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Free trade is a good moral concept for the simple reason that politicians and bureaucrats should not be allowed to interfere with voluntary transactions between consenting adults.

It’s also a good economic concept for the simple reason that protectionists can’t provide good answers to simple questions.

And free trade is a good geopolitical concept because it is far better than foreign aid as a mechanism for generating prosperity in less-developed nations.

Writing for the Economic Times of India, Bjorn Lomborg of the Copenhagen Consensus Center writes about the benefits of open markets among nations.

With one simple policy—more free trade—we could make the world $500 trillion better off and lift 160 million people out of extreme poverty. …reducing trade barriers not only makes the world richer, it is a great enabler for reducing poverty, curtailing hunger, improving health and restoring the environment. …Freer trade essentially means that each country can focus on doing what it does best, making all countries better off.

The good news is that global trade has been substantially liberalized. Protectionist barriers are much lower than they were a few decades ago.

Indeed, shifts to freer trade have helped compensate for growing fiscal burdens in the post-WWII era.

But we also have bad news. There are still sectors where trade taxes and other protectionist policies inhibit voluntary exchange, most notably for agriculture and textiles.

Lomborg cites data about the huge gains that would be possible if these sectors were liberalized.

The direct economic benefits would be a 1.1 per cent increase in global GDP. This sounds modest. But because it would impact the entire world economy, by 2030 we would be about $1.5 trillion richer every year. Open economies also grow faster. In the last 50 years, countries as diverse as South Korea, Chile and India have seen their rate of growth shoot up by 1.5 per cent per annum on average, shortly after liberalisation. If Doha can be completed, it is estimated that the global economy will grow by an extra 0.6 per cent for the next few decades. By 2030, such dynamic growth would make the world economy $11.5 trillion larger each year, leaving us 10 per cent more resources to fix all other problems. …By the end of the century, free trade could leave our grandkids 20 per cent better off, or with $100 trillion more every year than they would otherwise have had.

Lomborg is making the very important point that even modest increases in growth, sustained over long periods of time, can lead to huge increases in prosperity.

He correctly applies this analysis to the trade sector, but it’s a lesson that has universal applicability. It’s why we need better tax policy, a lower burden of government spending, less regulation and red tape, and better rule of law to limit government corruption.

But today’s focus is trade, so let’s look at a great video from Marginal Revolution University. Here’s Professor Tyler Cowen of George Mason University talking about the benefits of trade.

By the way, I didn’t notice it at first, but Tyler’s video doesn’t focus on international trade. He simply explains the benefit of trade among people.

But this also helps to explain why free trade across borders is good for growth. If it’s good for two people inside Virginia to engage in voluntary exchange, and if it’s good for a person in Virginia and a person in Ohio to engage in voluntary exchange, then it’s also true that it’s good for a person in Virginia and a person in Ireland to engage in voluntary exchange.

Another subtle yet important secondary point from the video is that central planning is folly because no single bureaucrat, or group of bureaucrats, will ever have the necessary knowledge (much less incentive) to properly allocate resources. To elaborate, you just listened to Prof. Cowen explain that one of the big benefits of trade is that people can specialize in things where they have a comparative advantage. And when people specialize, they develop greater knowledge in particular fields, which further increases their productivity. Yet it’s impossible for that diffuse knowledge to be centralized, much less used properly.

Which is why centrally planned economies such as North Korea, Cuba, and Venezuela are such disasters.

And this also explains why nations that normally rely on markets get such bad results when politicians take control of specific sectors of the economy. Just consider the failures of Obamacare and the U.K.’s government-run healthcare system.

But let’s get back to the issue of trade.

Politicians sometimes make arguments about “economic patriotism.” If that simply meant, for instance, that they wanted a lower corporate tax rate to make American companies and workers more competitive, that would be fine.

But as we’ve seen with Obama, language about patriotism oftentimes is a ruse to push for protectionism and other bad policies.

And one of the reasons why the protectionism-patriotism argument doesn’t make sense is that it presumes a contest among nations. Yet as Walter Williams wisely explained, trade ultimately is between private individuals.

P.S. The MRU videos are great tutorials about economics. In prior posts, I’ve shared videos explaining how taxes destroy economic value, highlighting the valuable role of market-based prices, and revealing the destructive impact of government subsidies. They’re all worth a few minutes of your time.

What are the wisest words ever uttered by an American president?

I’m not going to pretend to know the answer, but there are some options that are high on my list.

I like what Ronald Reagan said about the government’s view of the economy, a quote that I shared just a few days ago.

I also like what the Gipper said about big government during his inauguration in 1981.

Since I’ve asserted that Calvin Coolidge may be the best President of the 20th Century, it behooves me to point out what he said, as cited by Reagan, about shrinking government to save people.

Going back further in time, it’s hard to come up with better advice than these sage thoughts from Thomas Jefferson.

And let’s not forget the principled words of Presidents Madison, Pierce, and Cleveland. Walter Williams has cited their impressive fealty to the Constitution, an approach that is in stark contrast to the behavior of today’s politicians.

Now let’s look at another option in our best-quote contest.

But, first, some background.

What is it that our statist friends want? At the risk of oversimplifying, they think the government should use redistribution to provide basic needs for everyone.

That certainly was the core message of FDR’s so-called second bill of rights.

And it’s certainly the prevailing mindset of most Europeans.

Well, there is a group of Americans – numbering above 2 million – who do have all their basic needs provided by government.

They get their housing from government. They get their food from government. They also get free health care from government. And their clothing as well. And don’t forget free utilities!

Who are these “lucky” folks? Well, these are the people locked up in America’s prisons. So, yes, their needs are provided by government, but the tradeoff is that they don’t have freedom.

And this brings us to a very good quote from General Dwight Eisenhower. Here’s part of what he said to students at Columbia University in 1949.

In these times when we hear so much of security, security, security for everything we do — when so many of us want to be sure that we shall never be cold, or hungry, or out in the rain, or have a leaky roof… I should think that the best example of it would be a man serving a lifetime in a federal prison.

And here’s an image I found online that captures the same spirit, though I confess I don’t know if Ike uttered these specific words (shockingly, not everything you find on the Internet is true!).

But since it echoes the same sentiment as his remarks in 1949, I figure it’s worth sharing.

Now let’s close with an amusing interpretation of Ike’s quote.

I’ve shared many jokes about our political masters.

Here’s one that I got from my mother.

It’s about a possible new “Part G” for Medicare.

Medicare – Part G – Nursing Home Plan

Say you’re an older senior citizen and can no longer take care of
yourself. The government says there’s no Nursing Home care available
for you. So, what do you do? You opt for Part G.

Our plan gives anyone 65 years or older a gun (Part G) and four bullets.
You are allowed to shoot four politicians. This means, of course, that
you’ll be sent to prison where you’ll receive three meals a day, a roof
over your head, central heating & air conditioning, cable TV, library,
and all the Health Care you need. Need new teeth? No problem. Need
glasses? That’s great. Need a hearing aid, new hip, knees, kidney,
lungs, sex change, or heart? They’re all covered.

As an added bonus, your kids can come and visit you at least as often
as they do now!

And, who will be paying for all of this? The same government that just
told you they can’t afford for you to go into a home. And….you can
get rid of 4 useless politicians while you’re at it. And now, because
you’re a prisoner, you don’t have to pay any more income taxes.

Is this a great country or what?

Now that we’ve solved your senior financial planning, enjoy your week.

Though I suppose I should add that this is just a joke and that no actual politicians were harmed in the writing of this post.

After all, there’s no need to shoot these scoundrels. As Instapundit periodically reminds us, tar and feathers are a much more appropriate punishment.

I’ve often complained that government-created third-party payer is the main problem with America’s healthcare system, and I was making that point well before Obamacare was imposed upon the country.

The issue is very straightforward. In a genuine free market, people pay “out of pocket” for routine expenses. And they rely on insurance only in cases where they may face large, unexpected costs.

But in our current healthcare system, thanks to Medicare, Medicaid, and the tax code’s healthcare exclusion, most of us buy services with other people’s money and that dramatically distorts incentives.

Here’s some of what I wrote about this messed-up approach back in 2009.

…our pre-paid health care system is somewhat akin to going to an all-you-can-eat restaurant. We have an incentive to over-consume since we’ve already paid. Except this analogy is insufficient. When we go to all-you-can-eat restaurants, at least we know we’re paying a certain amount of money for an unlimited amount of food. Many Americans, by contrast, have no idea how much of their compensation is being diverted to purchase health plans. Last but not least, we need to consider how this messed-up approach causes inefficiency and higher costs. We consumers don’t feel any need to be careful shoppers since we perceive that our health care is being paid by someone else. Should we be surprised, then, that normal market forces don’t seem to be working? …Imagine if auto insurance worked this way? Or homeowner’s insurance? Would it make sense to file insurance forms to get an oil change? Or to buy a new couch? That sounds crazy. The system would be needlessly bureaucratic, and costs would rise because we would act like we were spending other people’s money.  But that’s what would probably happen if government intervened in the same way it does in the health-care sector.

As you can see, I’m frustrated.

I think the system is inefficient from an economic perspective. But I’m also a consumer, and I’m very dissatisfied whenever I have to deal with the healthcare system.

Fortunately, more and more people are adding their two cents on this topic.

Here’s some great analysis on the issue by Mark Perry of the American Enterprise Institute. He starts by pointing out how prices for health care generally climb much faster than the overall CPI price level.

Between 1998 and 2014 the price of medical care services in the US (as measured by the BLS’s CPI for Medical Care Services) has increased by 88.5%, or more than twice the 45.8% increase in consumer prices in general over that period… On an annual basis, medical care costs in the US have increased more than 4% per year compared to an average inflation rate of only 2.4% over the last 16 years.

He then explains that a big problem is third-party payer, which eviscerates normal market forces.

As a result, consumers are relatively insensitive to price, which means producers and providers can charge more and be relatively inefficient.

One of the reasons that medical care costs in the US have increased almost twice as much as general consumer prices since 1998 is that a large and increasing share of medical costs are paid by third parties (private health insurance, Medicare, Medicaid, Department of Veterans Affairs, etc.) and only a small and shrinking percentage is paid out-of-pocket by consumers. According to data from the Census Bureau, almost half (47%) of health care expenditures in 1960 were paid by consumers out-of-pocket, and by 1990 that share had fallen to 20% and by 2009 to only 12%. …Consumers of health care have no incentive to monitor prices and be cost-conscious buyers of medical services when they only pay 10% themselves, and the incentives of medical care providers to hold costs down are greatly reduced knowing that their customers aren’t price sensitive.

Mark then asks what the world would look like if the free market was allowed to function. And he identifies a niche in the healthcare system where that happens.

How would the market for medical services operate differently if consumers were paying out-of-pocket for medical procedures in a competitive market? Well, we can look to the $7.5 billion US market for elective cosmetic surgery for some answers.

And the information he shares is remarkable.

The table…shows the top five most popular surgical procedures and top five most popular non-surgical procedures for 2014, the number of each of those procedures performed last year, the total expenditures for each procedure, the average price per procedure both in 1998 and 2014, and the percent increase in price since 1998 for each procedure. …For the top ten most popular cosmetic procedures last year, none of them has increased in price since 1998 more than the 45.8% increase in consumer price inflation…, meaning the real price of all of those procedures have fallen over the last 16 years. …For three of the top five favorite non-surgical procedures in 2014 (botox, laser hair removal and chemical peel), the nominal prices have actually fallen since 1998 by large double-digit percentage declines of -23.6%, -31.2% and -30.1%.  …none of the ten cosmetic procedures in the table above have increased in price by anywhere close to the 88.5% increase in medical care services since 1998.

Here’s Mark’s chart, and I’ve circled the relevant bits of data.

Just in case it’s not obvious, Mark then draws the should-be-obvious conclusions from this data.

Simply stated, when people spend their own money, they are careful shoppers. And when consumers are careful shoppers, that leads to competitive pressure on producers and providers to be much more efficient.

The competitive market for cosmetic procedures operates differently than the traditional market for health care in important and significant ways. Cosmetic procedures, unlike most medical services, are not usually covered by insurance. Patients paying out-of-pocket for cosmetic procedures are cost-conscious, and have strong incentives to shop around and compare prices at the dozens of competing providers in any large city. Because of that market competition, the prices of almost all cosmetic procedures have fallen in real terms since 1998, and some non-surgical procedures have even fallen in nominal dollars before adjusting for price changes. In all cases, cosmetic procedures have increased in price by less than the 88.5% increase in the price of medical care services between 1998 and 2014.

That last sentence is the key. Because of third-party payer, overall health care expenses have climbed about twice the rate of inflation.

For cosmetic surgery, where normal market forces operate thanks to an absence of government-imposed and government-subsidized third-party payer, prices climb slower than overall inflation.

Here’s a video, produced by the Center for Freedom and Prosperity, on the problem of third-party payer.

As you can see, Obamacare made the problem worse, but it’s just one small part of a really big problem caused by decades of government intervention.

P.S. The video expands upon the analysis provided in a previous CF&P video.

P.P.S. Setting aside the debate about whether it’s right or wrong, the abortion market also is an interesting case study of how prices don’t rise when consumers pay out of pocket.

P.P.P.S. Government-created third-party payer also is screwing up the market for higher education.

P.P.P.P.S. Mark Perry not only is a good economist, as you can see above, but he’s also a brave guy for being willing to antagonize feminists.

With tax day looming, let’s wallow in misery by contemplating the burden on America’s taxpayers.

But we’ll ignore the angst caused be dealing with an indecipherable tax code and an oppressive IRS and simply focus on the amount of money that gets extracted from our income each year.

The bad news is that the federal government is collecting a record amount of money, even after adjusting for inflation. Here’s a chart, based on the latest numbers from the Office of Management and Budget.

But there is some good news. This isn’t a record tax burden when measured as a share of economic output.

Federal taxes are projected to consume 17.7 percent of GDP this year. That’s higher than the post-WWII average of 17.2 percent of GDP, but there have been several years in which the federal tax burden has been higher than 17.7 percent, most recently in 2007, when it reached 17.9 percent of economic output.

So while it’s bad news that the IRS is collecting a record amount of revenue in inflation-adjusted dollars, I guess we should consider ourselves lucky that it’s not a record share of GDP.

I discuss the growing federal tax burden in this CNBC debate with Jared Bernstein.

A few points are worth emphasizing from the interview, two of which deal with corporate taxation.

First, it’s silly to talk to compare “taxes by individuals” to “taxes paid by corporations.” That’s because all taxes on business ultimately are paid by individuals, whether as workers, consumers, or shareholders. To be blunt, corporations may collect taxes, but the burden inevitably falls on people.

Second, the fact that corporate tax receipts are lagging is a sign that tax rates are too high rather than too low. In other words, there’s a Laffer Curve effect, and there’s lots of evidence that a lower corporate rate will generate more revenue. Which is precisely what happened when personal tax rates were reduced on the “rich” in the 1980s.

Third, if we want a balanced budget, the only responsible approach is spending restraint. As I’ve noted before, our long-run fiscal challenge is because of a rising burden of spending. Indeed, spending is more than 100 percent of the long-run problem.

By the way, let’s not forget about the role of state and local governments. WalletHub just released a report on state and local tax burdens.

Here are the 10 best states.

I’m mystified to see California in the top 10.

Though maybe this is a Laffer Curve-based result. In other words, perhaps taxes are so high that people are paying less?

Moreover, the Golden State drops to 30 if you adjust for the cost of living (see column on far right).

Now here are the 10 worst states.

I’m not surprised to see Illinois in last place, but who knew that Nebraska was a hotbed of taxaholism?

And if you look at the right-most column, you’ll see that New York and Connecticut could be considered the worst states. Both jurisdictions are richly deserving of that designation.

P.S. Don’t forget that Puerto Rico is a secret tax haven for American citizens, particularly when considering federal taxes, so it deserves honorary first place recognition.

P.P.S. The best (i.e., least worst or least destructive) approach to taxation is the flat tax.

P.P.P.S. Though the ideal scenario is to have a very small federal government so that there’s no need for any broad-based tax whatsoever. Our nation enjoyed strong growth before that dark day in 1913 when the income tax was imposed.

What’s the most important factor for economic progress?

There are several possible answers to that question. We can take a big-picture view and argue that the key is free markets and small government, and there certainly is lots of evidence in favor of this assertion when you compare countries over time.

But what if we narrow our focus and try to identify, for instance, the key characteristic of a free market. At times, I’ve highlighted the importance of both property rights and the price system.

Private property gives people the right incentives to both produce and conserve, a lesson learned early in American history.

An unfettered price system is a mechanism that best ensures resources are efficiently utilized to serve consumers.

But we need to augment this list by also including the valuable role of the profit motive.

This Prager University video, narrated by my friend Walter Williams, succinctly explains the issue.

I especially like the section where Walter asks what institutions and entities leave us happy and contented. The answer, at least for most of us, is that we’re more likely to be satisfied in our dealing with private companies operating in competitive markets.

That’s because the profit motive gives them an incentive to treat us well, both to boost their reputations and so we’ll be repeat customers.

Simply stated, in a true free market, entrepreneurs, investors, and business owners can only become rich by providing consumers with things that make our lives better.

But our dealings with government (or government-enforced monopolies like cable companies) tend to be less rewarding, whether it’s because bureaucrats are taking our money, bossing us around, or simply treating us poorly.

So the next time some politician or pundit complains about “evil profits,” just remember Walter’s wise words from the video.

P.S. I’ve shared two other videos from Prager University, one of the Laffer Curve and one about statist policies and the Great Depression. They’ve both very much worth watching.

P.P.S. It goes without saying (but I’ll say it anyhow) that profits are only admirable if they’re earned honestly. There are fraudsters in private markets who rip off consumers and there are crony capitalists who use coercive government policies to line their pockets. These groups deserve disdain and punishment.

P.P.P.S. Walter Williams is one of America’s best public intellectuals. I’ve cited his work numerous times, but your first stop, in learning more about him, is this video from Reason TV.

When writing about the Golden State, I generally focus on fiscal policy. After all, California is trying to become the France of America by imposing punitive tax rates and continuously expanding the burden of government spending.

And since this leads to the loss of jobs and competitiveness, California offers a helpful reminder that bad policy has consequences.

But let’s now look at another example of misguided policy in California. The state is suffering a drought, which obviously isn’t the fault of state lawmakers, but policies imposed by those lawmakers are turning the drought from a problem to a crisis.

The Wall Street Journal opines on the issue.

The liberals who run California have long purported that their green policies are a free (organic) lunch, but the bills are coming due. Lo, Governor Jerry Brown has mandated a 25% statewide reduction in water use. Consider this rationing a surcharge for decades of environmental excess. …During the last two winters amid the drought, regulators let more than 2.6 million acre-feet out into the bay. The reason: California lacked storage capacity north of the delta, and environmental rules restrict water pumping to reservoirs south. …no major water infrastructure project has been completed in California since the 1960s. Money is not the obstacle. Since 2000 voters have approved five bonds authorizing $22 billion in spending for water improvements. Environmental projects have been the biggest winners. …studies show that mandates and subsidies for low-flow appliances like California’s don’t work because people respond by changing their behavior (e.g., taking longer showers). Despite the diminishing returns, Mr. Brown has ordered more spending on water efficiency.

In other words, the government-run system for collecting and distributing water is suffering because of a failure to generate enough supply and because non-price mechanisms aren’t very effective at limiting demand.

So what would work?

The WSJ suggests market-based pricing.

And the good news is that it is a small part of the Governor’s new proposal.

The most proven strategy to reduce water consumption is market pricing with water rates increasing based on household use. …To his credit, the Governor has instructed the State Water Resources Control Board to develop pricing mechanisms… Not even Gov. Brown can make it rain, but he and other politicians can stop compounding the damage by putting water storage, transportation and market pricing above environmental obsessions.

By the way, it’s worth noting that market-based pricing is actually the most effective way of achieving the environmental goal of conservation.

So if you want more water for fish, make sure it’s priced appropriately.

To elaborate on this topic, Megan McArdle, writing for Bloomberg, explains that subsidized water encourages overuse.

California’s problem is not that it doesn’t have enough water to support its population. Rather, the problem is that its population uses more water than it has to. And the reason people do this is that water in California is seriously underpriced… While the new emergency rules do include provisions for local utilities to raise rates, that would still leave water in the state ludicrously mispriced. …the average household in San Diego pays less than 80 cents a day for the 150 gallons of water it uses. …Artificially cheap water encourages people to install lush, green lawns that need lots of watering instead of native plants more appropriate to the local climate. It means they don’t even look for information about the water efficiency of their fixtures and appliances. They take long showers and let the tap run while they’re on the phone with Mom. In a thousand ways, it creates demand far in excess of supply.

Megan agrees with the WSJ that market-based prices are far more effective in controlling demand than non-market restrictions and mandates.

Having artificially goosed demand, the government then tries to curb it by mandating efficiency levels and outlawing water-hogging landscaping. Unfortunately, this doesn’t work nearly as well as pricing water properly, then letting people figure out how they want to conserve it.

And while it may be a challenge to figure out the “market rate” when water is being provided by a government monopoly, it’s safe to say that this rate is a lot higher than it is today.

…we could set some minimum amount of water that would be sold at a very cheap rate, with any excess charged at market rates to reflect the actual supply and the cost of providing it. This would be hugely unpopular with homeowners who have big lawns as well as with farmers.

There’s a semi-famous saying that “if you want less of something, tax it; if you want more of something, subsidize it.”

I don’t know if somebody famous uttered that phrase, or something like it, but the point is correct.

The bottom line is that subsidies encourage over-utilization, inefficiency, and insensitivity to price. That’s true for health care and higher education, just as it’s true for water.

Now let’s look at a video that helps illustrate the damaging impact of subsidies.

It’s not completely applicable because water isn’t sold by profit-making companies, but this video from Marginal Revolution explains how consumers will demand a much greater quantity of a product when the price is artificially low because of subsidies.

Indeed, the video even uses California water as an example.

P.S. The MRU videos are superb tutorials. In prior posts, I’ve shared videos explaining how taxes destroy economic value and highlighting the valuable role of market-based prices, and they’re all worth a few minutes of your time.

P.P.S. Shifting from substance to California-specific humor, this Chuck Asay cartoon speculates on how future archaeologists will view California. This Michael Ramirez cartoon looks at the impact of the state’s class-warfare tax policy. And this joke about Texas, California, and a coyote is among my most-viewed blog posts.

P.P.P.S. Paul Krugman has tried to defend California’s economic performance, which has made him an easy target. I debunked him earlier this year, and I also linked to a superb Kevin Williamson takedown of Krugman at the bottom of this post.

I’ve written many times about the shortcomings of government schools at the K-12 level. We spend more on our kids than any other nation, yet our test scores are comparatively dismal.

And one of my points, based on this very sobering chart from one of my Cato colleagues, is that America’s educational performance took a turn in the wrong direction when the federal government became more involved starting about 40-50 years ago.

Well, the same unhappy story exists in the higher-education sector. Simply stated, there’s been an explosion of spending, much of it from Washington, yet the rate of return appears to be negative.

Let’s take a closer look at this issue.

Writing for the New York Times, Professor Paul Campos of the University of Colorado begins his column by giving the conventional-wisdom explanation of why it costs so much to go to college.

Once upon a time in America, baby boomers paid for college with the money they made from their summer jobs. Then, over the course of the next few decades, public funding for higher education was slashed. These radical cuts forced universities to raise tuition year after year, which in turn forced the millennial generation to take on crushing educational debt loads, and everyone lived unhappily ever after. This is the story college administrators like to tell when they’re asked to explain why, over the past 35 years, college tuition at public universities has nearly quadrupled, to $9,139 in 2014 dollars.

That’s a compelling story, and it surely has convinced a lot of people, but it has one tiny little problem. It’s utter nonsense.

It is a fairy tale in the worst sense, in that it is not merely false, but rather almost the inverse of the truth. …In fact, public investment in higher education in America is vastly larger today, in inflation-adjusted dollars, than it was during the supposed golden age of public funding in the 1960s. Such spending has increased at a much faster rate than government spending in general. For example, the military’s budget is about 1.8 times higher today than it was in 1960, while legislative appropriations to higher education are more than 10 times higher. In other words, far from being caused by funding cuts, the astonishing rise in college tuition correlates closely with a huge increase in public subsidies for higher education. If over the past three decades car prices had gone up as fast as tuition, the average new car would cost more than $80,000.

Unfortunately, little of this money is being used for education.

…a major factor driving increasing costs is the constant expansion of university administration. According to the Department of Education data, administrative positions at colleges and universities grew by 60 percent between 1993 and 2009, which Bloomberg reported was 10 times the rate of growth of tenured faculty positions. Even more strikingly, an analysis by a professor at California Polytechnic University, Pomona, found that, while the total number of full-time faculty members in the C.S.U. system grew from 11,614 to 12,019 between 1975 and 2008, the total number of administrators grew from 3,800 to 12,183 — a 221 percent increase.

This is great news, but only if you’re a bureaucrat.

But if you think education dollars should be used to educate, it’s not very encouraging.

For example, check out this very depressing example of bureaucratic bloat at the University of California San Diego.

Now let’s zoom back out to the bigger issue. Professor Richard Vedder from Ohio University is even more critical of handouts for the higher-education sector. Here’s some of what he wrote for National Review.

America’s colleges and universities are terribly inefficient and excessively expensive, foster relatively little learning and ability to think critically, and turn out too many graduates who end up underemployed. These and related problems have grown sharply in the half century since the Higher Education Act of 1965 heralded a major expansion of the federal role in higher education.

Rich correctly points out that the federal government has made matters worse.

Washington is far more the problem than the solution to the current afflictions of American higher education. …Tuition has skyrocketed in the era since federal student-loan and grant programs started to become large in the late 1970s. Colleges have effectively confiscated federal loan and grant money designated for students and used it to help fund an academic arms race that has given us climbing walls, lazy rivers, and million-dollar university presidents — but declining literacy among college students and a massive mismatch between students’ labor-market expectations and the realities of the job market.

And you won’t be surprised to learn that federal handouts have backfired against low-income students.

…the primary goal of the federal student-aid programs was to improve access to college for lower-income persons. Here, the record is one of total failure: A smaller percentage of recent college graduates come from the bottom quartile of the income distribution today than was the case in 1970, when federal student-assistance programs were in their infancy.

To close on a semi-optimistic note, Prof. Vedder highlights some intriguing incremental reforms advanced by Senator Lamar Alexander of Tennessee, including the notion that handouts should be linked to performance.

…he seems to embrace the idea that colleges should have “skin in the game”: They should face financial consequences for admitting, and then failing to graduate, students who default on loans and have marginal educational backgrounds indicating that they were clearly ill prepared for truly higher education. …Users and providers of university services need to feel the pain associated with academic non-performance. Growing federal involvement in higher education has brought rising prices, falling quality, and student underemployment. While it is perhaps politically impossible to radically change the federal student financial-aid programs now, the Alexander move is an important first step to rethinking how we finance higher education.

Ultimately, though, we won’t solve the problem unless the federal government’s role is abolished, which is yet another reason to shut down the Department of Education in Washington.

P.S. Here’s a great video from Learn Liberty explaining why subsidies have translated into higher tuition.

P.P.S. Some people have their fingers crossed that there’s a “tuition bubble” that’s about to pop. I hope that’s true, and it may be happening in a few sectors such as law, but I don’t think the overall higher-education bubble will pop until and unless we end government subsidies and handouts.

P.P.P.S. I’m even against subsidies and handouts for economists!

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