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The Double Edge Sword of a Government Subsidy

Wednesday July 20th, 2011   •   Posted by Stephanie Freedman at 3:54pm PDT   •  

One would like to think that every public policy initiative begins as a good intention. The problem with good intentions when it comes to government subsidies, is there can be unintended and unforeseen results. The Washington Examiner article “Will College Bubble Burst From Public Subsidies” discusses the backlash of government assistance in the higher education process. Michael Barone suggests:

Subsidies create incentives for what economists call rent-seeking behavior. Providers of supposedly beneficial goods or services try to sop up as much of the subsidy money as they can by raising prices. After all, their customers are paying with money supplied by the government.

In the case of the higher education system, it is not a question of importance, it is a concept of misappropriation of funding.

For what have institutions of higher learning accomplished with their vast increases in revenues? The answer in all too many cases is administrative bloat… These people get paid to “liaise” and “facilitate” and produce reports on diversity. How that benefits Cal State students or California taxpayers is unclear.

The question is: are these subsidies helping or hurting? The article reads:

Politicians of both parties have called for giving everybody a chance to go to college, just as they called for giving everybody a chance to buy a home. So government has been subsidizing higher education with low-interest college loans, Pell Grants and cheap tuitions at state colleges and universities.The predictable result is that higher-education costs have risen much faster than inflation, much faster than personal incomes, much faster than the economy over the past 40 years. Moreover, you can’t get out of paying off those college loans, even by going through bankruptcy. At least with a home mortgage you can walk away and let the bank foreclose and not owe any more money.

Senior Fellow Richard Vedder is quoted:

As economist Richard Vedder points out, 45% of those who enter four-year colleges don’t get a degree within six years. Based on the low achievement level of most high school grads, many of them shouldn’t have bothered in the first place.

Just because an intention may originate from a positive place this in no way insinuates the results will be positive as well. Thus the double edge sword of a government subsidy.

Read full article here

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July 2011