A Golden Oldie: Invest in People

Now that stimulus is just around the corner, we are hearing more discussion of what form it should take. There is a general desire to prop up state budgets, so that legislatures are not forced to cut spending on services in the middle of a slump—a good idea. There is also an interest in putting money into roads and bridges, usually referred to as our “crumbling infrastructure”—another good idea. Here I want to broach a third.



The ranks of the unemployed are increasing by as much as half a million a month. Even if we can stop the plunge, we are in for a long, slow season, and the need for structural change in the economy guarantees that large numbers of us are going to have a rough time getting our working lives back on track. The silver lining to this very dark cloud is that it gives us an opportunity to take time out, to go back to school to get new skills, perspectives and perhaps even life goals. Already applications are up at two- and four-year colleges around the country. Meanwhile, however, the credit crunch is making it hard for prospective students to find loans, funding cutbacks are driving rapid tuition increases, and higher education is being starved for the resources it needs to continue at the same level of service, much less the increased level needed to meet the demand.

So the solution is clear: the third big piece of the coming stimulus, overlapping somewhat with revenue sharing, should be a commitment to education—to turn the tragedy of unemployment into the promise of a new beginning. Our universities, community colleges and other institutions have a model that is intrinsically scalable; give them more money and very quickly they will be able to create more seats in more classrooms, with little or no reduction in quality. There is a vast body of economic research that shows that this is one of the most productive investments we can make as a society, one that will bring returns to us as individuals and as a country long after the immediate crisis has passed.

One nice twist to this idea is that it could be accompanied by introducing a new system of tuition financing that works on both the individual and macroeconomic levels. It goes like this: students take out loans from a government agency, but instead of paying back the precise amount they borrowed, they agree to a modest tax surcharge on their earning for several years after they graduate. If they end up with high-paying jobs, they pay back more into the student loan system. If they end up with lower-paying jobs, they pay less. The overall terms, the percent of the surcharge and the number of years, are set so that, over all the graduates combined, the money borrowed is equal to the money returned. This is a progressive approach that scales the financial contribution of those who benefit from college to their ability to pay, and it reduces the pressure on borrowers to take the most lucrative jobs rather than the ones that appeal to their interests and ideals. (More schoolteachers and fewer bond traders would be a small but positive benefit of this approach.) I don’t know who first came up with this idea, but I associate it with the late, great Ben Harrison.

From a macro point of view, instituting this reform at the same time fiscal deficits are being jacked up to pay for the immediate expansion of education sends a strong signal that those deficits are temporary. They will help pull us out of the slump, but over the longer term we are putting in place a mechanism to more fully finance tomorrow’s students. The US Treasury is currently able to borrow as much as it wants at a near-zero interest rate, but this will not last forever. At some point skepticism about the fate of the dollar will start to mount, and it will be necessary to demonstrate that fiscal policy is sustainable. Reforming tuition finance is not everything, but every $50 billion or so helps.