Nothing Good about The Higher Ed Pricing Game
On Tuesday I noted that the College Board had released its annual reports on college prices and student aid. At the time I wrote the post I hadn’t yet been able to download the reports, but was planning to provide a rundown of their major findings once I’d read them. I’ve now done the latter, but it turns out that Ben Miller over at the Quick and the ED has already posted a pretty good summary of the most important findings. Go there if you want the highlights. Don’t go there, though, if you want to know what the highlights mean, at least for anyone other than students. For that, you’ll have to read on here….
The big news is that net college prices — what students pay after aid– have actually decreased over the last 15 years. While sticker prices were rising much faster than incomes and inflation, what students were actually paying dropped. The implication of this is so obvious that Mr. Magoo couldn’t mistake it: Student aid, much of which comes through taxpayers, enables schools to charge ever-higher prices with near impunity.
Back to the Quick and the ED. To some degree, Miller sees declining net price as a triumph for federal aid, making college more affordable even as prices explode:
This story should be encouraging for legislators that fought hard to win Pell Grant increases over the last few years. The steepest decreases in net price occur beginning in the 2007-2008 academic year, the same time Congress began passing legislation that boosted the maximum Pell Grant award several times. This at least suggests that the money spent on the program did play some role in lessening the financial burden for students and was not completely eaten up by sticker price increases.
On the flip side, Miller at least acknowledges that:
The net price figure also lessens the pressure on schools to actually take proactive steps to lower their costs. If the price you list isn’t actually what you charge, then why should anyone care what the listed price is and how high it gets? Net price thus serves as a kind of smokescreen that gets colleges at least partially off fo[r] charging an arm and a leg.
So what’s wrong with this analysis?
Most important is that Miller softpedals the aid effect, suggesting that the main negative consequence of ever-increasing assistance is that it bleeds off a bit of the pressure for schools to lower costs. But it likely has a much more destructive effect than that, not just curbing efficiency pressures, but enabling schools to constantly charge and spend more. It’s a likelihood that student-aid defenders try to dispel by citing studies that cover very short periods of time, or that simply pronounce that we don’t know that it happens. That it probably happens, however, has been borne out empirically, and it’s readily ackowledged by prominent higher educators including former Harvard president Derek Bok, former Stanford vice president William F. Massy, and former University of Iowa president Howard Bowen. Indeed, the latter’s “law” couldn’t be more blunt: “Universities will raise all the money they can and spend all the money they raise.”
Miller’s other major failing is that he completely ignores that all this aid has to come from somwhere, and that “somewhere” is largely taxpayers. (OK, first it’s China.) Just to give you a sense of the impact on taxpayers, College Board data show that between the 1998-99 and 2008-09 academic years, total federal aid — including grant money recipients don’t have to pay back, and loans they (sometimes) do — rose from $61.1 billion to $116.8 billion. Add state aid to that, and the total goes from $66.6 billion to $126.2 billion.
And what are some of the major downsides of these forced third-party payments? Miller mentions a few pricing difficulties for students, but makes no mention of the potentially huge negative consequences for the nation: Encouraging lots of people to attend college who simply aren’t prepared for it; cranking out many more degrees than the job market demands; and potentially slowing economic growth by taking funds from productive uses and giving it to efficiency-averse colleges and students.
The big finding in the latest College Board data, which the Quick and the ED nails, is that net college prices have been going down. The important story, however, is that this is bad news for the country. Unfortunately, the Quick and the Ed misses that almost completely.
Filed under: Education and Child Policy; Finance, Banking & Monetary Policy; Health, Welfare & Entitlements; Tax and Budget Policy
We Can No Longer Afford an Education Monopoly
In an IBD op-ed today, I point out that we’re spending twice as much per pupil as we did in 1970, despite no improvement in achievement at the end of high school and a decline in the graduation rate over that same period.
What difference does that make? If public schools had just managed not to get any less efficient over the past 40 years, we’d be saving $300 billion annually.
Our education monopoly is a luxury we can no longer afford. When the economy was booming, it didn’t matter that it cost us more and more every year for the same or even inferior results. These days, it’s becoming imperative that we find ways for our education system to enjoy the same relentless increases in efficiency that we take for granted in every other field.
This, for instance, would be a good start.
Economic urgency isn’t the only good reason to bring education back within the free enterprise system, but when the school monopoly starts bringing entire states to their financial knees, it’s certainly one we should take seriously.
Duncan Balls
It seems U.S. education secretary Arne Duncan and British schools secretary Ed Balls disagree on the merits of national standards. While Duncan has said that homogenizing educational standards nationwide is his single most important goal while in office, Balls has just pulled the plug on the U.K.’s 10 year experiment with national reading and math strategies. He told the media:
I think the right thing for us to do now is to move away from what has historically been a rather central view of school improvement through national strategies to something which is essentially being commissioned not from the centre but by schools themselves.
The problem with saying that every 5th grader in the nation should learn the same things at the same time is that all 5th graders are not created equal. Some are better at math than reading. Some the reverse. Some are quick learners across the board. Some are slower. To deny this is ridiculous, but to acknowledge it is to admit that homogenized standards in a system that groups students rigidly by age is educational malpractice.
Even if kids were all identical automatons, national standards wouldn’t drive excellence. It is the incentive structure of the free enterprise system that has driven progress in all the fields that have actually progressed — not externally-imposed standards.
What America needs for an educational renaissance is to release schools and families from the shackles of monopoly, and re-inject the freedom and incentives that kindle innovation and efficiency. Sitting 50 million Jills and Johnnies down on a conveyor belt that drags them all through their studies at the same pace makes no sense.
How Many Uninsured? It Does Not Matter
As my colleague Michael Cannon discusses below, in today’s WSJ Online, Carl Bialik examines the data on how many Americans do not have health insurance. Discussions like this one will be rehashed repeatedly during the coming health care debate, but they miss the crucial point: the U.S. should not expand government subsidy for health insurance whether the number of insured is 46 million or just 46.
The economics argument for subsidizing health insurance rests on the claim that private insurance markets do not provide fairly priced insurance. This is allegedly because insurers cannot distinguish the good health risks from the bad health risks and thus price insurance at a level only the bad risks are willing to pay.
This claim of “asymmetric information” is incredibly unpersuasive: absent regulation to the contrary, an insurance company can require any medical tests it wants and learn an insurance applicant’s health at least as well as the applicant. It can also condition coverage on relevant behavior, such as not smoking or maintaining a reasonable weight.
The problem is thus that insurance companies can determine all too well who is a good health risk and who is not, so they will price insurance accordingly if the law permits. This strikes many people as unfair, so they want to subsidize insurance for those born with unhealthy genes.
If insurance subsidies had few unintended consequences, this might be a reasonable form of social insurance. The problem is that subsidizing insurance exacerbates moral hazard, the tendency of people with insurance to consume too much health care. This is a crucial reason for rapidly increasing health expenditures.
Policy must therefore accept a trade-off: subsidizing health insurance will increase some people’s perceptions of fairness, but it will make the health care market less efficient.
A reasonable balancing of these two concerns suggests subsidizing insurance for the truly poor, but no more. In fact, the U.S. already does that via Medicaid. The uninsured are mainly people with too much income to qualify for Medicaid, or people eligible but fail to apply. Thus expansion of subsidized insurance to the currently uninsured, whatever their number, is likely to generate substantial inefficiency relative to any increase in “fairness” it creates.
Cato on Health Care Reform
We are now facing some of the most sweeping changes health care has seen in decades. Reform is needed, but increasing government control over one-sixth of the economy and over important personal and private decisions — as many of the proposals aim to do — would harm American taxpayers, health care providers, and patients.
This week, the Cato Institute launched Healthcare.Cato.org, which highlights Cato’s contributions to the health care debate. The resources provided on the site provide in-depth analyses of health care issues and reform initiatives, and underscore the ways in which free-market reforms, increased consumer choice, and energized competition — not more government control — improve the quality and cost-efficiency of health care.
Please check back regularly for updates and new resources!
Update: The Cato Institute Conference on Health Care Reform will be Webcast live from 9:00-5:00 PM Wednesday.
Featured speakers:
- Rep. Paul Ryan (R-WI)
- Rep. Michael C. Burgess, M.D. (R-TX)
- Rep. Jason Altmire (D-PA)
- Karen Davenport, Director of Health Policy, Center for American Progress
- Douglas Holtz-Eakin, Former Director, Congressional Budget Office, and Director of Domestic and Economic Policy for the McCain presidential campaign
- Tom G. Donlan, Barron’s
- Karen Tumulty, Time Magazine
- Susan Dentzer, Health Affairs
- John Reichard, Congressional Quarterly
Full schedule of events and Webcast, here.
Filed under: Cato Publications; Health, Welfare & Entitlements
Which Is Greener?
Which uses less energy and emits less pollution: a train, a bus, or a car? Advocates of rail transportation rely on the public’s willingness to take for granted the assumption that trains — whether light rail, subways, or high-speed intercity rail — are the most energy-efficient and cleanest forms of transportation. But there is plenty of evidence that this is far from true.
Rail advocates often reason like this: the average car has 1.1 people in it. Compare the BTUs or carbon emissions per passenger mile with those from a full train, and the train wins hands down.
The problem with such hypothetical examples is that the numbers are always wrong. As a recent study from the University of California (Davis) notes, the load factors are critical.
The President’s New Cars
I had an op-ed yesterday in USA Today about President Obama’s proposed new fuel-economy standards. Don’t like ‘em. Unfortunately, an editing snafu over at the newspaper inadvertently left out the fact that there are four models at present that meet the proposed new standard — the 2010 Honda Insight (41 mpg) and the 2010 Ford Fusion Hybrid (39 mpg) were left off the list.
Space prohibited me from making an additional point. Even if there is no rebound effect, my colleague Pat Michaels finds that global temperatures will only be reduced by 0.005 degrees Celsius by 2050 and 0.0078 degrees Celsius by 2100 once you plug those emissions reductions into the computer models used by the IPCC. Of course, proponents contend that U.S. action on fuel efficiency will lead to like action abroad. Well, good luck with that. But even if all of the signatories to the Kyoto Protocol adopted Obama’s proposed fuel-economy standards, global temperatures would be reduced by only 0.038 degrees Celsius by 2050 and 0.071 degrees Celsius by 2100. If you tried to monetarize those benefits, you would be hard pressed to come up with an defensible number of consequence.
So what should be done instead? Nothing. At the risk of sounding politically irrelevant, there is no good case for the government to reduce U.S. gasoline consumption via fuel economy standards or fuel taxes; an argument I made at length in a study I co-authored almost two years ago with my colleague Peter Van Doren.
[Cross-posted at The Corner]
How Serious Is U.S. Ed. Productivity Collapse
A commenter at Joanne Jacobs’ edu-blog wonders “how serious this ‘collapse’ is.” I offered the following response:
How serious of a collapse is it? Total k-12 expenditures in this country were about $630 billion two years ago (see Table 25, Digest of Ed Statistics 2008). The efficiency of our education system is less than half what it was in 1971 (i.e., we spend more than twice as much to get the same results — see Table 181, same source).
So if we’d managed to ensure that education productivity just stagnated, we’d be saving over $300 billion EVERY YEAR. If we’d actually seen productivity improvements in education such as we’ve seen in other fields, we’d be saving at least that much money and enjoying higher student achievement at the same time.
My guess is that most people would consider saving $3 trillion per decade and more fully realizing children’s intellectual potential are both very important.
Another commenter observes that spending has of necessity increased due to the combination of rising salaries and a failure to deploy new technologies to lower costs. This is true to a point, but the total employee/student ratio in public schools has also grown dramatically over the same period. A few years ago I calculated that taxpayers would save more than $100 billion annually if the public schools just went back to the employee/student ratio of 1970. And the savings are still massive even if you account for a roughly 10% increase in teachers for expanded special education services.
Ultimately, though, you have to ask WHY public schools have failed to use technology to lower costs as virtually every other field has successfully done. The answer is that doing so is difficult and so won’t happen without the freedom and powerful systemtic incentives to MAKE it happen. The only system of freedoms and incentives that makes productivity growth the norm is the free enterprise system.
Globalization and Tax Reform
Despite the recession, globalization continues to exert pressure for beneficial tax reforms. From Tax Notes International today:
Jordanian Finance Minister Bassem al-Salem on April 20 confirmed that the government is working on draft legislation that would cut corporate tax rates drastically, reducing them in some cases by more than half.
Al-Salem said the government will seek to introduce a single 12 percent tax rate for most corporate entities, although companies in the banking, insurance, and mining sectors would pay tax at a rate of 25 percent. The current corporate tax rates range from 15 percent to 35 percent for different profit levels and also differ by business sector.
The draft legislation would also rationalize individual income tax, custom duties, and other taxes to increase efficiency, al-Salem said. Jordan has about 100 different taxes.
Al-Salem said the tax cuts are needed because many countries in the region either don’t have taxes at all or have much lower tax rates than Jordan’s, making them more attractive jurisdictions for investment.
The full story on taxation and globalization is here.
Filed under: International Economics and Development; Tax and Budget Policy
Waste, Fraud, and Stimulus
At Capitol News Connection, brought to you each morning by your tax dollars, they reported this morning:
With more than a trillion tax dollars tied up in the Troubled Asset Relief Program and stimulus spending, Congress is trying to figure out how to account for every penny.
Uh-huh. Congress is always on top of our federal dollars.
Coincidentally, just hours after the CNC report, the Government Accountability Office released a report warning about the lack of oversight procedures in the kitchen-sink stimulus bill. And a few days earlier the inspector general for the TARP program reported that Treasury has no real details on how TARP funds are being spent. In fact, IG Neil Barofsky told Congress that there were 20 criminal investigations into possible TARP fraud already underway.
Two months ago Barofsky and the comptroller general had warned of the likelihood of waste in huge new government programs:
Neil Barofsky, the special inspector general for the $700 billion Troubled Asset Relief Program, told a House subcommittee that the government’s experiences in the reconstruction of Iraq, hurricane-relief programs and the 1990s savings-and-loan bailout suggest the rescue program could be ripe for fraud…
Gene Dodaro, acting comptroller general of the U.S., told the subcommittee that a reliance on contractors and a lack of written policies could “increase the risk of wasted government dollars without adequate oversight of contractor performance.”
Week in Review: Tax Day, Pirates and Cuba
Tax Day: The Nightmare from Which There’s No Waking Up
Cato scholars were busy exposing the burden of the American tax system on Wednesday, the deadline to file 2008 tax returns.
At CNSNews.com, tax analyst Chris Edwards argued that policymakers should give Americans the simple and low-rate tax code they deserve:
The outlook for American taxpayers is pretty grim. The federal tax code is getting more complex, the president is proposing tax hikes on high-earners, businesses, and energy consumers; and huge deficits may create pressure for further increases down the road…
The solution to all these problems is to rip out the income tax and replace it with a low-rate flat tax, as two dozen other nations have done.
At Townhall, Dan Mitchell excoriated the complexity of the current tax code:
Beginning as a simple two-page form in 1913, the Internal Revenue Code has morphed into a complex nightmare that simultaneously hinders compliance by honest people and rewards cheating by Washington insiders and other dishonest people.
But that is just the tip of the iceberg. The tax code also penalizes economic growth, distorts taxpayer behavior, undermines American competitiveness, invites corruption and promotes inefficiency.
Mitchell appeared on MSNBC, arguing that every American will soon see massive tax hikes, despite Washington rhetoric.
Don’t miss the new Cato video that highlights just how troubling the American tax code really is.
U.S. Navy Rescues Captain Held Hostage by Somali Pirates
USA Today reports that the captain of a merchant vessel that was attacked by Somali pirates was freed Monday when Navy SEAL sharpshooters killed the pirates. The episode raises a larger question: How should the United States respond to the growing threat of piracy in the region?
Writing shortly after Capt. Richard Phillips was freed, foreign policy expert Benjamin Friedman explained the reasons behind the increase in piracy:
It’s worth noting the current level of American concern about piracy is overblown. As Peter Van Doren pointed out to me the other day, the right way to think about this problem is that pirates are imposing a tax on shipping in their area. They are a bit like a pseudo-government, as Alexander the Great apparently learned. The tax amounts to $20-40 million a year, which is, as Ken Menkhaus put it in this Washington Post online forum, a “nuisance tax for global shipping.”
The reason ships are being hijacked along the Somali coast is because there are still ships sailing down the Somali coast. Piracy is evidently not a big enough problem to encourage many shippers to use alternative shipping routes. In addition, shippers apparently find it cheaper to pay ransom than to pay insurance for armed guards and deal with the added legal hassle in port. The provision of naval vessels to the region is an attempted subsidy to the shippers, and ultimately consumers of their goods, albeit one governments have traditionally paid. Whether or not that subsidy is cheaper than letting the market actors sort it out remains unclear to me.
Appearing on Russia Today, Friedman discussed the implications of the increased threat and what ships can do to avoid future incidents with Somali pirates.
Since the problems at sea are related to problems on Somali land, what can Western nations do to decrease poverty and lawlessness on the African continent? Dambisa Moyo, author of Dead Aid, argued at a Cato Policy Forum last week that the best way to combat these issues is to halt government-to-government aid, and proposed an “aid-free solution” to development based on the experience of successful African countries.
Obama Lifts Some Travel Bans on Cuba
The Washington Post reports:
President Obama is lifting some restrictions on Cuban Americans’ contact with Cuba and allowing U.S. telecom companies to operate there, opening up the communist island nation to more cellular and satellite service… The decision does not lift the trade embargo on Cuba but eases the prohibitions that have restricted Cuban Americans from visiting their relatives and has limited what they can send back home.
In the new Cato Handbook for Policymakers, Juan Carlos Hidalgo and Ian Vasquez recommend a number of policy initiatives for future relations with Cuba, including ending all trade sanctions on Cuba and allowing U.S. citizens and companies to visit and establish businesses as they see fit; and moving toward the normalization of diplomatic relations with the island nation.
While Obama’s plan is a small step in the right direction, Hidalgo argues in a Cato Daily Podcast that Obama should take further steps to lift the travel ban and open Cuba to all Americans.
New at Cato, Tax Day Edition
Here are a couple of dishes Cato Institute scholars cooked up for Tax Day:
- Writing for National Review Online, Chris Edwards warns against the dangers of rapidly increasing government spending:
When filling out your tax forms, you might want to think for a second about where all that money is going. After federal spending roughly doubled in the Bush years, it is growing by leaps and bounds under President Obama. What’s more, the federal government is increasing the scope of its activities — it is intervening in many areas that used to be left to state and local governments, businesses, charities, and individuals.
There are now a staggering 1,804 subsidy programs in the federal budget. Hundreds of programs were added this decade, and the recent stimulus bill added even more. The result is that we are in the midst of the largest federal gold rush at taxpayer expense since the 1960s.
- At Townhall, Dan Mitchell rails against the current tax code:
Beginning as a simple two-page form in 1913, the internal revenue code has morphed into a complex nightmare that simultaneously hinders compliance by honest people and rewards cheating by Washington insiders and other dishonest people.
But that is just the tip of the iceberg. The tax code also penalizes economic growth, distorts taxpayer behavior, undermines American competitiveness, invites corruption and promotes inefficiency.
- At CNSNews.com, Edwards argues that policymakers should give Americans the low and simple tax code that they deserve.
- Also, don’t miss the new Cato video that reveals how troubling the American tax system really is.
Obama Administration Agrees with Cato on Auto Fuel Efficiency
Well, sort of. The Obama administration signaled last week their belief that it would be better to have one national fuel efficiency standard than a multiplicity of different state fuel efficiency standards. Now, we have long maintained that fuel efficiency standards — federal or state — are a bad idea. Consumers should be free to buy whatever sort of car they want without government economic coercion. But if we must do violence to consumer sovereignty, better to do so via one national standard rather than via a hodge-podge of differing state standards.
This is the very argument I made late in January over at The New York Times when asked about California’s petition to establish its own fuel efficiency standard as a means of addressing greenhouse gas emissions. Alas, I was pilloried on the NYT comments board at that time for all sorts of sins against man and nature. Now it appears that President Obama has come over to the dark side. Welcome to my world, Mr. President.
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