Two Terrible Ideas in One!
Government interference in the higher-education market needs to be curtailed, not expanded.


Mona Charen

It’s interesting that the Democrats are attempting to roll two of their highest priorities into one bill this month. The labyrinthine legislative legerdemain called health-care reform now includes a reconciliation package that would fold in student-loan reform. And by “reform” the Democrats mean increasing direct lending to students by the federal government.

Though the two issues may seem utterly unrelated, they do have this in common — both health care and higher education are realms of American life in which government has undermined the operation of market forces and caused artificially high prices. These are two arenas in which the Democrats now propose to do exactly the wrong thing. Their reforms reinforce old errors and will infinitely compound the problem of rising prices.

In health care, as Andrew Biggs has outlined in National Review, the third-party-payer problem (created when government made health insurance deductible to employers) has insulated consumers from the true costs of their purchases. Whereas 47 percent of health-care purchases were out-of-pocket in 1960, only 12 percent are today. In addition, programs like Medicare and Medicaid are on auto-pilot, automatically increasing expenditures in response to demand without further appropriations from Congress. When someone else is paying, whether the federal government or the employer, consumers are heedless of cost. Have you seen the TV ads for the Scooter Store? “My scooter didn’t cost me a dime!” exults a customer. “Medicare and my insurance covered the whole thing.” Multiply that by several million and you have a sense of the incentives.

But the world of supply and demand, competition and price, is alien to the Democrats. Their explanation for rising health-care costs is the greed of insurance companies.

They don’t seem to ask themselves why health-care costs have risen so much faster than other costs, that is, faster than the overall rate of inflation. Are health-insurance companies greedier than computer makers, restaurateurs, airlines, or other businesses? Devotees of free markets don’t deny the existence of greed; they simply want to make it work for the consumer through increased competition. And that brings us to student loans.

Just by coincidence, college costs have also been rising much faster than inflation for the past several decades. Or perhaps it’s not coincidence. From 1982 to 2003, health-care prices increased by 195 percent. Tuition at universities increased by 296 percent over the same period. Just as government has distorted the health-care market with mandates, tax exemptions, and limitless subsidies, so it has distorted the higher-education market with ever-ratcheting grants and loans.

Economist Richard Vedder, in Going Broke by Degree, outlined the trap into which politicians continually fall.

America has gotten itself into a vicious cycle with respect to higher education financing that goes like this: In year 1, tuition goes up fairly substantially. Political pressures build to “do something” about the increases. Congress expands guaranteed student loan programs to make education more affordable, in turn increasing the demand for education and allowing universities in year 2 (or year 3, depending on the lag) to raise prices further. The result is a further expansion of student loan programs, state scholarship efforts, and other third-party funding.