Bernie Sanders, in his election manifesto, has argued for making tuition free at public colleges and universities. This is a proposal that has struck many, including prominent economists, as ludicrous. For sure, there are scant details about how all this would work in practice and I don’t mean to shove those under the rug. And yes, there are legitimate concerns from economists about making education too cheap, thereby promoting its overuse, as well as reducing the skin in the game for students.
But I am here to argue that the plan makes economic sense, and the current generation of middle-aged workers, even if it means higher taxes on them, should consider rallying behind it. My argument is a variant of the old adage: “Be nice to your children. They’ll choose your nursing home.”
In any welfare state, and the US is no exception, the government makes significant tax-financed expenditures on education, health and old-age pensions. The young and the old are typical net beneficiaries, while the middle-aged are net contributors because most revenue is raised via taxes on those working. I see this as proof that a two-part intergenerational social contract is operative: one arm of this contract is education, the other social security. How so? The middle-aged finance welfare payments, both for the young (in the form of public education) and the old (in the form of public pensions) and then, when the time comes, the next cohort of middle-aged people – their children – takes care of them.
A salient feature of these intergenerational welfare arrangements is that they are front-loaded. This means that the expected value of publicly funded care, education and health benefits received early in life as well as care, health and pensions received later in life ultimately exceeds the cost of tax payments. In Europe, and especially in Scandinavia, people have long recognized this. For example, by some calculations, the net lifetime gain to a Danish citizen from participating in the intergenerational contract is roughly 80,000 euros in present-value terms.
At the moment, the market requires students to pay substantial interest rates on the education loans they take on. Under the Sanders plan, publicly funded students would not graduate with costly debt. It turns out that this is a bad idea from society’s point of view. Here’s why: middle-aged workers could pay for the current, younger generation’s education and be compensated later at the same rate of interest that the market charges for student loans to the young. This compensation would come in the form of payouts from a public pension system that their by-now-middle-aged children pay into. In other words, middle-aged workers can, via their taxes, act as a cheaper stand-in for the student loan market that currently prevails.
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There’s another huge source of gain in Sanders’ plan. If more students get an education because the cost goes down, there will be tremendous positive spillovers (economists call them human capital externalities), both within and across generations: within, because businesses can hire from a much bigger pool of talent and can ask more of those workers. Across, because better-educated parents raise healthier, smarter kids.
Workers will be more productive because they are constantly surrounded by other smart people. They can then be taxed to help defray some of the costs. This represents a strong tailwind that would bring prosperity for a long time to come.
Polling data suggests Sanders has been garnering more support from the young than the elderly. Based on the logic I have presented above, that makes sense; people who are elderly at the moment will not benefit from Sanders’ education scheme. But my claim is that the current generation of middle-aged workers will benefit. Certainly, they’ll pay more in taxes to cover the cost of educating their children. (And no, Mr Sanders, all this cannot be funded by taxing the super-rich alone!)
But the key thing is that these children will grow up smarter, earn more, pay more in taxes, and ultimately, via the intergenerational compact, pay their parents a higher pension. And that, of course, could mean the difference between a bad nursing home and a good one.