The Bubble Is Set To Burst On College Subsidies

Michael Barone, writing in The Washington Examiner, considers the fate of lucrative subsidies currently enjoyed by many state universities and colleges

In The Washington Examiner, columnist Michael Barone takes a look at the financial bubble that is set to burst for state-run colleges and universities.

When governments want to encourage what they believe is beneficial behavior, they subsidize it. Sounds like good public policy.

But there can be problems. Behavior that is beneficial for most people may not be so for everybody. And government subsidies can go too far.

The problem with subsidies, Barone points out, is that they create incentives for what economists call rent-seeking behavior.  Those responsible for providing beneficial goods or services try to soak up as much of the subsidy money as they can by raising prices. This is because their customers are paying with money supplied by the government.  But, as anyone knows, the money eventually runs out.  We are still suffering from the bursting of the housing bubble created by low interest rates, lowered mortgage standards, and subsidies to Fannie Mae and Freddie Mac. Those policies encouraged the granting of mortgages to people who should never have gotten them, and when they defaulted the whole financial sector nearly collapsed.

For years government has assumed it’s a good thing to go to college. College graduates tend to earn more money than non-college graduates.

Politicians of both parties have called for giving everybody a chance to go to college, just as they called for giving everybody a chance to buy a home.

So government has been subsidizing higher education with low-interest college loans, Pell Grants and cheap tuitions at state colleges and universities.

According to Barone, the predictable result is that higher-education costs have risen much faster than inflation.  They’ve also risen much faster than personal incomes and much faster than the economy over the past 40 years.  Add to that the fact that you can’t get out of paying off those college loans, even by going through bankruptcy. At least with a home mortgage you can walk away and let the bank foreclose and not owe any more money.

Politicians, including President Obama, still give lip service to the notion that everyone should go to college and can profit from it. And many college and university administrators may assume that the gravy train will go on forever.

But that’s what Las Vegas real estate developers and home builders thought in 2006. My sense is that once again, well-intentioned public policy and greedy providers have produced a bubble that is about to burst.

Read Mr. Barone’s full column here.