In an effort to increase access to higher education, the government has been lavishing financial aid on students. The largest of these subsidies are the loan programs (primarily the federal direct and guaranteed loan programs, Perkins and PLUS), which accounted for just under 70 percent of all federal financial aid last year, according to the College Board. But there is reason to believe that these subsidies do not achieve their goal due to an unintended consequence, specifically, the incentive the subsidies give to colleges to increase their tuition.
Instapundit, for his part, notes:
I suspect that runups in higher education costs have been underwritten by the availability of easy credit to students and parents, and I wonder if colleges and universities won't meet a lot more market resistance if that credit dries up even partially.
What I'm wondering is whether this is in any meaningful way different from the housing mess. Or the S&L mess. When I took economics a hundred years ago, we learned all about supply and demand, and then we learned about intervention at the macro level by the government. What struck me at the time is that while the mechanics of markets finding a price level were quite clear, figuring out how the government could best make adjustments at the macro level is really quite tricky. The real problem is not how, but why? And I think we've lost our way with the why.
The problem we face today is that the government has been tampering with the economy so long that we don't really know what's underneath. What's housing demand? Between the breaks for home ownership, the encouragement for lending, the push to lend to minorities, incentives at the local level to construct housing, etc, nobody knows what people are really prepared to pay to put a roof over their heads, or to take ownership of the house as opposed to renting. What we have instead is a system where it's assumed that you'll put some kind of roof over your head, but there are government restrictions on how you can build your house that push up the cost, followed by government incentives to make up for the fact that houses are too expensive, followed by prices going up because screwed up credit rules to encourage home ownership increase the credit available to purchase homes and, for that matter, to speculate in them. By the way, how do we know that houses are too expensive? Because politicians pitching to the middle class think that expanding home ownership will all them to claim that their policies are allowing more people access to the American dream. The same goes for higher education, only it's worse because while owning a house at least keeps out the rain, what a college degree does for you is more nebulous these days. What's striking in all this is that while we complain plenty about how the government taxes us to give our own money back, we don't give nearly as much thought to how much government paternalism costs us by screwing up the markets in which we must participate to draw out our living and acquire the things we need and want in life.
Reagan used to say that when a politician starts talking about how he's going to help you, you'd better keep your hand on your wallet. But on the tail end of years of the government driving economic expansion as much as possible, whenever possible, while avoiding putting on the brakes - that's no fun - but never just leaving the economy alone, it's time to expand the maxim: If a politician is in Washington and he's breathing, hang onto your wallet. Because the question isn't whether it's going to cost you - only when and how much, and, of course, whether you'll even realize it.
What to do then? I'm inclined to say, "as little as possible." The one thing that creates a bigger mess than the government simply acting is the government acting to set right what it's screwed up before.
