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Nine Reasons the Government Should Not Subsidize Higher Education
by John Lehman
4/07/2012

#1

Imagine a company that is in the clothing business. Now image that this company starts a training program to teach its workers how to build radios. This training program is a complete squandering of the company’s resources, as increasing their workers knowledge of radio building doesn’t help them sell more clothes whatsoever.
Government funding of higher education squanders resources in a similar fashion. How so? To my knowledge, when government gives out loans, grants, and subsidies to students, it does not use the student’s field of study as a discriminator in the decision of which students receive the funds. In other words, when the government gives students money for college, it gives the money to them regardless of whether they are engineering majors or Chicano studies majors. This completely subverts the function the pricing mechanism serves in the market. Prices send signals. They transmit preferences and reveal where resources are needed and where they are not. When the government does not use field of study as a discriminator in deciding how subsidies gets allocated, it essentially assigns the same price to all majors. If the government loans you $10,000 at 4% interest regardless of your field of study, the prices of both majors are artificially made equal.
But even with all of its power, government cannot change the following economic reality: employers do not value all majors the same. Companies have a higher demand for engineering students than they do Chicano studies students. Why? Customers demand the products that engineers produce more so than the products Chicano studies majors produce.
So what is the end result of government’s interference into the education market? Colleges produce a higher number of Chicano studies students above which the market required. The result? Unemployment, students moving back into their parent’s homes, and the squandering of taxpayer dollars.
Had a pricing mechanism remained operative, such an outcome would likely be reduced. Lenders would take note of the majors that employers are demanding and those that they are not demanding as much, and they would price the loans they make to students accordingly. If a student selects a major that is not in high demand by employers, lenders would charge a higher interest rate on the loan to that student to cover the risk of the loan not being paid back if the student does not find a job in that field upon graduating. When the price is made explicit to the student in this manner, they may decide to reconsider and select a major in higher demand by employers in order to acquire a loan at a lower interest rate. If suddenly Chicano studies majors are highly demanded by employers, the interest rate lenders charge to students selecting that field will drop. In this manner, the preferences of employers and students are better aligned.

#2

With the expectation/promise of ample government subsidies in mind (and the demonization of anyone who opposes them as being “against education”), incentives of high school students are dulled. How so?
According to the Department of Education “most of the federal student aid programs do not take a student’s grades into consideration” [1].

 

With ample subsidies available, and academic achievement not used as a discriminator in determining who receives those subsidies, students are not incentivized to work hard to receive a subsidy. All else equal, if you are an A student or a C student, you have the same chance of receiving the subsidy.
Without government interference, private lenders would never have such lax standards. They would be more willing to lend money to students with good grades and good teacher recommendations than to students with poor grades and poor teacher recommendations. Good students would be charged a lower interest rate. Poor students would be charged a higher interest rate or would not receive a loan at all.
First, with this discriminator in place, students would be incentivized to take high school more serious. Less time would be spent on sports, video games, pot, and beer. More time would be spent studying.
Second, the job of a teacher would be made easier. They would spend less time disciplining their students. Not only would they have harder working students, they would have students who would treat them with more respect and who would disrupt the classroom less, as these students would attempt to reputation build in the hope that their teacher would be willing to write a good letter of recommendation to potential lenders.

#3

In Economics in One Lesson, economist Henry Hazlitt outlines the problem with government loans. He writes the following:
There is a decisive difference between the loans supplied by private lenders and the loans supplied by a government agency. Each private lender risks his own funds. When people risk their own funds they are usually careful in their investigations to determine the adequacy of the assets pledged and the business acumen and honesty of the borrower.
If the government operated by the same strict standards, there would be no good argument for its entering the field at all. Why do precisely what private agencies already do? But the government almost invariably operates by different standards. The whole argument for its entering the lending business, in fact, is that it will make loans to people who could not get them from private lenders. This is only another way of saying that the government lenders will take risks with other people’s money (the taxpayers’) that private lenders will not take with their own money.
In other words, government necessarily makes riskier loans than private lenders.
This helps explain why you will find hundreds of thousands of students on college campuses who have no business being there. They receive 65% on a multiple choice test. They fool around for hours in student centers instead of studying. And then, they drop out.
This helps explain the fact that only 53% of students who enter college graduate within 6 years [8].
The taxpayer’s money has been squandered. The student’s time has been wasted, for they should have been exhausting their time and effort towards more productive ends.

#4

Businesses try to reduce the costs they face in order to be able to keep the prices of the products they sell competitive. In a normal market, colleges would operate in the same fashion. They would keep costs down in order to be able to charge lower tuition and attract more students.
However, when government subsidizes higher education, colleges have less of an incentive to cut costs. Why?  Because they have implicit knowledge that when tuition rises, Congress will vote to increase financial aid in order to gain the political favor of their constituents who are largely empathetic toward supporting education.  With such increased funding, tuition becomes more affordable again. The college does not face the consequence of losing the student’s business, which they normally would have faced if the government had not been involved. Economist Thomas Sowell sums this up nicely when he writes “In any kind of economic transaction, it seldom makes sense to charge prices so high that very few people can afford to pay them. But, with the government ready to step in and help whenever tuition is “unaffordable,” why not charge more than the traffic will bear and bring in Uncle Sam to make up the difference?” [2].
This conclusion is supported by the research of economist Gary Wolfram. He writes “There is a good deal of evidence suggesting that federal assistance has the unintended consequence of increasing tuition for all students”. He finds that for each dollar in Pell Grants, net tuition increases by 60-68 cents, and that for each dollar of loan aid, the tuition of private colleges increases 72 cents [3].
Subsidies push up prices, which leads to more demand for subsidies, leading to increased prices.
Peter Schiff, CEO of Euro Pacific Capital, calculated that between 1874 and 1918, a worker at Ford Motor Company would have to work 32 days to pay for one year of tuition of Yale University. Now, an average worker would have to work 1.5 years to pay for one year of tuition [4].

#5

If it is true that the average college graduate makes one million dollars more over the course of their lifetime than the average high school student, why should is it necessary for government to subsidize such a wise investment? By the same logic, why doesn’t the government give me $18,000 (the average debt of a college student upon graduation [5]) to invest in stocks that I know will appreciate by a million dollars?

#6

The government already socializes education for 13 years of our lives.

#7

$173 billion dollars could be spent elsewhere or could remain with the taxpayer [6].

#8

The Constitution does not grant the federal government the power to subsidize college.

#9

Liberals outnumber conservatives 11-1 in the social sciences and 13-1 in the humanities [7]. Tax dollars should not be used to fund such biased education. Should we also spend billions to enable 18-years-olds to listen to Rush Limbaugh and watch Fox News?

Sources:

[1] http://www.usatoday.com/news/education/2009-06-03-diploma-graduation-rate_N.htm
[2] http://townhall.com/columnists/thomassowell/2008/04/23/the_economics_of_college_part_iii/page/full/
[3] http://www.cato.org/pubs/pas/pa531.pdf
[4] http://www.youtube.com/watch?v=AIcfMMVcYZg
[5] http://www.humanevents.com/article.php?id=19016
[6] http://www2.ed.gov/about/overview/budget/budget11/summary/edlite-section3d.html
[7] http://www.mindingthecampus.com/originals/2007/10/professors_just_as_liberal_or.html
[8] Hazlitt, Henry. Economics In One Lesson. 1946, Harper & Brothers.
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