe there is room for significant structural reform to NSHE finance that could correct for the adverse impacts of aggressive subsidization that I have identified. As such, I believe that the funding proposals that have been outlined by Governor Sandoval represent a good first step in this direction.

Thank you.