At the Library of Economics and Liberty, Arnold Kling writes that Washington Post columnist "Steve Pearlstein uses his column to explain some freshman economics." Kling includes the following from Pearlstein's December 1, 2004 column:
"What two things do a college education, health care and housing have in common?
"One is that the price of these things has been rising at least twice as fast as other prices. The other thing is that they are all subsidized by government . . . .
"Let's take college tuition...But the reason, in the end, that they do raise prices is, like any business, because they can. And one of the big reasons they can is the ever-increasing amount of public money pumped into the system in a losing effort to keep college "affordable." In effect, these well-intentioned subsidies have the perverse effect of shielding colleges from the kind of market discipline that would have forced them to hold down prices by constantly improving their productivity and efficiency, as happens in just about every other industry."
Which brings us to a recent study by economics professors Grey Gordon, Indiana University, and Aaron Hedlund, University of Missouri, entitled, "Accounting for the Rise in College Tuition (here at the National Bureau of Economics Research, and here as a .pdf file).
Investor's Business Daily cited the study in a December 22, 2015 editorial about the explosion in student loans, advising readers that if the explosion makes you angry, then blame the federal government, explaining:
"In a sweeping new study, “Accounting for the Rise in College Tuition,” economists Grey Gordon and Aaron Hedlund conclude that “demand shocks” from federal loans, subsidies and aid “lead to higher college costs and more debt, and in the absence of higher labor market returns, more loan default inevitably occurs.”
"In a nutshell, federal loan aid to colleges is pushing up tuition faster than inflation. Students must take out ever higher amounts of debt to pay for their education, but starting salaries haven’t kept up. If students don’t get good jobs when they graduate, many will default.
"The study, published by the National Bureau of Economic Research, shows conclusively that growth in one program — the Federal Student Loan Program — was more than enough to account for the entire rise in college tuition from 1987 to 2010 — a stunning conclusion that suggests a massive market failure.
"From 2006 to today, total student loan debt soared from $517 billion to $1.3 trillion, a 152% jump, to cover surging tuition costs. Over that same period, real starting wages for college grads were essentially flat.
"Sadly, this should be no surprise, given recent history.
"Whenever government gets involved in subsidizing anything — from sugar to home mortgages — higher prices emerge, leading to market disruptions and, often, a “crisis.”
The following chart from the IBD editorial shows graphically how fast student debt has increased:
At American Thinker the same day, Tom Lifson adds these comments:
"The higher education industry has become rich and fat off its ability to raise prices at a rate roughly triple inflation over the last five decades. Because intelligence tests are forbidden to be used by employers (as supposedly discriminatory), the only way to sort through job applicants by intelligence is through the rough proxy of a college degree. As gatekeepers to careers, colleges have been able to exploit the vulnerability of students (and parents) seeking to be hired by employers offering good prospects.
"Student loan debt, incurred to pay for skyrocketing college tuition, is a ticking time bomb in the American economy, roughly the same si(z)e as mortgage and credit card debt. But unlike mortgage or credit card debt, it cannot be discharged by personal bankruptcy."It should be noted that higher education is one of the major sources of donations to the Democratic Party and Democrat presidential candidates. So some of the subsidy money for higher education ends up being laundered, indirectly, through higher education, into the coffers of the Democrats."
In an article by Ellen Wexler, originally published in Higher Education February 9, 2016, Slate magazine presents an alternative view this week, writing:
"But the idea that increased student aid drives up tuition is contentious, as is the researchers’ model. The paper’s conclusions depend on a model of one hypothetical college, which is based on data from private and public nonprofit institutions.
“This is an atom bomb mathematical technique on a problem that requires much more nuance,” said David Feldman, economics professor at the College of William and Mary and author of the 2010 book Why Does College Cost So Much?.
"Feldman said increasing federal aid will rarely change how high a college sets its tuition. A college’s sticker price is set by its wealthiest students’ ability to pay—and the wealthiest students never take out loans.
"That doesn’t mean colleges never use federal aid to their advantage. Especially at private colleges, Feldman said, federal aid may replace existing scholarships. Take a student who would have gotten $20,000 from a college. If she gets an extra $1,000 in Pell Grants, she may get $19,000 from her college instead. The student pays the same, but the college pays less.
"At public universities, increases in Pell Grants typically lower net tuition. “It’s a very different system,” Feldman said. “That’s the nuance that’s missing.” For-profits, on the other hand, are the one sector where the theory “applies in spades,” he said.
"While the paper looks at nonprofit institutions, the idea that student aid increases tuition is perhaps most evident in for-profit colleges . . . ."
At the Foundation for Economic Education, Alex Tabarrock, economics professor at George Mason University, observes:
"Sound familiar? Some of these results appear too large to me and the authors caution that they need to assume a lot of monopoly power to solve their model so the results should be taken as an upper bound. Nevertheless, the Econ 101 insight that subsidies increase prices (even net for those who are not fully subsidized) holds true."
Growls readers are encouraged to write to their Congressional representatives about student debt. Take a few minutes to write to them. You can find contact information at the Library of Congress' Thomas website (use left-hand column). Here are Arlington County's members of Congress:
- Senator Mark Warner (D) - write to him or call (202) 224-2023
- Senator Tim Kaine (D) -- write to him or call (202) 224-4024
- Representative Don Beyer (D) -- write to him or call (202) 225-4376
Remember to ask for a written response, and tell them ACTA sent you.