"Buy American" - Really?

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I'm watching the 60 minutes episode regarding the "Buy American" aspects of the stimulus package and cannot help but post a comment on the policy. This is a shortsighted policy and it exemplifies the general public's lack of understanding about economics and trade.

By forcing firms to buy American made steel, prices for US steel will rise. The policy eliminates some of the world's largest producers of steel from our markets and removes some of the competitive pressure keeping our steel producers productive and efficient - the same competitive pressure that has led to a resurgence of the US steel industry in the last decade.*

Any microeconomics student will tell you that both of these factors will lead to higher domestic prices. Higher domestic steel prices will decrease the supply of steel intensive products and this will in turn increase the prices of many durable goods. So although this policy may have short run positive effects specific to the domestic steel industry, it has the potential to have much larger and longer lasting costs to the entire economy. On net, the economy, the taxpayer, and the consumer lose.

Many like to argue that one reason to protect domestic industries is that free trade really isn't free - that other countries are playing by a different set of rules and we need to support our domestic industries. But I would ask, why do we care? If China is using its wealth or its citizens' tax dollars to subsidize its steel industry, then what they are basically doing is transferring their wealth to us. We can buy cheap subsidized steel (or cheaper steel from other parts of the world who are trying to compete with China). Caterpillar can build cheaper earth moving equipment. Harley-Davidson can produce cheaper bikes. As the economy turns, builders can use cheaper steel in their buildings. Consumers will buy cheaper washers, dryers, and cars. The money US corporations and consumers save on cheaper steel can go to shareholders, new technologies, and new products. Will the US steel industry be hurt? Yes, but the argument from above is now reversed. The US economy, taxpayer, and consumer stand to benefit by more than what the steel industry loses. On net, this is a win for the US economy.

It is certainly hard to think about the big picture when it’s your husband, wife, or friend who is laid off. But there may be better ways to deal with the problem then protectionist trade policies. “Buy American” will, on net, reduce our GDP and make consumers worse off. So instead, let’s try to conservatively estimate the cost we will likely incur from a “Buy American” policy and use that money to instead create an “Educate Americans” policy where workers who lose their job can receive education and training in other industries and professions or we can invest into new research and development. This way, we are investing into human capital and R&D that have the potential to increase the economic pie and we are not incurring a cost that basically only benefits one industry. Think about this too… what does “Buy American” get us in the long run when the economy recovers... higher steel prices and less efficient steel producers who were protected from their competition?

What will be the reason for government assistance then... bad government policy?

* What's funny about this is that the American steel industry and Nucor are praised during the episode for their resurgence over the last decade. It can be argued that the lack of a bailout of the steel industry over a decade ago and the subsequent bankruptcies of many inefficient steel companies is one of the main reasons for industry's new competitive outlook. Although painful for the people and families associated with the industry at that time, the survival, health, and productivity of the US steel industry today is a direct result.

Even Calvin Needs a Stimulus Bill

I saw the cartoon years ago (big Calvin and Hobbes fan). Recently, this was posted on Greg Mankiw's Blog and it reminded me of how much I enjoy Calvin and Hobbes cartoons.

The Hidden Shift in Higher Education Funding

I recently took a look at the Factbook for the PA State System for Higher Education. As an economist and an employee of a state university, I was interested in the breakdown of funding over time. I noticed that the data regarding state funding and tuition reveune were not adjusted for inflation. After adjusting for inflation, this is what I found:

Click on graph to view

The graph above shows how there has been a significant shift in pushing more of the cost of a college education in the state's "true" public university system on to the student. The magnitude of this "hidden" shift can only be seen once the data are adjusted for inflation.

Educational and General revenue (E&G) per full time student (FTE) is based on tuition and fees. From 1983-1991, the amount of revenue coming from students increased but remained consistent with the rate of inflation. Then in 1992, the amount of revenue from tuition and fees began to rise faster than the rate of inflation. Explanations for the increase in tuition and fees might include the rising costs of higher education (faster than the rate of inflation) and the expansion of the state system. However based on the data regarding the state's appropriation, another explanation emerges - a change in political philosophy resulting in more of the cost burden being borne by students and less by taxpayers.

If, as many in the state legislature have claimed over the years, the reason for increasing tuition and fees ABOVE the rate of inflation is due to the rising cost of a college education, then why not attempt to split the burden between students and taxpayers? After all, the idea of a public higher education system is to provide the state's residents with a more educated and productive labor force (positive externalities) as well as a government solution to the market failure in credit markets for educational loans. But after looking at the inflation adjusted data, it's clear that the cost burden has shifted on to students.

From 1992-2001, the state's budget appropriation per student remained consistent with the rate of inflation. Yet, at the same time, revenue from student tuition and fees was approximately $2000 more than the inflation adjusted amount. Thus for almost a decade, students continued to contribute more to the state system's operations while taxpayers saw no change.

Then, after keeping pace with the rate of inflation from 1984-2000, the inflation adjusted appropriation per full time student began to fall short. Coincidentally, this was the first year for the new Chancellor, Judy Hample. With tuition and fees running above the rate of inflation and appropriations running below, a gap has opened up and the student is falling through.

By the end of the 2008 school year, students were contributing over $12,700 in tuition and fees while the inflation adjusted amount was just over $9800 and they were receiving approximately $4600 in state funding while the inflation adjusted amount was $6200. On an inflation adjusted basis, they were over paying by almost $3000 and under funded almost $1600 in the 07-08 academic year - the hidden shift that has significantly burdened students.

Funding for State Universities in PA

Given recent news regarding the state budget, I thought that I’d post an op-ed that I wrote 2 years ago. Recently, Governor Rendell asked each of the state owned universities to set aside over 4% of their current budget just in case the state wants it back. Yes, these are very difficult times and all parts of government need to sacrifice, but many taxpayers are unaware of the relationship between the various “public” colleges and universities in PA. At a time when state funding is being cut and the true state university system has no other choice but to let it affect quality, is it time to ask the wealthier “state-related” universities to dip into their endowments?

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Excerpt from op-ed published in March 2007:

Along with all of the other consumers, property owners, and workers in the state, my tax dollars partially fund the education of students attending the 14 state-owned universities known as the State System for Higher Education (PASSHE). Our tax dollars also partially fund the education of students attending the 4 state-related universities, Penn State, Pitt, Temple, and Lincoln as well as students attending select private institutions.

According to the Department of Education’s Summary of State Appropriations for February 2007 (available at www.pde.state.pa.us), taxpayers spent approximately $465 million on the 14 state-owned universities (PASSHE), $644 million on the 4 state-related universities, and $83 million on select private colleges and universities. Based on published enrollment figures, PASSHE received approximately $4,266 per student. Penn State received approximately $4,093 in taxpayer dollars per student, Pitt received $4,941, Temple received $4,985, and Lincoln received $4,095 per student.

Taxpayers might not realize that although their tax dollars support the education of over 250,000 students, the institutions are not created equal. The University of Pittsburgh has the 8th largest endowment of any public university in the country at $1.6 billion and Penn State ranks 12th with an endowment over $1.2 billion according to the National Association of College and University Business Officers.* Combined, Pitt, Penn State, and Temple have an endowment of over $3 billion, over $20,000 per enrolled student. PASSHE, the 14 state-owned universities, has a combined endowment of $209 million, approximately $1,900 per enrolled student.

All of these institutions provide tremendous benefits for the Commonwealth and the students who attend. Yet as budgets shrink and taxpayers demand more accountability, I feel it is important that taxpayers understand the economics and politics of higher education funding in the Commonwealth.

*Data from 2007