Wait Until It’s Free

Political satirist P. J. O’Rourke famously quipped:

If you think health care is expensive now, wait until … it’s free.

He first offered this observation way back in May, 1993, when then-First Lady Hillary Clinton was leading an effort to overhaul health insurance in America. The initiative, called the Health Security Act but far more commonly known as Hillarycare, was an epic debacle that many consider a major contributor to the rout the Democrats suffered in the 1994 mid-term Congressional elections. Much ink has been spilled pointing fingers and assigning blame for its failure, but only the fact of its failure remains in the zeitgeist two decades after the fact.

President Obama began work on his signature Affordable Care Act (aka Obamacare) almost immediately upon taking the oath of office. Where the Clintons failed, Obama succeeded, and Obamacare is now the law of the land. It’s in deep trouble, though, with many insurers fleeing the exchanges and many of the exchanges failing.

Statist politicians are notorious for ignoring the lessons of history. Instead, they often seem to work from the notion that, if some big-government effort failed, it simply wasn’t big enough. That’s what we were told about the trillion dollars Obama spent to “stimulate” the sagging economy early in his first term, and that’s what we’re now hearing about Obamacare (i.e. it should have been “single-payer” aka socialized medicine from the get-go).

It’s also what we’re hearing about government involvement in tertiary education. College has gotten absurdly expensive, with tuition and other costs far outpacing inflation. A rational actor might think to look into what caused this, and if he did he’d find that government involvement (i.e. student loan subsidies) was a prime driver of cost increases.

However, “rational” and “government” produce a null-intersection Venn Diagram. “Rational” is way, way down on the list of motivators for government action. So, instead of hearing about how government’s loan guarantees have driven tuition sky-high and loaded graduates with six-figure debt, we hear much gnashing of teeth about how unfair it is that students are graduating with six-figure debt. That’s followed up by folks like Elizabeth Warren engaging in populist rage about how obscene it is that the government is profiting off student loans, and that it’s morally wrong that student loans cannot be cleared but rich businessmen can escape their debts via bankruptcy.

The latter point makes great chum for the liberal masses, but in typical fashion it doesn’t bother acknowledging the reasoning behind that distinction: Student loans are not collateralized by anything, while business and other debt usually is. If a business defaults on its loans and goes through bankruptcy, the existing assets will be distributed or liquidated to give the creditors something. They won’t be made whole, but they’ll get a piece of what’s owed to them back. How would that be done in the case of student loans? Crack open a brain pan and scoop out some gray matter?

As for the interest rates on loans that generate “profits” for the government? Interest charged on loans serves several purposes, even in a “non-profit” sense. There are administrative costs. There is the cost of money: Given that our government operates in a constant state of deficit, loans that the government makes should at the very minimum earn enough interest to cover the interest the government is paying for the money it lends.

Then there is default. Any lender needs to manage the risk associated with lending, and the interest rate charged is one mechanism for doing so. A well collateralized loan (e.g. a first mortgage on a piece of real estate that’s only half of the fair market value of that real estate) has low risk, so a low interest rate can be offered. A poorly collateralized loan (e.g. a business startup with little in the way of assets) has higher risk, so a lender will expect a higher interest rate. A lender will mitigate risk across a large number of loans, and will need to charge interest rates that do so. Student loan default rates are currently near 12%.

The interest that the government charges isn’t “profit” if it offsets loan defaults, administrative costs and the cost of money itself. I am not inside Ms. Warren’s head, but I doubt that she figured these factors in her anti-profit raging. Like all good populists, she rages in order to support giveaways that buy votes. Her goal, one shared by Bernie Sanders and recently picked up by Hillary Clinton, is government funding of tertiary education.

Remember what P. J. O’Rourke said about “free” heath care? Guess what’s going to happen to college education once it’s “free?”

Statists, big-government types (I repeat myself), technocrats, authoritarians, and even many conservatives love to assert the tragedy of the commons as justification for state intervention in lieu of unfettered free markets. How, though, can they not see the obvious tragedy-of-the-commons peril of “free” tertiary education?

Some have… slightly. Clinton’s Vice Presidential candidate Tim Kaine observed that it would be unfair to offer “free” college to the wealthy, a valid observation in itself, but a note that simply reinforces the fact that they all have a redistributionist mentality ruling their cognitive processes.

Meanwhile, how should we expect “free” college to work under President HRClinton? A means-tested elimination of tuition at in-state public universities. A plan that Forbes magazine calls a giveaway to the upper-middle-class and will cost, by the Clinton camp’s own estimates, $100 billion over the course of a decade. If you believe it’ll cost that little, you haven’t been paying attention.

What I don’t see in these discussions is the flip side of the free-college coin – a rationing mechanism such as some European nations use. Cost pressures (yes, we’re back to the tragedy of the commons) regulate the use of resources. Absent those cost pressures, something else will arise to balance supply and demand. Many European nations, including France and Germany, ration access to “free” college via testing. If you don’t test well enough, you don’t get in, and if you don’t test well enough in the disciplines related to your desired field of study, you don’t get to study what you wish. The lack of such a proposal is emblematic of the American approach to implementing European-style social-welfare policies, i.e. advocates ignore the flip side of every giveaway.

“Free” college a la HRClinton reads like my favorite educational-waste target, Head Start. The government’s own studies have found that Head Start confers no lasting benefit to its enrollees, making it a glorified baby-sitting program. “Free” college without academic rationing confers a vision of four years of post-high-school slacker-dom funded by taxpayers. Mommy and Daddy can hand newly minted adults off to the State for care taking, and those newly minted adults can hang out playing frisbee and Pokemon Go while learning the nuances of micro aggression, social justice and demanding ever-more free stuff.

Some people do get that there is no such thing as a free lunch. Check out the comments attached to this silly free-education meme. They generally point out that people pay higher taxes in the nations with “free” college education. Unfortunately, we are well into the era of largesse from the treasury, which does explain the nation’s increased favoritism towards omnipotent demagogues (see, Barack Obama, Donald Trump, Hillary Clinton).

Meanwhile, consider the quality of “free” stuff. How can something that’s “free” be expected to have as much value as something you pay for. Yes, of course, someone will be paying for college, but if the consumer isn’t paying for it, what pressure will there be to provide a quality product to the consumer? Quality will suffer, and we’ll have people with college degrees worth exactly as much as they paid for them.

The correct solution to runaway college costs isn’t doubling down on government’s financial involvement, which has fostered financial irresponsibility by decoupling the consumer from the payer. Yes, students are borrowing money to pay for college, but taking on debt offered loosey-goosey by the government does not engender the same discipline as having to borrow from the private sector or save money beforehand. Furthermore, we’ve seen that colleges still look to extract the maximum money that students can afford to cough up from their own sources. Loans don’t reduce out-of-pocket, they simply add to the college’s coffers. The way to fix this is in the area no one talks about – fiscal discipline in the universities. That fiscal discipline (think: reducing overhead, cutting back on administrators and non-teaching staff, etc) will only be imposed by market forces. Yes, that means cutting back on government’s role in lending to students, and shifting that role back to the private sector where it belongs. In addition to traditional lending, where the private sector’s role would be to better vet borrowers, there are numerous non-traditional ideas out there, including [human capital contracts][14] proposed by Milton Friedman decades ago. The beauty of free markets is that neither we as individuals nor policy maker as overlords have to come up with the “right” solution – human ingenuity driven by self-interest will handle it.

We should fix education – as we fix everything else – by getting government out of it. Yes, it’s that simple.