Hutchins Roundup: State Funding to Public Colleges, Pension Plans, and More

Vivien Lee,
Vivien Lee Senior Research Assistant - Hutchins Center on Fiscal & Monetary Policy, The Brookings Institution
Manny Prunty, and
Manny Prunty Intern - Hutchins Center on Fiscal & Monetary Policy, Brookings Institution
Louise Sheiner

June 20, 2019

Studies in this week’s Hutchins Roundup find that declining state funding to public colleges reduces degree attainment, pension plans should avoid one-size-fits-all life-expectancy tables because the rich live longer, and more.

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Declining state funding to public colleges reduces degree attainment

Public colleges and universities, which enroll 77% of all undergraduates and award 72% of STEM doctorates, have had declining state funding since 1990. Exploiting the variation in state support for public colleges, John Bound of the University of Michigan and co-authors find that declining state funding induced public universities to raise tuition and to shift toward tuition as their primary source of revenue. Although highly-ranked research universities have mitigated some of the lost funding by attracting out-of-state and international students, who pay higher tuition than in-state students, and by raising more philanthropic funding, lower-ranked schools and non-research schools were unable to use this strategy. Overall, the increased tuition has resulted in increased unmet need—the cost of attendance not covered by grants or family resources—among moderate- and low-income students at all public colleges, the authors say. Additionally, the authors estimate that a 10% drop in state appropriations led to a 3.6% drop in bachelor’s degree attainment and a 7.2% drop in PhD degree attainment at public research universities. The findings suggest that stagnating state support for public universities may have long-term adverse effects on the supply of skilled workers with college degrees and workforce productivity, the authors say.

Pension plans should avoid one-size-fits-all life-expectancy tables because the rich live longer

The widening gap between the life expectancy of rich and poor in the US and in other developed countries makes public pension programs more regressive over time because higher-income participants tend to live longer and thus, receive benefits for longer. Using the Health and Retirement Survey to compare lifetime benefits of male cohorts born in 1930 and 1960, Miguel Sánchez-Romero and Alexia Prskawetz of the Vienna University of Technology and Ronald D. Lee of the University of California, Berkeley, find that differences in life expectancy by income make the U.S. Social Security system mildly regressive. Lifetime benefits would become progressive only if Social Security incorporated mortality differences by income into the benefits formula. Introducing separate life tables by income group would achieve the best welfare outcomes for the bottom three quintiles, the authors find.

Convergence of GDP and consumption growth across eurozone countries is similar to that across U.S. states

Twenty years after the advent of the euro, the growth rates of GDP and, to a lesser extent, consumption growth, among 10 of the original members of the monetary union (all but Greece and Ireland) have become synchronized to a degree similar to those across the U.S. states, Jean Imbs and Laurent Pauwels of the European Central Bank find. The authors attribute this convergence in growth rates to increases in bilateral “export intensity”—the proportion of a sector’s value chain that is directed towards exports—across the countries. In particular, they find that export intensity, which is much higher between European countries than between Europe and the US or China, can explain up to 20 percent of the increase in GDP growth correlation during this period, and that it played a larger role in the service sector than in manufacturing.  Because of Ireland and Greece, though, there is still more heterogeneity in GDP growth rates among all eurozone countries than among U.S. states.  The authors argue that the convergence of consumption growth rates across EMU countries can partially be traced to financial deregulation, which facilitated more financial integration.

Chart of the week: Of all G10 countries, the US has had the sharpest decline in prime-age male labor force participation since 2000

lfpr male

Quote of the week:

“If expansionary fiscal policy is needed at the euro level, it is likely to be under supplied. The reason is spillovers, i.e. the externalities arising in a group of highly integrated countries. The increase in domestic demand from the fiscal expansion partly falls on imports rather than on an increase demand for domestic output. As a result, countries are likely to do too little and the euro output gap is likely to remain. How can this be solved? Conceptually, in one of two ways,” says Olivier Blanchard, former Chief Economist of the International Monetary Fund.

“First, through a coordinated fiscal expansion, the way it was done by the G20 in 2009, with each country issuing debt. This would however have to be limited to the coalitions of the able… Second, through a common budget, financed through euro bonds. But this implies risk sharing, and we know the political difficulties of doing so…I realize that what I have offered is blue sky thinking, ignoring the complex euro geo-politics which will determine the outcome in the end. But it is the right place to start…Monetary policy has transformed itself. Now is the time to do the same for the rest of the macro policy architecture.”