The Reason Why College Is So Expensive Is Actually Dead Obvious

Friday, May 10, 2013

If you artificially inflate demand for something and don’t let supply adjust, prices will go up.

Some conservatives like to say that liberals don’t understand economics, but that’s not really true. Liberals understand certain macroeconomic issues better than conservatives. And most liberals don’t hate entrepreneurship and innovation. But for some reason, for many liberals, the part of the brain that deals with economics tends to shut down when discussing sectors like higher education (or healthcare).

It would seem that the Economics 101 story around higher education for the past few decades would go something like this: for various reasons, government has decided to increase demande for higher education massively, via increased subsidies and in particular student loans; meanwhile, supply has not kept up, because non-profit universities get paid in prestige (understood as mathematical selectivity) and therefore have an objective self-interest in not growing; the for-profit sector has been designed by regulation such that it exists to vacuum up subsidies rather than provide valuable education; and the government sector hasn’t kept up with demand.

As Roosevelt Institute wonk Mike Konczal notes, this means we have “the lowest hanging policy fruit imaginable: save money by not providing aid and lower tuition in the process”. Indeed! But he doesn’t think this makes sense. Actually, maybe he does, but he can’t find evidence for what he calls the Bennett Hypothesis, after Reagan-era Secretary of the Education William Bennet (but you could easily call it the Friedman Hypothesis, or the Economics Hypothesis, or the Common Sense Hypothesis).

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