Bad Economists and Good Budget Cuts

Yesterday in the Patriot-News, yet another Penn State administrator campaigned against Gov. Tom Corbett’s proposed cuts to the generous subsidies our public universities receive from taxpayers (many of which the House Republicans are rightly proposing to sustain today). This time, it’s Dr. Mukund S. Kulkarni, the chancellor of Penn State Harrisburg, who bills himself as “an advocate of pro market business policies” who’s been a finance professor for decades.

Dr. Kulkarni’s basic point is that by forcing taxpayers to subsidize teaching at Penn State, we enable other parts of the university to grow the economy. In his words, “Teaching is a necessary springboard for other fully self-supported auxiliary activities of the university that also contribute to Pennsylvania’s economy.” He cites jobs created, patents received, and more.

Unfortunately for Dr. Kulkarni, there are two problems with his argument that render it invalid.

Problem number one: The 1862 law creating land-grant institutions, to which Penn State loves to refer, says the “leading object” of such institutions shall be “to teach…in order to promote the liberal and practical education of the industrial classes in the several pursuits and professions in life” (emphasis added). Teaching students is also why taxpayers pony up every year with their tax dollars. Extras are fine, sure. But in tough times, extras are the first thing you cut. Penn State needs to honor that old-fashioned, common-sense notion.

Problem number two: Dr. Kulkarni’s analysis fails to take into account the principle of the seen and the unseen, as famously expounded by the nineteenth-century French economist Frederic Bastiat. Check out what he wrote:

In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

He continued:

Have you ever heard anyone say: “Taxes are the best investment; they are a life-giving dew. See how many families they keep alive, and follow in imagination their indirect effects on industry; they are infinite, as extensive as life itself.”…

The advantages that government officials enjoy in drawing their salaries are what is seen. The benefits that result for their suppliers are also what is seen. They are right under your nose.

But the disadvantage that the taxpayers try to free themselves from is what is not seen, and the distress that results from it for the merchants who supply them is something further that is not seen, although it should stand out plainly enough to be seen intellectually.

When a government official spends on his own behalf one hundred sous more, this implies that a taxpayer spends on his own behalf one hundred sous the less. But the spending of the government official is seen, because it is done; while that of the taxpayer is not seen, because—alas!—he is prevented from doing it.

You compare the nation to a parched piece of land and the tax to a life-giving rain. So be it. But you should also ask yourself where this rain comes from, and whether it is not precisely the tax that draws the moisture from the soil and dries it up.

Boiling it down: Yes, the jobs and patents Dr. Kulkarni attributes to Penn State are good things. But they are the “seen.” The “unseen” is what jobs and patents the private sector could not add and produce because of the nearly $3.5 billion taken from taxpayers for Penn State over the last decade, even as the university doubled tuition. So the choice isn’t between Penn State’s current “economic impact” and nothing. Furthermore, if you don’t think entrepreneurs could do better than a public institution, I’ve got some oceanfront property in Arizona, and we should talk.