Drawing on Frederic Bastiat, one of the most important lessons that Henry Hazlitt imports in â€œEconomics in One Lessonâ€ is to focus not only on the visible effects of an action â€“ the unseen are often times more important. In few places is this more important than in education funding.
University education has come to be seen as the textbook example of a good in need of public expenditure. The positive externalities of education â€“ under the pretence that an educated populace is the preferred populace â€“ imply that the government should compensate the educated for the benefits they reap upon us all. Indeed, opening almost any introductory economics text reveals the same examples. Filthy steel mills that need to be taxed to disincentive the production of their negative externalities, and poor yet educated students that need to be compensated to incentive the production of their positive externalities.
Yet what of the unseen effects? While learning the economics of externalities, students are generally aware o f some of the unseen effects of policies that promote or mitigate them. The concept of the deadweight loss â€“ those ubiquitous triangles caused by interventions that distort the market â€“ are colourfully illustrated in every introductory economic course. Students realise that taxes nearly always result in a reduction of total wellbeing that the market can provide, and otherwise stop interested parties from engaging in welfare enhancing trade.
When externalities enter the picture, this caution is mostly thrown into the wind. Negative externalities can be cured through taxes, and positive externalities can be promoted through subsidies (never mind that these must be paid for by, in most cases, taxes).
With the recent hullabaloo in Quebec over proposed tuition hikes, one gets the feeling that there is a different economic fallacy at play.
Every introductory economics student learns that the cost of something is the foregone alternative. One implication of this lesson leads to the second great lesson of economics â€“ there is no such thing as a free lunch. Whenever a good or service is provided it must be paid for.
University tuition in Canada is a good case in point. Students are often led to believe that University is costless (or nearly so) since they do not pay the full cost of tuition out of their pocket. Actually, the cost is still there, it is only a matter of who pays for it. Students can defer the cost of their education, but they cannot avoid paying it.
That someone that pays their tuition is the taxpayer, someone that they will hopefully be one day. While students enjoy a relatively low-price education for four years, the reality sets in soon thereafter. Taxes are relatively higher to fund this University system â€“ your take-home pay will be that much smaller as a result. Students assume they get a free lunch for four years, but the real cost is a higher average tax rate for the rest of their lives. Four years of â€œfree tuitionâ€ seems like a short ride in comparison to the next fifty some odd years they will contribute to the system.
The actual cost doesnâ€™t stop there. Cost is the foregone alternative, therefore we need to know what would have been done with that income if it was take-home pay, and not filling Ottawaâ€™s, or Quebecâ€™s or whatever provinceâ€™s tax coffers. For some students, it might only be one drink less in the bar for the rest of their lives â€“ a good trade-off one might conclude.
For others it might mean less money contributed to their registered or unregistered savings plan. The cost here manifests in two ways. The most obvious way is through a reduced retirement allowance when the time comes. Living the high life when one is young might result in a bill to be paid in old age if it implies less money is available for retirement than was originally reckoned. Another way is to look at what that invested money would have done over the workerâ€™s life. Businesses rely on our hard-earned savings to fund their investments today. A reduction in savings translates into less funding for business investment. Less business investment implies less job opportunities, or fewer goods created to satisfy our wants and desires.Â An infinite regress of negative feedbacks could be thought of, all stemming from a reduction in investment because taxes were that much higher, all to fund a University system today.
This is not to say that higher education doesnâ€™t have positive externalities to it, or that uninterested parties do not benefit from some strangers bettering themselves in such a way. As I type this out on Microsoft Word I am reminded that Bill Gates did complete, after all, at least some of his Harvard classes (and that I did not pay for any of them).
When students strike because they donâ€™t like tuition increases, they would do well to keep it in perspective. The future that they canâ€™t see is one with higher taxes to be paid (and which they will have to pay) in order to fund the University system that they are in today. Paying more today might seem like a harsh expense.Â The expense is really the same, however. It is only a matter of transferring the payment of tuition from someone who only indirectly benefits through a supposed externality, to someone who obliviously benefits directly. Economists teach students that markets are efficient when those that directly benefit from a good incur the cost of that good. Transferring the cost of education from taxpayers to students does nothing to change the total cost, and reduces the negative externalities that higher future taxes can create.