DEATH IS EASY
by
Russell Madden
 
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FREEDOM, As If
It Mattered
by
Russell Madden
 
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SUBSIDIZED EDUCATION

by

Russell Madden

 



Any student who has been in college for very long is all too familiar with the annual ritual. With a sense of dread tinged with resignation, students wait to discover just how much their tuition will rise this year. Unlike their experience with new computers, they entertain no expectation that rates for their education will decrease. The upward spiral in prices appears inexorable.

Yet is that the way it must be?

For a student in college between 1997 and 2001, average total costs will be nearly $46,000 for those attending public institutions. For those in private schools, the news is even bleaker. Such students face expenses approaching $97,000. Students graduating twenty years from now may well be staggered by costs of $157,000 and $327,000, respectively.

In the past four decades, the total yearly spending on higher education increased from $7 billion to $170 billion a year. Financial aid at both the state and federal levels reached $60 billion in 1998 with guaranteed student loans comprising nearly 60% of that aid, a six percent increase from 1997. Many people would contend that such a bump in financial aid is justified given the price hikes in tuition and other costs. Not only would they adamantly resist any attempt to lower that aid, they actively lobby for even more outlays of government monies.

Unfortunately, the first or most obvious answer to a problem is not necessarily the correct one.

The reality is that government subsidies not only lead to ever greater educational costs but threaten the very existence of private institutions of higher learner.

There are two fundamental dimensions to be considered in evaluating this dismal situation. The first factor is one of basic economic principles. The second is an issue of individual freedom.

As with other areas of life, the price we pay for any good or service is essentially determined by relative supply and demand. Other things being equal, the greater the supply of some product with a given demand, the lower the price the supplier will ask and obtain for that product. Conversely, when a given supply is coupled with a rising demand, prices will increase.

This is as it should be. Through this process, consumers indicate the importance they attach to a certain product or service by their willingness to purchase it at a given price. This free market method of distribution insures that economic goods will flow to those who most desire them. Costs are incurred by those with the most urgent needs or wants while others who are outbid turn elsewhere to satisfy their desires.

Under normal circumstances, when prices are high and supply relatively low, more providers will move into this area of production. By doing so, they hope to cash in on prices higher than they might obtain producing other types of goods or services. This increased supply then tends to bring down prices. Left to operate on its own, supply and demand will bring goods and prices into alignment or equilibrium until all the supply is purchased by those willing to pay the price (the goods will "clear the market").

What happens, though, if the price of some product is artificially lowered below it's "clearing price"?

If music CDs usually sell for, say, $15, there will be a given number of people willing to purchase them at that price. However, what if a third party decides to subsidize the cost of CDs and pays each music lover $5 to help defray the cost of purchasing his music? More people will now decide they can afford to purchase CDs. After all, these $15 CD only cost them $10. They will now buy CDs even though they value them less than those willing to pay the full $15 price.

Demand for CDs will increase. Delighted producers will make more of them. Sales increase.

It does not require much thought, though, before the producers realize that, hey, there was a good supply of people willing to buy these CDs at the unsubsidized price of $15. They are now buying more CDs at less cost than they would really be willing to pay.

So the producers start increasing their prices, say to $17 at first, then $19, then $20. After all, with the subsidy, it really only "costs" the consumer $15.

But now there are a larger number of people who have grown accustomed to buying cheaper CDs. With the increase in prices, some of these consumers will soon have to cut back on their purchases or stop them entirely. But they like listening to CDs and are unhappy with the prospect of lowering their lifestyle. They begin to complain and demand a larger subsidy to cover their increased costs. The producers will probably join the consumers in seeking higher subsidies. After all, the higher prices had begun to cut into their sales.

If the buyers succeed in getting the "music they deserve" at the price they want, the whole cycle will begin again.

So it is with government programs that mask the true costs of college for students. State and federal grants, guaranteed student loans, and direct subsidies to public colleges and universities lower the apparent price of obtaining a college education. This leads to a higher demand. Because of this higher demand, college administrators feel justified in increasing tuition and fees. And because they realize that many if not most students have these costs subsidized in one form or another, these administrators will worry less about raising tuition. They know the higher costs will not really impose all that much of a burden on the students. Plus, students will complain less than they might if they faced the full cost of their education. This will make it easier for the administration to "get away with" hiking their prices.

The cycle is born: raise tuitions; give out more aid; raise tuition again.

A side-effect of all this is that more, poorly qualified students who value higher education less than others willing to pay the full price will attend college. Since these students do not pay the complete costs of their education, they will have less incentive to work hard and will experience a greater drop-out rate. In addition, colleges must devote more resources to remedial programs to deal with these less prepared customers.

Another problem is that since these administrators do not have to show a profit in order to stay in business, they are less concerned with the satisfaction of their customers. (Remember the last time you had to wait in an interminable line at the post office or department of motor vehicles?) School officers also have incentives to increase their budgets needlessly. After all, increased "costs" translate (through a kind of self-fulfilling prophecy) into increased subsidies.

In the thirty years after its inception in 1965, the federally guaranteed student loan program subsidized the costs of 74 million students to the tune of $180 billion. By artificially lowering interest rates and insuring banks against defaults, this program has raised the costs of a college education for all students...whether those students received a guaranteed loan or not.

When combined with direct subsidies to public colleges, this loan program makes public institutions more attractive to students than they might otherwise be. Private colleges are finding it difficult to compete against another supplier whose product cost is lowered by an infusion of taxpayer-supplied money.

At the beginning of this century, eighty-percent of students enrolled in private schools. Now that same percentage of students enter public colleges. In the past thirty years, over 300 private institutions closed.

The effect is the same as if the government decided to subsidize one supplier of CDs and not another. Who would want to buy more expensive (unsubsidized) CDs? The second supplier would soon be out of business.

When government interferes in the supply of any economic good or service -- whether it be CDs, food, or education -- it distorts the behavior of consumers and producers alike. When the product is education, this process becomes outright dangerous. A vital society depends on a diversity of viewpoints and ideas. With government largesse comes government control.

But government has no business regulating ideas. That is the essence of the First Amendment to our Constitution. Our political leaders should not be picking winners or losers in the realm of education. Diversity of approach, of attitude, of emphasis should be left to the producers and consumers of education.

Even beyond this encroachment on liberty is the fact that no one has a right to anyone else's money. The taxes diverted towards education are taken not only from those who do attend college but from those who do not. No one should be forced to pay for something he does not use. Even less so should anyone have his wealth and the portion of his life which that wealth represents taken from him to pay for the teaching of ideas he does not support.

Liberty and intellectual independence (both personal and institutional), economic efficiency, and educational diversity and quality all argue that government subsidies and guaranteed student loans should be ended. Only in this way will the never-ending upward surge in costs be moderated. Even more importantly, only this course will ensure that the freedom and dignity of each individual will be respected.

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Resources:

www.ncpa.org/pi/edu/edu13.html#b

www.heritage.org/library/categories/education/ib215.html

www.cato.org/pubs/pas/pa-278.html

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