Friday, December 03, 2004

The Cost of CSU: What Is Not Seen

The California State University (CSU) Chancellor and Board of Trustees are trumpeting a new study that purports to demonstrate how important and valuable the CSU system is to the state of California. Unfortunately, in evaluating CSU’s economic impact, the study neglects the notion of opportunity cost.
Looking first at the pure economic effect of spending: because of the multiplier effect, for every $1 the state invests in the California State University system ($3.09 billion in 2002/03), CSU-related expenditures generate $4.41 in spending.

As a result, the immediate impact of CSU-related expenditures creates $13.6 billion annually in economic activity and supports 207,000 California jobs. In addition, some $760 million in taxes is generated for the state’s coffers.
The relevant question is, what would have been done with the state’s revenues if they hadn’t been spent on CSU? Maybe they would have been spent on other government programs, or maybe (heaven forefend!) they would have been left in the pockets of taxpayers. Either way, the money would have been spent or invested in other ways. These forgone opportunities are the true cost of funding CSU.

But what about the all-important multiplier effect? Multiplier effects are indeed real: When person A spends money, that money is received as income by person B, who spends the money and passes it on to person C, ad infinitum. The hitch is that there’s also a negative multiplier: Money spent on CSU is money not spent elsewhere, and thus not received as income by person X, who does not spend the money and pass it on to person Y, who does not spend the money and pass it on to person Z, ad infinitum. For every positive multiplier effect like the one identified in the CSU study, there is also an unseen negative multiplier effect elsewhere in the economy. There’s no escaping opportunity cost: money and resources spent in one place are money and resources not spent in another.
But the CSU does not just spend money: it spends money to educate, thus increasing the economic power of the state and of its citizens by building up the knowledge base. CSU graduates obtain better jobs because of their degrees, while the state benefits because the deep pool of trained and knowledgeable citizens produced by the CSU allows more high-end jobs to be created and performed in the state.

“CSU’s well-educated graduates help to attract, retain, and develop the companies that are leading California’s economy into the future,” said Chancellor Reed. “An investment in the CSU is an investment in California.”
There’s a little more truth to this analysis, but it’s still misleading. The education received by CSU graduates (if it is indeed effective) increases their earning power, and that’s clearly good for them. But is it really good for everyone else in the state? The better-trained employees also have to be paid higher wages – that is, after all, why they wanted the education – and that means employers and (ultimately) consumers must pay for their skills. If the CSU graduates don’t get offered high enough pay by California companies, they’ll move out of state.

Now, consumers might still be better off, because it’s always good to be trading with people who can produce high-quality output. But is there some reason why the skilled people we trade with need to be Californian, instead of (say) Texan or Indian? From the consumer’s perspective, the only issue is whether our trade partners produce high quality output at a low enough price; their nationality or state of origin doesn’t matter. But there is a crucial difference between the Californian CSU graduate and the Texan: if you live in California, you’ve subsidized the education of the former but not the latter. For the California taxpayer/consumer, the situation is as follows: you pay for the education of CSU graduates, and then you pay them again when you purchase their services.


Anonymous said...

Wow, what a great post! I am indeed tired of seeing my tax dollars wasted to futilely try to educated a bunch of ungrateful, unwilling to study, poor schlub students. I'm also sick and tired of paying for a bunch of pampered unionized professors who are paid outrageous wages and benefits. Why should I have to pay for your skiing accident? You weren't even on the job when you broke your damn leg! NO FREE LUNCH, damn it! I want to see the CSU system sold off piecemeal to be followed by the UC system. The first campus to go will probably be CSUN because, frankly, the weather stinks in Northridge: boiling hot in the summer and freezing cold in the winter. Chances are Wal-Mart will pick up the school at a bargain basement price. Why? Because brick and mortar universities are so passe and so expensive to run. Anyway, who wants to commute from L.A. to the San Fernando Valley--fighting traffic and searching for a parking space--when you can sit in front of your own fireplace (or swimming pool) with a nice cup of tea and your laptop to do your studies.

Wal-mart should have no trouble hiring most of the former CSUN students to work in retail--at $3.00 an hour--because of course the minimum wage has been repealed as well. Any student of economics knows that an artificial minimum wage creates unemployment. Wait a minute, will there be any students of economics left? Look, eating always comes before studying even if your eating leftovers.

But, I'm afraid the CSUN professors won't be so lucky. They are WAY over-qualified to work at Wal-Mart or McDonalds. Bad for them, PhDs are a dime a dozen in India and they along with their elephants will work for peanuts. Thanks to modern communication, all you need is a $5 modem and phone line to connect to Bombay or New Dehli. So, just what will Glen do to make ends meet? Fortunately, he's an excellent writer so he will no doubt espouse his worthy economic theories that way. His first book should be entitled "How I Lost My Job to Outsourcing." Will you autograph my copy, please?

--Autograph Seeker

Glen Whitman said...

I fully admit that my job would not exist (at least not in its current form) if my policy recommendations went into effect. I never lobby the state for more funding for my university; I never contribute any more to the faculty union than I am forced to. And I think it would be a *great* thing if academics had to compete in a truly free market. If someone in India can teach economics better than I can at a lower price, that's great. Who am I to force students to buy my overpriced services instead?

Anonymous said...

Wow Glen, I never thought I would hear this from you: "The education received by CSU graduates (if it is indeed effective) increases their earning power..."
I know that CSUN isn't the highest ranking school by any means but the "if it is indeed effective" comment was a little bit of a surprise. Thank God I'm a graduate student from a way better undergraduate school and now paying her own tuition, otherwise I'd get the "Why should I pay for her with my tax dollars speech."
Brick and mortar universities have a crucial role and not passe at all 'autograph seeker'! The experience of attending a university not quite as much of a commuter school as csun is priceless. That is where you form your identity and develop as a diverse human being. Although I admit entrepreneurism and business sense is hardly tied to formal education.
Glen, I am a little surprised also that you have no problems handing over your job to an Indian guy b/c he's cheaper. I always complained that the pro-outsourcers were usually people who's jobs were not in danger; take away their jobs in Washington DC, outsource them. It's unfortunate when it happens to your neighbor, but if it happens to you it's a disaster.
I find it hard to believe that people are *truly* that idealistic in their political beliefs as to say "take my job please."
With that I think I will go study finance. I am here at CSUN afterall for the cheapest way to get quantitative skills.


Glen Whitman said...

SK -- I didn't mean to bag on CSUN with the "if it is indeed effective" comment. I was just referring (obliquely) to the fact that some majors may not carry much of a wage premium. I won't mention the majors I have in mind, for fear of insulting people. But my guess is that business degrees, especially graduate ones, *do* measurably increase your earning potential.

Anonymous said...

"I never lobby the state for more funding for my university; I never contribute any more to the faculty union than I am forced to."--Glen Whitman

You've gone through that litany before and I just find it a rationalization. You ARE a member of the faculty union and you are being paid by the state of California. By being a part of (higher) public education, you are de facto supporting it and helping to perpetuate it. Suppose I'm a German after WWII and say, "Well, I was a member of the Nazi party (it looked good on my resume) but I never had anything against the Jews nor did I believe in the war." This doesn't pass the smell test.

When I was a kid, I noticed that liquor stores in the inner city seemed to do a brisk business. (I surmised that fact from the scheer number of stores and from the number of winos.) I told my uncle that I wanted to be a liquor store owner when I grew up. He replied, "You can do better than that!" Not one to take no for an answer, I said that if I didn't own a liquor store then someone else would. My uncle persisted, "But YOU don't have to own a liquor store!"

I'm an understanding guy, so I don't hold it against you for taking the open position at CSUN in the first place. You may have had strong practical and expedient financial reasons to do so. But, to continue to bad-mouth your school from the INSIDE is just too much for me to bear. You need to start looking for a new job asap to restore your credibility. If you don't, I may just tear up my autographed picture of you on my wall!

Glen, you can do better than that!!


Anonymous said...

"Me" poster above: I don't think Glen was 'bad-mouthing' csun per se. Let's not get all irrational about the point Glen made through this post. I disagree with some of the policy leanings Glen has as noted above in my posting, but that's not reason to be disrespectful in the comments section. Despite his politics (not an insult, just pointing out your policy leanings about the open market, privatising of education etc), I've heard he is still very respectful of students and an excellent teacher thus no credibility damage there. Save the ad hominem "me"!


Glen Whitman said...

I don't feel any ethical discomfort with the career choices I've made, nor any particular need to justify them.

But if you're really just curious about my reasoning (which I actually considered carefully before deciding to take my job), here goes: First, I don't live in a libertarian world, and it would be unreasonable for me to pretend I do. I respond to the incentives of the world I actually live in. I think that more roads should be privatized, for instance, but I still drive on public roads. I also obey various laws that I consider unjust.

Let's also be clear about "how far down" the incentives of the current system go. If I lived in a more libertarian society, I might never have decided to become an econ professor in the first place, since my career choice was strongly influenced by my desire to make the world a better place for liberty. If you think I should live as if I were in a libertarian society, you shouldn't be asking why I teach at CSUN -- you should be asking why I'm not a businessman or actor or biologist.

If I didn't have this job, somebody else would, and that somebody else might never expose his students to free-market arguments (except, perhaps, to discredit them). If *all* libertarians refused to take government jobs, the result would be that all government jobs were held by exactly the wrong sort of people. Every professor teaching in a public school would be a statist, and that would ultimately be worse for liberty. Since you've brought in the Nazi comparison, let's consider the case of Oskar Schindler (not that I think I even remotely measure up to his great example). Should he have refused to work with the Nazis, even though working with them allowed him to save many Jews in the process? I think he made the better choice: doing the best he could under the regime in place.

BTW, do you also think that Marxists should refuse any ownership of the means of production -- in other words, they should relinquish their 401K's? And if they favor a moneyless economy, should they stop using currency?

Anonymous said...

Ok, one last comment and I *really* have to finish memorizing some formulas.

"...since my career choice was strongly influenced by my desire to make the world a better place for liberty..." That is some noble feat. I always found it fascinating that there are people willing to die for a cause (not that I think you're gonna die for libertarianism), especially given that we don't live in a particularly oppressive society like Iraq. I've always wanted to do some psychological/sociological study on motivation: particularly people motivated by idealism. It's easy to see why how people are motivated by money and luxury, but idealism --that's another story. Perhaps you've already fulfilled most of your Maslow's hierarchy of needs compared to most of society thus are slightly more self-actualized and now want to make a difference in the world.
I see the same kind of idealism in religion (they live to spread the gospel) and even the LaRouche folks who call me regularly like a church-outreach to come to their Economics retreats or meetings. I have to say that there is some fascination and admiration for someone who devotes their whole life for a cause b/c most of my idealistic flame has been snuffed out shortly after working, despite going to a very liberal school full of idealists and being one myself at one time.
But how large is the impact? I do understand that college students are quite impressionable thus exposing them of Libertarian ideas at that age would be a ripe time. And you win them one at a time and then by multiplier effect.
And on an unrelated note; let's say that after being tenured at your teaching position for years, you are called to take a job (as lots of academics are asked to) in Washington DC for Greenspan's job or other Federal Treasury board type jobs; are there negative implications for not belonging to a mainstream party? Are most economists in Washington Libertarian? Or is it common for economists to be Libertarian? I would imagine so b/c I would guess that most economists will be pro free-markets--that is what makes our capitalist society so prosperous. Is being on the margin (by this, i mean belonging to a non-maintream party) ultimately not so advantageous and your party affiliation truly for the sake of idealism?
I do not know enough about this topic, so if I asked really strange questions please bear with me.

Oh, and why did you list biologist? I get the actor and businessman, but didn't get biologist. Do you mean like pharmaceutical type jobs b/c that is private although highly tied to gov't?


Anonymous said...

Now, that's the snarly Glen that I like best! I didn't think you simply took your job singing, "California here I come..." or intoning a la Jethro Bodine Clamplett,"Hotdog! Californ-I-A, beau-T-ful starlets, cement ponds..."

You're right, you don't have to justify your important life choices to an annoying inquisitor like me. But that's your nature and you know it: you are an elucidator, a justifier. OK, you're a lot more than that (a little stubborn?), but I'm not in a flattering mood at the moment. I think the best part of your argument was the influence and impact you will have on your impressionable students. But remember the downside: your students stay forever young while you watch yourself grow old like Dorian Gray.

Even Thorstein Veblen was tempted by the prospect of easy money. On the advice of a friend and thinking of his retirement, he uncharacteristicly invested a portion of his savings in an oil stock. It went up for a while until an oil scandal caused the stock to go bust. You might say that it served him right for not staying true to his cynical self!

I think it is great that you carry in your idealist head the vision of a virtuous libertarian world were economists are (presumably)no longer much in demand. In that Shangri-la, what would your true calling be? Does Hollywood have something to do with it? Just what's stopping you now? Stage fright or forgetting your lines?

For the time being, I intend on keeping your picture hanging on my wall along with posters of Bob Dylan, Elvis and Anna Nicole Smith, in random order.(I keep my voodoo dolls and dart boards separately.) Now can we get to the real reasons you wanted to come out to California: Lights, Camera, Action!!

-- ALA (Acting Lessons Anyone?)

Anonymous said...

Oh, and you can email me instead if you don't feel like posting it on your blog. Or you can choose not to answer them b/c it's no big deal.

ALA--professors, at least to me seem to have more impact as they grow older. there seems to be more credibility with years as long as you're not reaching senility.
And Dorian's picture was getting old, not Dorian himself. But the physical Dorian wasn't getting younger either, he just stayed the same age until he slashed his portrait.


Saxdrop said...

Failing to take into account opportunity costs is the name of the game in all "feasibility studies" and these broader "economic impact" reports. Stadiums, convention centers, performance halls, and pretty much any capital-intensive public projects (transportation, for instance) are justified by reports that claim a "multiplier effect," without any attempt to acknowledge an opportunity cost.

In my neck of the woods, the local university has put out several economic impact reports from otherwise credible economists that quantify university's impact. It's wierd to think that a professional economist would stand by a claim that "the university spends $X, which is multiplied times Y, for a total positive impact of Z" and not think it suspect.