From the Oklahoma Council of Public Affairs:
Jack Wenders on "The Higher Ed Bond Issue: It's Just More Money
1/25/05

LINK

Funds raised through higher education bond issues are often earmarked for things like new construction or renovation. But since money is fungible, one in fact does not know where the money goes. Earmarking money to build or repair classrooms or other facilities can be viewed as a marketing technique designed to deceive taxpayers and their elected representatives.

Here's an example from Economics 101. Suppose a family currently has $12,000 of income, of which $4,000 is spent on food. Warmhearted legislators, wringing their hands over poverty and "hunger," design a program to (allegedly) help this family eat better. Call it a food stamp program.

The program gives the family $3,000 in food stamps. So now the family is able to spend $5,000 on food - $3,000 from the food stamp subsidy and $2,000 from its other income of $12,000. The family now has $2,000 left over from its other income.

What has happened is this: The $3,000 in food stamps has simply freed up $2,000 of the family's other income to be spent on other things, like ATVs and video rentals. So the net result of the purported $3,000 food subsidy is as follows: $1,000 of increased spending on food, and $2,000 in increased spending on ATVs and video rentals. In the end, the earmarking of the funds had little effect on food consumption, as the same thing would have been accomplished by simply giving the family $3,000 in cash (of which $1,000 would have been spent on food and $2,000 on ATVs and video rentals). Earmarking of funds is exactly equivalent to an increase in income.

As this example makes clear, any funding earmarked for the construction or repair of campus facilities inevitably displaces, or frees up, other funds - which then may get spent in ways much different from what was intended when the bonds were issued. Earmarked funding is simply more funding, period.

But earmarking is a shrewd marketing ploy, as legislators might be more inclined to vote for earmarked funding than for the same amount in general appropriations. That's because many legislators don't understand the displacement issue. They might not vote to give poor people $3,000 in cash but will vote to give them $3,000 for food, even thought the result is exactly the same through displacement.

Certainly, funding earmarked for classrooms or other facilities results in more facilities being built. But the question remains: Absent such funding how many would have been built anyway? And how does earmarked funding alter the pattern of spending from what it would have been if the same funds were simply appropriated with no earmarking? Since earmarked funding is easier to get through the legislature, universities may simply fritter away their annual appropriations knowing that they can more easily get earmarked funds later. As in the food stamp example - right out of Economics 101 - earmarked funding results in exactly the same ultimate pattern of spending as an appropriation with no strings attached. (As an aside, it has been my observation that universities greatly underestimate the hidden operating and maintenance costs of more facilities.)

Earmarked funding for public institutions simply amounts to more money being poured into those institutions, which then spend the increment in whatever way internal political forces dictate. One of the results of increased facilities funding may be more spending on the volleyball program, higher salaries for left-wing sociology professors, or any number of expenditures taxpayers and legislators would not approve if they understood the displacement issue.

The bottom line is that it's more money, period.

Dr. Wenders (Ph.D., Northwestern University) is professor of economics emeritus at the University of Idaho. He writes frequently for OCPA.

http://www.ocpathink.org/ViewResearchAndIdeasStory.asp?ID=594


© Copyright 2004 OCPA. All rights reserved.
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John T. Wenders
Professor of Economics, University of Idaho
Senior Fellow, The Commonwealth Foundation

Mailing Address:
2266 Westview Drive
Moscow, ID 83843

Voice: 208/882-1831
Fax: 208/882-3696
Cell: 509/336-5811
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www.uidaho.edu/~jwenders