A Response to Peter Sacks

I’d like to respond to Peter Sacks’ critique of my new study. Something that I think is lacking from Sacks’ critique is any sort of acknowledgement of what the paper is about. So, for those that haven’t read it yet, here is the basic story of my report…

  • The current structure of financial aid programs is inadequate.
  • We could restructure programs to better accomplish our goals in the following ways:
  • Goal: Promote Equality of Opportunity. Proposal: Leave the structure of Pell grants unchanged.
  • Goal: Fix imperfect capital markets. Proposal: Move to income-contingent lending.
  • Goal: Account for social benefits of education. Proposal: Subsidize those aspects of higher ed that generate social benefits.
  • We can reallocate educational funding to accomplish these proposals and reduce the federal deficit at the same time.

There’s more to the study, so please do go read it, but now let’s move on to Sacks’ critique. Here is his basic story (though he presents them in the opposite order).

  1. Sacks thinks we’d be better off if more people went to and graduated from college.
  2. Sacks thinks more money for low-income students would help accomplish this.  

If you notice a disconnect between what my study is about and what Sacks is arguing, it’s not just you. This is my biggest problem with Sacks’ critique: my study is about how best to structure government aid programs and is deliberately ambiguous about the appropriate level of funding, but Sacks wants to argue (albeit indirectly at times) about the appropriate level of funding.  

Here I am being ambiguous about the appropriate level of Pell funding:

funding levels could vary as future research reveals more details on the relevance of the financial obstacle. To the extent that students’ finances are still or become a significant obstacle, Pell funding should be expanded. To the extent that the financial obstacle has been or becomes more than overcome, I recommend cutbacks in the Pell grant program.

Here I am being ambiguous about the appropriate level of subsidization:

Future research will shed light on what aspects of higher education generate positive externalities and their magnitudes. Regardless of the specifics, the key point is that we should be subsidizing college attendance when it is generating positive externalities, and not subsidizing college attendance when it is not generating positive externalities.

In other words, you could completely accept Sacks’ take every time we disagree, and it wouldn’t matter as far as the core arguments in my report are concerned. This raises the question of what exactly Sacks is critiquing.

I should really stop here. But I have a well-documented compulsive need to respond, so…

It would be a mistake to take Sacks’ side every time he and I disagree. There are two big disagreements: a) the effect of grant aid on completion and b) the extent of positive externalities in higher ed.

Regarding the effect of grant aid on completion, there is a rough consensus in the literature on the effect of grant aid on enrollment, but there is no consensus about the effect on completion. Sacks and I have different theories about what that effect might be, which is fine. Note, however, that I acknowledge a version of Sacks’ theory in the report, but that his critique does not accurately portray my theory (his “academic skills” are not the same thing as my “readiness” of “sufficiently capable and persistent” students).

Regarding the second bone of contention, there is a rough consensus in the literature that positive externalities are either zero or small and positive. Sacks cites a study saying the consensus is wrong. That’s fine in general (I argue against the consensus from time to time, too), but you need to have a pretty good grasp of the topic to do so convincingly. That is not the case here.

First, it appears he’s confused about what externalities are, and/or how they relate to the point he’s trying to make. Consider this statement from his critique:

“The private benefits students are likely to realize in the labor market already internalize what Gillen calls externalities.”

This makes no sense according to the standard econ 101 concept of externalities. Externalities can still be present even if there are private benefits. You can devise an econ 201 model in which externalities are declining as Q increases, reaching a point at which there are no more externalities. I actually think this is a more appropriate model for higher ed. But while this version would make his statement logical, it would completely contradict his main argument, which is that there are massive externalities to higher ed, justifying massive subsidies from the government. So either the statement is wrong, or it reinforces rather than refutes my point.

Secondly, Sacks misinterprets the paper he cites, saying:

McMahon suggests that the total value of education externalities currently runs about 37 to 45 percent of the total returns to education spending. In other words, individuals and society are considerably better off investing in education than in government bonds paying a 10 percent return on the initial investment.

Here’s McMahon, warning readers not to do that:

These percentages should not be mistaken for rates of return.

To sum up, Sacks has not made a convincing case regarding either of the two disagreements (but his interpretation regarding completion is at least defensible, as is my interpretation). But even if you accept his position on both points, you wouldn’t have any greater insight into the core ideas in my paper, which is concerned about the best structure for financial aid programs.


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