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So I don't know if this might be the right place, if it isn't I'd appreciate if anyone can link me to the right place. Anyways here is the question.

I've read up on what are the cons of printing more money and that's basically inflation. But that only happens because we are injecting that printed money directly into the financial system, in this case, everybody has more money which leads to inflation. Consider a different case.

Suppose we want to make education free (zero tuiton/fees etc), but how are we supposed to pay all those professors and people working in these universities?

We could start printing more money and give those people money from government's reserves. Now you would say, But this in-turn means people all over the country have more money since they don't have educational expenses for their children.

How about increasing the tax rates for anybody who has children, to compensate for this? This way people who didn't have children remain unaffected, while those who have, have to pay more taxes which minimizes the difference of what they gained by not spending on their children's education.

You would say that this doesn't change the overall outcome, so what's the use of this sort of system. Well this means international students could study for free, children living in orphanages could as well. I don't know if children in orphanages are getting education or if there is an another system for it though.

In the end I don't see how this could cause inflation or other problems as everybody still has the same amount of money.

EDIT:- For people who don't understand let me summarize the situation.

1) Print more money. Use this money to pay salaries for university staff.

2) Increase tax rates for people who have children so that they don't have more money left due to not paying educational expenses.

3) Foreign and orphans and other students with similar cases (basically people with no children), don't have to worry about taxes. They can get free education if of course they pass the eligibility criteria for that university

EDIT:- (in response to erik's edit)

So try thinking of it this way. Is it more likely that people continue living their normal life and ignore this high quality education which they possibly can't afford or they choose to pay for this education and bring their living standard down?

If it's the latter, then yes it causes inflation but if it's the former then no it doesn't since they still have the same amount of money.

An example to explain it better. Suppose I want to do Masters from USA but it costs me 2000$ (idk the actual amounts so it's an assumption). Well If I collect all the money from my banks and savings I can manage to get this education but I won't have anything left for other life expenses (food, clothes, entertainment, etc). So I decide to not do this Masters from USA and carry on my with my never changing life.

However if the government pays this money for my education. Do I have more money now? The answer is NO. It's just I'm getting the education free, I ain't getting any money.

The alternate view of this is with people who can afford it and are paying this money from their own pockets. They will see the difference as they will be saving their own money if the government pays their expense.

However do you really think that this bunch of people can cause really such high inflation the government fears? First of all the likelihood of these people hogging all the international seats are low. Secondly making education free means they will have more competition from people all around who couldn't afford it before (I think the latter are greater in size than the ones who can afford)

In any case looks to me the gains far outweigh the losses. Eliminating poverty in this way will lead to much better economy later on.

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    $\begingroup$ I am afraid I don't understand your question. You assume that education is free, but for some reason the exact same people go to college? No new students enroll? $\endgroup$ – Giskard Aug 12 '18 at 10:34
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    $\begingroup$ Also if you are increasing taxes to pay for the salaries of university professors in such a way that net government expenditure is unchanged, you are not printing extra money, are you? $\endgroup$ – Giskard Aug 12 '18 at 10:35
  • $\begingroup$ @denesp - 1) No new students are enrolling, but international students, and basically anyone who couldn't afford can now give tests for that university and get education for free. 2) We aren't increasing taxes to pay the salaries. We are increasing taxes to minimize the increase in the money people are gaining due to not paying educational expenses for their children. This doesn't apply to international/orphans. We pay salaries by printing more money and give this money to the university staff. $\endgroup$ – gallickgunner Aug 12 '18 at 10:38
  • $\begingroup$ Also I forgot to mention but I ain't an economics student :) I'm a CS student so don't know much about politics/economy. It's just i was wondering why couldn't this be done to provide free education. $\endgroup$ – gallickgunner Aug 12 '18 at 10:47
  • $\begingroup$ What about children who do not go to university? Should their parents pay that tax too? Have you considered how private universities work? $\endgroup$ – Ignacio Valdés Zamudio Aug 12 '18 at 11:29
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Let us think about this in the following way:

(1)Suppose education is funded by government spending (G). So the real value of education = G. The government decides to balance the spending by taxing the parents of children (children who must be educated by some well enforced law). Then the government's budget deficit is:

G-TR

where TR is the total tax revenue collected from the parents. Does the government need to print money? No, as long as G-TR=0 Has education been made free? No. The spending on schooling by parents, prior to government intervention, has now been replaced by the tax they pay to the government.

(2) What if now, the government decides to pay for education of not only the domestic, but also the foreign students. Say that extra spending is Gf. Now the budget deficit is:

G + Gf - TR

If G = TR, then the government must secure some way of funding the extra spending. Hence, $\dot{m} = G+Gf-TR$, where $\dot{m}$ is the change in nominal balances (money) that is achieved by printing money.

In (1) there is no inflation. In fact, (1) can be solved without even introducing money in the model. In (2) there will be inflation as long as there is some budget deficit, with the deficit spending funded through seignorage.

Note however, the government can raise the spending on deficit, without printing money at all. They could be issuing bonds to cover the deficit spending.

EDIT
Method (2) will create inflation. Why? Assume that the economy is at balanced government budget, so G = TR. Now suppose a foreign student joins the education system in the country, and the government spends Gf = \$100 for this student. But the government does not raise taxes to fund this spending, rather prints \$100 and pays for this education.

This extra income of Gf which was received by the education provider increases the provider's budget by Gf. The extra demand made by the provider for goods and services in the economy will lead to a rise in prices for goods and services leading to inflation.

EDIT after the edit on OP's question

The example you gave about the Masters is absolutely correct. You are also right to identify that you do not have extra money. However, the person(s) who taught you they have the extra money. This income received by your educators was in lieu for services they provided - however, the source of the income was the government printing money and giving to them. That, causes the inflation. If for example, they were paid by you, then what you would be doing is paying a fraction of resource you have (by virtue of income earned, capital asset returns or loans) in lieu of the educational service provided.

I hope I have pointed out the difference in the two flows of income for the educators. The first one, the government money, is generated by mandate. The second one, fraction of your resource is part of the economy's circular flow. The first one generates inflation, because suddenly there are some educators in the economy who have more income due to money being printed and handed to them, which means that their excess demand will not be met by a higher production. The second one does not, because you are paying for services you are receiving out of your own income, not by using money - your purchases are adjusted accordingly and balanced out by the demand made by the educators with their income.

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  • $\begingroup$ I don't understand how will there be inflation in case 2 when almost everybody has the same amount of money thus no effect on supply/demand chain, except for the parents of foreign students and people who had no money at all like orphans. People who had money and who were spending it on educational expenses for their children won't feel the difference, but foreign students and people who have no children and want to study further will see the difference. $\endgroup$ – gallickgunner Aug 12 '18 at 12:36
  • $\begingroup$ I thought inflation due to printing money was caused when the government injected that money into the financial system, thus everybody had more money. But we countered that by increasing the taxes so 90% of the population is still like it was before. $\endgroup$ – gallickgunner Aug 12 '18 at 12:39
  • $\begingroup$ Imagine that there are no foreign students studying in the country. The financing is as (1) and there is balanced budget. Now admit a single student from abroad. The government makes that student's education free. The government does not impose any extra taxes. Now if that student's education needs \$100 spending per time period, the government simply prints a \$100 bill and purchases the educational services for this foreign student. That \$100 bill was the $\dot{m}$ which leads to inflation in the economy. $\endgroup$ – erik Aug 12 '18 at 12:43
  • $\begingroup$ Ok maybe I have a very naive concept of inflation. Can you elaborate and edit in your answer, how this $100 bill will cause inflation in the economy of that country. I mean what's gonna actually happen to create inflation by creating this 100 dollar bill. $\endgroup$ – gallickgunner Aug 12 '18 at 12:58
  • $\begingroup$ I knew you would say that, Please check my edited question to see my response to that. $\endgroup$ – gallickgunner Aug 16 '18 at 20:48

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