What’s the Role for Government in Higher Education:  Fiscal or Monetary?

The kids know from listening to me – typically in a shoe-propelled rant at the University of Phoenix television commercial – that their enrollment in a for-profit institution is unlikely.  We live in a corporate age and this is just another attempt by the corporations to milk us for increasingly scarce dimes.  But if there’s strength in numbers and we hold that education truly is critical in this post-manufacturing "knowledge-based" economy, there is a crucial role for the government to be involved.  There are three policy legs – tax, fiscal and monetary – and both state and federal governments are involved in the tax policy with tax-advantaged savings programs to help with tuition.  But in a time of rapidly increasing tuitions, tax policy is the least important.  What’s the value of a tax savings if you can’t afford the education in the first place?  That leaves fiscal and monetary policy, and which is the true place for the government?

For the greater part of our nation’s first century, government had no role in education whatever; any schools formed were solely at the local level to provide the rudiments of reading, writing and arithmetic.  Higher education was available via private institutions and was the province of the affluent or the exceptional, who worked assiduously to finance their studies.  The federal government’s initial foray came – incredibly enough – during the Civil War when the urgings of an idealist Congressman led to the passage of the Morrill Act of 1862 and the creation of the Land Grant universities.  Even here, the national government didn’t provide money, but simply free land – and boy howdy, did we have it then – with the caveat that the subscribing states sell part of the land for seed money for an institution, to be built on a portion of that free land.  The congressman’s efforts were the fusion of two elements:  one that he believed and another that he understood.  The belief was that a person would both prosper and become a more enlightened citizen if they had access to an education that provided the skills and tools to better their circumstances.  The understanding was that the nation required a skilled, educated populace for it’s growing and changing needs.  One fed the other in a virtuous circle. 

The Morrill Act also laid out the premise that meeting the educational needs of the population were best left at the state level; different regional needs could be best managed at the lower level, which had greater familiarity with its needs and circumstances.  So apart from creating a framework within which the states could establish their systems – building the sandbox – the federal government stepped aside and left the growing fiscal needs of higher education to the various states.  It was throughout the growing industrialization and prosperity of the next century that the states, with the footing provided by the Morrill Act, created an infrastructure of institutions to provide an reasonably affordable higher education to the young.  The apogee of this educational availability occurred in the years after the Second World War, when the nation entered an era of affluence that had never before been seen in history.

But this availability was funded directly – via fiscal spending – by the states.  Times were flush and the resources existed to fund higher education, and the states put up the funding to make education affordable for the masses.  Labs were funded, buildings built and faculty salaries paid by purposeful state funding.  But the world changes before we’re aware of it and as funding continued, additional demands were made upon resources by others and state funding for social needs rose.  The states also felt the impact of the "Reagan Revolution’s" mantra that government isn’t the solution, it’s the problem.  Spending was questioned and the line items that could actually be managed were slowly pared away; but spending on social needs programs continued and the emphasis in state government spending went from preparation to caretaking.  By the first decade of the 21st century, per capital spending by state governments – the fiscal policy – was in decline.  State colleges and universities were seeing that the average family incomes of their students was rising; it’s counter-intuitive since you’d think that was a good thing.  But what it means is that the students from the higher income families themselves were being squeezed out of the private and into the public institutions, while the students from the lowest income families were squeezed out of the public institutions entirely.  It’s now where we’re at, with purposeful fiscal spending in decline by the states.

While there was an apogee and subsequent decline in fiscal spending and policy for higher education, there was also movement in the monetary policy towards higher education.  While fiscal policy pertains to actual spending – putting your money where your mouth is – monetary policy is about simply making the money available, in volume and at low cost.  The crunch and upwards in student debt occurred in the first decade of the century, propelled by twin engines.  The first engine was the real need for borrowed money as the tuition finally outpaced the ability of the average family’s falling incomes, forcing many families and students to truly borrow large sums.  The other engine was the glut of easy money made available as the Federal Reserve truly opened up the money supply after the dotcom and housing bubble collapses.  Families were now forced to let the students take on the debt themselves as their own circumstances worsened, and the Fed’s easy money policy made it available in spades.  As states scaled back their per-capital student spending and costs rose, the federal government stepped in with easy money.

Here’s the thing about monetary policy and higher education however:  it’s a chicken-or-the-egg proposition.  Escalating tuition and decreasing government support made an easy monetary policy seem beneficial since abundant money made the college education work.  Yet part of the tuition problem was due to the existence of an easy money policy.  On one hand, institutions had no impetus to control their spending since the money was available, even if it was funneled through the students from the lenders.  As competition raged amongst the institutions, they began to market the experience as well as the education and money was frankly spent on sheer frivolities; if your college markets a climbing wall and Mongolian grill, then it’s frivolous.  On the other hand, the easy money availability led to predatory recruitment practices by for-profit institutions; the present default rate at for-profit institutions is double that at public and triple that at non-profit institutions.  The money created an impetus to defraud the students.

There is a distinct difference between the effects of fiscal and monetary policy on higher education.  But the effect of easy monetary policy is largely the same in higher ed as in the other arenas:  it breeds laziness and radically increases the prospect of moral hazard.  The laziness is on the part of the public, who simply look at the low cost loans and the advertising and don’t consider other aspects until it’s too late; the institutions are equally lazy as the stream of funding lulls them into thinking that choices don’t have to be made and decisions can be deferred.  The stream of funding propels the amoral into acts of immorality as the rewards far outweigh the cost of the penalty.  If you doubt this, ask yourself whether the penalties meted out to institutions even meet – let alone exceed – the profits garnered. 

Fiscal policy however, literally means that you’re putting the money where your mouth is.  It means that there’s an actual debate – contentious, perhaps – about not only how society perceives the value of higher education but also how funding is apportioned to support that value.  If the nation truly believes that education matters for the good of the person and the nation, then funding should be allocated to support it accordingly.  As the phrase goes, money talks and bullshit walks

We’ve now boxed ourselves in.  We’ve confused money with the real and productive assets that support the debt that’s been incurred.  The costs of an education have far outstripped the debt-servicing ability of the average American family’s declining income, yet we’ve restructured ourselves as both a service and knowledge-based economy that notionally requires a college degree for any real financial success.  Student debt is now a bubble and the smell of the easy money has led to poor personal decisions and corrupt business decisions that taint monetary policy.  Even if tuition at an increasing number of institutions is cut, the college cost/family income ratio is so disproportionate – and the job market so bleak – that it would take decades for any proportionality to be restored.  If we truly value education at both the personal and national level, then there’s no other choice but to provide fiscal policy support to the public institutions.  The eras of easy money and unfettered prosperity are over.  Dead.  Gone.  There is a time coming, and soon, when we’ll have to make conscious choices first about what we truly value and then about how we’ll allocate the remaining resources amongst those values. Our mettle is going to be tested and it will be truly unpleasant.  If there’s a bright side, it’s the realization that the value question isn’t new ground but has already been addressed.  At least we don’t have to revisit in the midst of a civil war. 


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