Last Tuesday’s MDJ included a story from the AP on the rising costs of college education and the similar rise in federal financial assistance. Both the article’s title and opening paragraph suggest federal student aid is rising to offset higher education costs. In reality, higher education costs are rising sharply as a result of the increase in federal financial aid.
Education can be thought of as a technology. It is a tool used to increase productivity and prosperity. The normal cost structure for technologies is to start high and decline rapidly (think of the cost of a computer). Education is one of the lone technologies to defy this pattern, specifically because it is so dependent on subsidies such as financial aid and “scholarships.”
Government subsidies are often promoted specifically to drive prices higher. For example, federal price quotas on sugar result in a price for American consumers nearly double the price on the global market. This is done openly with the political objective of protecting domestic producers from the harm caused by lower prices. Although politicians would never admit financial aid programs are designed to drive prices higher, the consequences of these programs is widely accepted within the realm of economics.
People spend their own money more prudently than they spend other people’s money. People who spend other people’s money on other people spend least prudently of all. Only when the subsidies end will the costs of college, or sugar, decline.