from elsewhere:

Subsidized Education
by Russell Madden

It's an annual ritual. With a sense of dread
tinged with resignation, college students, or
their parents, wait to discover how much this
year's tuition will rise. 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 at government institutions, reports
Investor's Business Daily (December 8, 1998).
For those in private schools, the news is even
bleaker. Students face expenses approaching
$97,000. Twenty years from now, graduates 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 percent 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
more.

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 also threaten the
very existence of private institutions of
higher learning.

Two things need to be considered in this
matter: basic economic principles and
individual freedom.


Supply and Demand

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 a product with a given
demand, the lower the price the supplier
will ask and obtain. Conversely, when demand
rises relative to supply, 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 insures that economic goods flow to the
people who will pay the most for them. Those
who are outbid will turn elsewhere to satisfy
their desires.

Under normal circumstances, when a product's
price is high and supply relatively low, more
producers move into that line of work, hoping
to cash in on greater returns than they might
obtain producing other 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
equilibrium until all the supply is purchased
by those willing to pay the price.

What happens, though, if the price of a product
is artificially set below its 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, if a
third party decides to subsidize music lovers
to the tune of $5 per CD, more people will
decide they can afford to purchase CDs. Demand
will increase. Delighted producers will make
more of them. Sales will increase.

Before long, producers will realize that all
those people willing to buy CDs at the
unsubsidized price of $15 are paying less than
they are willing to pay. So the producers will
start increasing their prices, say to $17 at
first, then $19, then $20. After all, with
the subsidy, the consumer has to pay only $15.

But some consumers who have grown accustomed
to buying cheaper CDs will have to cut back
on their purchases or stop entirely. They
are unhappy about seeing their living standard
fall. So they demand a larger subsidy, joined
by the producers, who face declining sales.
If the buyers succeed in getting the "music
they deserve" at the price they want, the
whole cycle begins 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. College administrators then
feel justified in increasing tuition and fees,
realizing that many if not most students are
subsidized in one form or another.

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


Lesser Students

A side effect of this policy is that it attracts
more poorly qualified and less motivated students
who value higher education less than others who
are willing to pay the full price. Colleges have
to devote more resources to remedial programs,
and students in these programs have a greater
dropout rate.

Another problem is that since public administrators
do not have to show a profit 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?) Administrators
also have incentives to increase their budgets
needlessly. After all, increased "costs" translate
(through a kind of self-fulfilling prophecy) into
increased subsidies.

According to the Heritage Foundation, in the 30
years since its inception in 1965, the federally
guaranteed student loan program subsidized 74
million students to the tune of $180 billion.
By artificially lowering interest rates and
insuring banks against defaults, this program
has actually raised the total cost of a college
education in the long term for all
students -- whether they receive guaranteed loans
or not.

While the short-term direct costs of subsidized
loans are less than for loans obtained in a free
market, the long-term result is to reinforce a
cost spiral that outpaces the general price
rise (as outlined above). With less attention
paid to restraining spending -- by administrators
and students -- waste and unnecessary expenses
tend to increase more than they would in a
market-based environment.

When combined with direct subsidies to
government-owned colleges and universities, the
loan program makes such institutions more
attractive to students than they might otherwise
be. Private colleges find it difficult to compete
against public institutions whose price is lowered
by taxpayers' money.

At the beginning of this century, 80 percent of
students enrolled in private schools. Now that
same percentage of students enters government-owned
colleges. In the past 30 years, over 300 private
institutions closed.

It is 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
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. Political leaders should not
be picking winners or losers in the realm of
education. Diversity in approach, attitude, and
emphasis should be left to the producers and
consumers of education.

Besides that encroachment on liberty, no one has a
right to anyone else's money. The taxes diverted
toward education are taken not only from those who
do attend college but also from those who do not.
No one should be forced to pay for something he does
not use. Even less 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, intellectual independence (personal and
institutional), economic efficiency, and
educational diversity and quality all argue that
government subsidies and guaranteed student loans
should end. Only in this way will the unceasing
upward surge in tuition be moderated. Even more
important, we can begin to restore respect for
the freedom and dignity of each individual.
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