Wednesday, June 17, 2015

Subsidies Increase Prices. Period.

One of the fastest inflation rates today is in higher education, and the explanation for the growth is very simple.

Every college is a business looking to maintain or enhance it's revenue stream. Even "non-profit" public and private colleges still look towards operating with maximum net revenue.

So every college charges the most that it believes it can, while still maximizing (or filling out) it's student body. But why is the rate of tuition keep sky-rocketing? And where does the money go?

The primary reason tuition keeps skyrocketing is the subsidies used to offset them. The solution is itself the problem. Here's how it works:

Colleges know, roughly, how much people will pay to attend. (College is also weird in that low prices discourage buyers.) To phrase it differently, colleges know how much they can extract from the family of each student. When subsidies, in the form of grant money and lower cost loans, come in, colleges re-calibrate their pricing to capture the subsidy and the maximum possible payment from the family. Like this:

Max pay rate + Subsidy = Cost
$10,000         +     0        = $10,000
$10,000         +  $5000   = $15,000
$10,000         + $10000  = $20,000

And so on. The question then is, where does the money go?

Administration. The number of administrators has skyrocketed, and these petty, insecure, small-minded apparatchiks can be seen in videos mindlessly threatening student arrest for peaceful protest without approval, and generally demanding students comply with nonsensical regulations and even destroying donated materials and stripping people of due process out of a destructive sense of law.

While some of the excess money goes to luxury infrastructure, most of it goes to pay the wages of administrators. They are even eating into the wages of the professoriate, resulting in grossly underpaid adjuncts with heavy classloads and no tenure track. This diversion of resources is only possible because of the heavy glut of income that subsidies have created. Without the subsidies, colleges would never have been able to even consider creating a large administrative corps.

And the problem is not unique to colleges. Any market with a guaranteed subsidy will see sellers price their goods to completely capture the subsidy and the full un-subsidized market price. There is no way around it, it would happen with construction or computers or milk.

The basic problem remains the same - pricing is built to absorb the subsidy and get the maximum market rate. Human nature.
Don't forget - you can follow me on Twitter and help support this content by contributing and sharing with your social circles.

No comments:

Post a Comment