Now let’s say a bunch of politicians in Washington announced they found it outrageous that well-educated, middle-class constituents -- the kind who vote and donate money to political campaigns, just by coincidence -- had to pay $12,000 for your optional but important service, and decided to arrange for each constituent to be handed $8,000 per year to help them pay your bills.
You know your customers are still willing and able to pay $12,000. But now -- with Congress footing two-thirds of their bill -- they’re really paying only $4,000.
What’s more, the new subsidy has brought thousands more customers to your door!
How long do you think it would take you to “add value” to your service, tacking on bells and whistles and granting raises to your employees with abandon, till the total annual bill for your service climbed to, oh ... about $20,000 per year?
The numbers are simplified, but we have just explained most of the huge jump in the cost of a college education in America over the past 40 to 60 years.
It started as a plan to help the young men who’d served their country in the frozen forests and tropical jungles of World War Two. But once begun, government programs only grow.
By the 1960s, through offering grants and subsidized low-interest loans to essentially all students, the central government had relieved the market pressure to hold fees and tuition down -- a corrective pressure which otherwise would have been immediately felt as fewer and fewer “customers” found it possible to pay skyrocketing tuitions.
From the start, a few critics on the right warned that “What the government funds, it will eventually seek to control.” More pragmatically, critics also warned that private banks could not be expected to survive in direct competition with Uncle Sam as a lender, while efficiency and cost controls would become faded memories if the Congress ever undertook to simply make college a tax-funded four-year government benefit.
To ward off these criticisms, defenders of the college loan program long insisted the government would stay in the background, merely subsidizing and “guaranteeing” loans made by private banks, who presumably knew something about amortizing risks, and all that fancy stuff.
Well, guess what.
Before they’ve even been installed, “Alarmed by a rapid rise in student debt, Democratic leaders in the coming Congress are promising to lower payments on new college loans by cutting the interest rate in half,” McClatchy-Tribune reported Tuesday.
“During the first 100 hours of the 110th Congress, Democrats plan on reducing the interest rate from 6.8 percent to 3.4 percent,” write McClatchy reporters Brady Averill and Rob Hotakainen. “They contend that would help the typical undergraduate student borrower -- who graduates with $17,500 in debt -- pocket $5,600. ...
“While the plan to lower interest rates has broad political appeal, it would cost an estimated $18 billion over five years and is likely to test Congress’ new commitment to hold down spending as a way to lower deficits,” the news service reported, apparently with a straight face.
“Some Democrats, including Sen. Edward Kennedy, D-Mass., the incoming chairman of the Senate Education Committee, say the government could save money by making college loans directly, relying less on private lenders.”
Really? Would Sen. Kennedy care to name any program which became cheaper and more efficient after being taken over by the federal government? Should we start with “farm quotas and price supports,” perhaps, or “the improved results and lower cost of public schools under the guidance of the federal Department of Education”?
Private banks -- responsible to their shareholders to not lose money -- calculate interest rates based on the anticipated erosion of those paid-back dollars by inflation, as well as by actuarial rates of default. Some comparison is presumably also made to how much could be earned by placing that same capital somewhere else.
Sen. Kennedy and his pals suffer no such real-world discipline. Convinced they are possessed of magic wands, they “calculate” rates based on “what sounds good” and “how much more we can squeeze out of taxpayers.”
As Ludwig von Mises and F.A. Hayek pointed out -- predicting the demise of Communism 40 years before most others saw the light -- resources will be dangerously mis-allocated if government messes with price signals, which otherwise help allocate limited resources to those who need and value them most.
In other words, give away free sandwiches, and the line is going to get really, really long. Not only that, when you inevitably go broke, you’ll find the old, for-profit sandwich shops are gone as well, killed by the “no-cost” competition. Result? No more sandwiches for anyone.
Remember “this is your brain on drugs”? Well, this is your Washington on the Democratic Party. Look on their works, ye mighty, and despair.