Monday, December 12, 2011

"U.S. University's Feast on Student Aid"

Healthcare, education, ethanol, anywhere you separate the payment from the recipient you'll get this kind of bizarro inflation. Back in February we posted "What Price Increases in the Education and Medical Rackets Look Like":
Smarter folks than I could probably draw some inference from the extent of government backing of academia or BigMed and the way they raise prices, I prefer to look at pictures. From dShort comes a fascinating series of charts:

What Inflation Means to You: Inside the Consumer Price Index  

...The chart below shows the cumulative percent change in price for each of the eight categories since 2000.
Click to View
Here's the headline story from Bloomberg:
The public is in a foul mood over increasing college costs and student debt burdens. Talk of a “higher education bubble” is common on the contrarian right, while the Occupy Wall Street crowd is calling for a strike in which in which ex-students refuse to pay off their loans.

This week, President Barack Obama held a summit with a dozen higher-education leaders “to discuss rising college costs and strategies to reduce these costs while improving quality.” The administration plans to introduce some policy proposals in the run-up to the presidential campaign.

Any serious policy reform has to start by considering a heretical idea: Federal subsidies intended to make college more affordable may have encouraged rapidly rising tuitions.
It’s not as crazy as it might sound.

As veteran education-policy consultant Arthur M. Hauptman notes in arecent essay: “There is a strong correlation over time between student and parent loan availability and rapidly rising tuitions. Common sense suggests that growing availability of student loans at reasonable rates has made it easier for many institutions to raise their prices, just as the mortgage interest deduction contributes to higher housing prices.”

It’s a phenomenon familiar to economists. If you offer people a subsidy to pursue some activity requiring an input that’s in more-or-less fixed supply, the price of that input goes up. Much of the value of the subsidy will go not to the intended recipients but to whoever owns the input. The classic example is farm subsidies, which increase the price of farmland.

Increasing Salaries
A 1998 article in the American Economic Review explored another example: federal research and development subsidies. Like farmland, the supply of scientists and engineers is fairly fixed, at least in the short run. Unemployed journalists and mortgage brokers can’t suddenly turn into electrical engineers just because there’s money available, and even engineers and scientists are unlikely to switch specialties. So instead of spurring new activity, much of the money tends to go to increase the salaries of people already doing such work. From 1968 to 1994, a 10 percent increase in R&D spending led to about a 3 percent increase in incomes in the subsidized fields.

“A major component of government R&D spending is windfall gains to R&D workers,” the paper concluded. “Incomes rise significantly while hours rise little, and the increases are concentrated within the engineering and science professions in exactly the specialties heavily involved in federal research."...MORE