Joshua Sharf comments on an Obama plan to give $4000 tax credits usable for tuition (he reports it as something he heard on TV; here's a transcript from the Nightly Business Report that mentions the plan, and here's the American Opportunity Tax Credit from his website):

I'd give it about half an hour before every college in the country raised tuition by about, oh $4000. Repeat after me: subsidies either raise prices or create surpluses.

The first part is mostly true -- a $4000 subsidy increases the demand for higher education and pushes prices up. Now if we have slack demand for seats in higher ed it won't be a $4000 rise in prices, as the quantity of seats supplied will respond to higher prices and fulfill some of that new demand. As always, a question of elasticity, this time on the supply side, and in the short run most goods are fairly inelastic. So price is going to absorb most of the price.

What happens if it doesn't? With all those new students subsidized into attending college rather than entering the labor force, the only way to keep students from queuing up for scarce seats is to raise price. Now, it might not be taken in tuition -- I could be fussier about who I admit, the university choosing better students over more money. If I do nothing, applications rise for the same number of admissions, leading to a lower acceptance rate. That should be seen as a shortage, not a surplus.

Joshua says that he heard there would be a service requirement to the rebate. His paraphrase of the speech says "We're going to invest in you. But in return (There's always an, "in return." -ed.), we're going to require you to invest in us by volunteering in the Peace Corps, the VA..." I did not see any references to a service requirement in the Obama materials I viewed. But let's assume Joshua heard this right. Who's going to take that deal? Who would trade a two-year commitment to the Peace Corps for $4000 rebates (for how long? One year? Two? Four? Six?) I would say you can forget anyone from business programs, or many pre-professional programs. It doesn't cash flow ($4ooo over the first four years in; two years entry level salary in your field minus about $6000 "readjustment allowance" out -- yes, you get a little money for meals and so on, so suppose you call it another $6000 a year, is this math working for you?) Great deal, however, for the various people getting degrees in, say, the Department of the 3.7 GPA.

Again, not sure that's part of the Obama plan, but if it is, it's a double whammy.

Labels: economics, higher education, Obama