Hot! Atlas may shrug, but does he drop out? [tuition costs]

TheGlobeandMail.com – GlobeCampus.ca
August 12, 2010.   Alex Usher

This week’s column is about tuition and its effects on access and retention.  But before doing so, I would like to take a short detour through the field of tax studies.  Bear with me, it’ll be worth it.

In 1998, University of Michigan professor Joel Slemrod edited an intriguing book entitled Does Atlas Shrug?  Playing on the title of the interminable Ayn Rand novel, Dr.  Slemrod and some associates tried to figure out whether or not taxing the rich really did make them “shrug” (that is, give up the risk-taking, go-getting behaviour that makes advanced market economies tick).

To the extent that the studies could determine anything – getting a decent natural experiment for this type of study is quite difficult – they tended to show that risk-seeking go-getters would generally engage in risky, go-getting behaviour regardless of the tax rate.  They might have made less money and the economy might have been less efficient than if taxes were lower, but risk-takers tended not to change their behavior much in response to changes in the tax code.

This was an intriguing result, because it undercut much of the rhetoric used by the anti-tax movement.  Taxes cannot be raised, they say, because investment will go elsewhere, or because talented individuals will begin to prefer leisure to work and thus deprive the economy of part of their services.  And yet, the Slemrod results show that this isn’t necessarily true.

Of course, this doesn’t mean that tax rises are pain-free.  After all, when taxes rise, everyone feels an immediate loss of welfare (though this may be partly off-set by the public goods purchased with these tax dollars), and dead-weight efficiency losses remain significant. But what the Slemrod results show is that a loss of welfare does not necessarily entail a change in behaviour.

What does any of this have to do with higher education?  Well, interestingly, the kinds of arguments that Dr.  Slemrod countered in his book are exactly the same as the ones that underpin the argument against tuition fees.

Tuition hikes, like tax hikes, clearly make students and families less wealthy, leaving them with less disposable income.  Indeed, as higher education edges closer and closer to universality, tuition for most people does start to look increasingly like a tax – a universal service-charge for education past the age of eighteen.

And just as advocates of lower taxes say that Atlas will shrug if welfare is diminished through tax rises, so advocates of lower tuition say that Atlas will drop out if welfare is diminished through tuition rises.

But is the proposition that changes in welfare cause behavioural effects any more true for tuition than it is for taxes?  Or is this argument just a smokescreen for what amounts to a middle-class hand-out?

The best available evidence from international experience shows that in fact rises in tuition have very limited behavioural effects.  At a jurisdictional level, there is simply no observed correlation between tuition fees and any of the normal indicators of access.

Take, for example, the following evidence we’ve come up with at Higher Education Strategy Associates:

University Participation rates are uncorrelated with tuition levels: Within Canada, Nova Scotia – the province which for thirty years had the country’s highest tuition fees -has consistently has the country’s highest participation rate while low-cost Quebec has a participation rate below the national average.  Internationally, both Canada and the US – both relatively high-tuition jurisdiction – have higher university participation rates than most no-tuition OECD jurisdictions.

Changes in participation rates are uncorrelated with changes in tuition levels: Ignoring Ontario, where the “double cohort” distorts the data, the two biggest jumps in enrolment in Canada in the early part of this decade were in Manitoba (29% increase) and British Columbia (33% increase).  The former saw tuition levels drop by 20% in real terms while the latter saw an increase of nearly 75%.

The stratification of the student body is uncorrelated with tuition levels: The Educational Equity Index (EEI) measures how “elite” a student body is by comparing students’ parents’ educational levels to those of the general population.  In Canada, the two least-privileged student bodies were in low-tuition Manitoba and high-tuition Ontario; the two most-privileged student bodies were in low-tuition Newfoundland and medium-tuition Prince Edward Island.  Internationally, Canada ranks among the top five countries for having the least-privileged student bodies, along with free-tuition Ireland and Finland, low-tuition Netherlands and high-tuition Canada and the United States.

Changes in the stratification of the student body are uncorrelated with changes in tuition: Even after adjusting for inflation, tuition has more than doubled since 1986.  Yet in a series of Statistics Canada studies, from 1986 onwards shows exactly the same pattern: youth from rich families are about twice as likely to go to university as youth from poor families.  Despite all the tuition policy changes, that relationship has remained very consistent over time.

In sum, there is very little international experience that should make us believe that the reduction of tuition fees would have much effect at all on the participation rates of youth from poorer family backgrounds.  The reason for this is bindingly obvious: kids from poorer families aren’t just disadvantaged in financial assets, they also have smaller pools of social and cultural capital on which to draw.  This means they are less likely to be able to get the grades to go to university and they are less likely to want to go on to university in the first place. Finances are thus at best a third-order cause of inequality of access.

None of this means that financial burdens have no effect on students.  Roughly one-in-five Canadian youth who do not go on to post-secondary education cite finances as the prime factor behind their decision and a majority of these are from lower-income backgrounds.  Various American studies have shown that reducing the net cost of higher education (that is, the cost of tuition minus grants) also increases access to higher education for students from lower-income families.  And some data that will be coming out soon from the MESA project (an effort I have been involved with for the last five years) will also show that changes in net tuition – that is, tuition minus grants – may play a role in altering the composition of student demand.

In other words, finances do matter for some students, some of the time.  But that suggests that the right policy response is a program of targeted grant assistance to low-income students.  It does not imply that reduced tuition for all students makes any sense at all.  Indeed, the evidence that such a policy would increase participation from low-income families is slim to nonexistent.  In the jurisdictions where tuition roll-backs have been enacted (Manitoba, Newfoundland, Ireland) there is no evidence whatsoever that the social composition of enrolments have changed.

So, do tuition hikes cause Atlas to Drop Out?  On the whole, and assuming there is a decent system of student aid available, no.  But they do mean that Atlas (and her parents) will have a little less money to spend on life’s luxuries, just as they would if their taxes were increased.

And therein lies the key to understanding the real reluctance of Canadian politicians to raise tuition fees.  The middle class – for whom university education is increasingly as normal as primary school – sees fees as a tax which reduces their spending power and reacts to them accordingly.  Concern about the ability of the poor to access PSE has nothing to do with it and is actually something of a smokescreen.  Reducing tuition is simply the big-government equivalent of middle-class tax cuts – no more, no less.

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ALEX USHER

Alex Usher, President, Higher Education Strategy Associates, is a graduate of McGill and Carleton universities. He has been studying higher education issues for 15 years with the federal government, the Educational Policy Institute and the Association of Universities and Colleges of Canada, among others. Here he will dish up his sometimes contrarian insights on national and global trends in higher education, and how Canadian governments, universities and colleges are trying to keep up with them.

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