Saying the Quiet Part Out Loud

Econ 101 instructors take note—a new illustration of the important microeconomic concept of incidence just dropped. Economists emphasize that there is a world of difference between legal and economic incidence. Legal incidence specifies who, on paper, has the right to claim a benefit or the obligation to bear a liability. Economic incidence analyzes which party receives a benefit or bears a cost in actuality. Who gets to command more or fewer resources?

Here’s how Art Carden and I discuss the incidence of a subsidy in a forthcoming book manuscript:

Subsidies follow the same logic. Whether the subsidy lands on the buyers or sellers is irrelevant. It sticks to whoever is the less price-sensitive side. Subsidies to corn consumers, for instance, often end up in corn growers’ pockets because they raise corn demand. Food stamps raise demand for approved foods: browsing Amazon.com for foods people can buy with funds from the Supplemental Nutrition Assistance Program (SNAP), we find Corn Flakes, Corn Chex, Corn Nuts, Corn Pops, corn chips, corn tortillas, cornmeal cornbread mix, corn salsa, canned corn, creamed corn, and popcorn, plus all sorts of other corn derivatives like corn syrup-sweetened soft drinks and candy corn (first ingredient: sugar. Second ingredient: corn syrup). The loud part of the food stamp program is that it helps poor people buy food. The quiet part is that it passes the taxpayers’ money to corn farmers through the pockets of the poor. It’s no accident that the Department of Agriculture administers SNAP while Congress funds it through the Farm Bill.

Economic incidence was also unintentionally illustrated via a recent Time article on the fortieth anniversary of the Supreme Court decision in Grove City College v. Bell. Grove City, my alma mater and employer, had long sought complete independence from government entanglement with higher education. When Title IX was passed, as Time puts it, “complications arose.”

The Time article reads, “On four occasions between 1976 and 1977, Grove City College refused to sign an Assurance of Compliance form needed for students to receive Basic Educational Opportunity Grants (BEOGs) and Guaranteed Student Loans (GSLs). It contended that students received federal aid, not the college.”

The government responded by saying the quiet part out loud: Legal incidence is not synonymous with economic incidence.

The Time article continues, “The Department of Health, Education, and Welfare (HEW, later ED), argued that the college was the ultimate beneficiary of the federal funds and needed to sign the compliance for students to receive those fund as of 1977.”

In other words, the federal government admitted what economic analysis already knew: Student loans are “ultimately” a handout to colleges and universities. More concretely, the loans increase the incomes of college administrators, faculty, and other employees.

Yes, subsidies pass through the “pockets” (legal incidence) of students, but they end up in the “bank accounts” (economic incidence) of schools. Put another way, student loans increase the demand for higher education, ultimately increasing its sticker price.

In the long run, once the dust has settled, some students pay more, some pay less, resources flow to higher ed (what’s the opportunity cost?), taxpayers’ wealth falls, and society overall is poorer. A benefit to some (e.g., higher ed employees) is not a benefit to all—and in this case it’s not even necessarily a boon to students themselves.

This article was adapted from Marginalia. You can read the original here.