America’s Reasonably Effective System of Higher Education Finance

I have a lot of issues with Luigi Zingales’ proposed reforms to America’s system of higher education finance, but rather than delve into the details I think it’s worth questioning his premises, which seem to be widely shared.

There’s a widespread belief in the United States right now that American higher education is in some sense badly broken. People on the left tend to emphasize the fact that a falling rate of subsidy relative to price has left students more-indebted than they were in the past, while people on the right argue that the existence of subsidy has rendered the whole sector bloated and overpriced. But normally when you see a badly mismanaged sector with bloated costs, what you see is that it becomes uncompetitive on the international stage. This is one of the reasons why export-oriented economic development plays such an important role in catch-up growth success stories. Every poor country wants to launch some brilliant industrial policy scheme. But one of the only ways to tell if your industrial policy is actually working rather than simply serving the well-connected is to see if foreigners who aren’t invested in your development scheme will buy your products. We know that Samsung isn’t just living on political rents because they’re selling phones at a profit in North America.

Back to higher education.

It’s logistically difficult to export higher education services. But America manages to do it! And by all accounts we’d be exporting even more higher education services if our immigration policy was more cooperative. These students aren’t coming to the United States to suck at the teat of federal subsidies. They’re coming because people think the American education experience is worth paying for. Now admittedly, a fair share of this is that people are paying for a consumption experience (i.e., college is fun) rather than to build human capital. Perhaps that’s a problem. But entertainment and hospitality services are a legitimate form of economic undertaking. The point is that whatever it is exactly that American colleges are selling, if it’s as bloated and overpriced as people say it should be impossible to export. Yet it’s not. People are clamoring for more.

If there’s a legitimate grip with American higher education it would have to be that the product is too high quality, involving a bundle of too much fun stuff when really students should be studying in grim conditions rather than enjoying themselves. But that’s a very different argument from the idea that status quo college is inefficient or a bad deal.