The Education Bubble

This is the first of two blog posts, linking to articles by Writer Virginia Postrel.♠  The point of this linked article is that the increase in the cost of education is, in part, an unintended consequence of government funding of education through grants and loans.

I would note that there is a difference between government loans and grants to students, allowing them to pay the freight, and government financing of schools, thus lowering tuition.  The first is inflationary and the second is not.

Here is the nut of the issue:

On the whole, it seems that universities are like the companies making capital equipment. If the government hands their customers the equivalent of a discount coupon, the institutions can capture at least some of that amount by raising their prices -- especially when demand for their product is increasing independent of aid, because a college degree promises to pay off in higher wages. They can then pay their employees more or simply not economize as they might otherwise have to do. Federal aid may also allow institutions to shift fundraising efforts away from drumming up scholarships and toward raising money for buildings, new programs or big-name professors.

It is not all siphoned off, but some of it is and the result is John Q Public losing faith in the higher education institutions in this country.

Ms Postrel finishes up:

A good chunk of the educated public has decided that college educators are decadent and lazy. Many are positively lusting to see higher education get its Detroit-style comeuppance.

This attitude is unfortunate and often unfair, but it’s the direct result of decades of federal policies. Any strategy to reduce college costs needs to look beyond traditional subsidies to remove some of the insulation that stifles innovation and feeds public resentment.

Hat tip to the Instapundit.

Regards  —  Cliff

♠  Virginia Postrel is a Bloomberg View columnist. She is the author of The Future and Its Enemies and The Substance of Style, and is writing a book on glamour.  This is the first of a two-part series on the economics of higher education. The opinions expressed are her own.  To contact the writer of this article: Virginia Postrel in Los Angeles at vp@dynamist.com.