In a column for Bloomberg , Virginia Postrel explains how “federal subsidies intended to make college more affordable may have encouraged rapidly rising tuitions.”
She calls the idea heretical, which it may be to some. But anyone who understands anything about economics should immediately nod their heads in agreement. I think I audibly uttered, “No duh.” There’s just no question that tuition will increase when, thanks to government grants or low-interest loans, people have more money to spend on tuition.
It’s basic supply and demand. Subsidies will shift the demand curve—people with more money to buy something will demand more of it—which shifts the point at which demand meets supply to both a higher price and a higher quantity delivered. The point is illustrated below.
There may be questions over just how much subsidies raise prices. How much prices rise will depend on how tight the supply is. If supply is tight—it’s harder to add more—then the above supply curve will be more vertical and any shift in demand will impact prices more than quantity. The opposite will be true if it happens to be easy to add more supply and the curve is more horizontal. Postrel notes certain restrictions on the supply of college education.
In the short-term, the number of slots at traditional colleges and universities is relatively fixed. A boost in student aid that increases demand is therefore likely to be reflected in prices rather than expanded enrollments. Over time, enrollments should rise, as they have in fact done. But many private schools in particular keep the size of their student bodies fairly stable to maintain their prestige or institutional character.
Postrel also outlines a number of other instances where government subsidies resulted in some unintended price hikes.
- Farms subsidies raised land prices.
- Research and development subsidies created “windfall gains to R&D workers.”
- Investment tax credits for capital equipment raises the prices of the equipment.
Again, none of this is surprising. It’s basic economics and Postrel is just the latest person to point out the obvious when it comes to the economics of college tuition subsidies. Type “government subsidies and college tuition” into your favorite search engine and you’ll find plenty of articles making the same point.
So we’re once again reminded of the obvious. Now what? Can anyone really imagine the federal government reducing funding for Pell Grants or Stafford Loans? I can’t. And so what are we to do?
Postrel doesn’t pretend to know and neither do I.
But one thing seems clear, if we don’t expect the federal government to change their policy, then, logically, we must look elsewhere for solutions. And because the federal subsidies will still be around, any solution must counter the natural tuition-hiking effect of these subsidies.
So where should we look for solutions?
While it might not be in their best interest (and maybe because it’s not in their best interest), we should be putting more pressure on colleges and universities to offer up more concrete solutions.
In Minnesota, the University of Minnesota and the Minnesota State Colleges and University systems each hired new presidents this year, which presents a great opportunity for some fresh thinking and leadership. I know they still need some time to settle in, but we should expect some concrete ideas soon.
Maybe asking public colleges and universities to counter the laws of economics is asking too much—especially when they’re the beneficiaries—but they need to at least give it the old college try.