The Fatal Flaw Of The Federal Subsidy. Why Things Aren’t Swell In The Land of Pell.

An old economic fallacy argues the following: Anything you subsidize, you get more of. Sadly, like bloggers jumping the latest shred of rumor they would like to believe, our political leadership decided that this supposed truism was Too good to check! One example of where the foolish fallacy has led to misery, involves the current state of the Pell Grant Program.

US Senator Claiborne Pell’s name-sake program was designed to give low-income Americans an opportunity to climb out of poverty through education. Senator Pell took great pride in providing Federal Money to educate people. He famously remarked “the real strength and health of America is the sum total of the education and the character of our people.” (HT: The Chronicle.com)

Like all diligent workers paving the road to Hell, the senator’s intentions were both noble and good. Senator Pell’s program is described below.

The Federal Pell Grant Program provides need-based grants to low-income undergraduate and certain postbaccalaureate students to promote access to postsecondary education. Students may use their grants at any one of approximately 5,400 participating postsecondary institutions.

(HT:ed.gov)

So what could possibly go wrong with a decent and admirable idea like the Pell Grant? The biggest problem I see is what Boz Scaggs once described as “the sad, sad truth, the dirty lowdown.” This indictment of Disco Morality; set to a really catchy back-beat, could describe the entire state of America’s Blue Social Model, according to Yuval Levin.

All over the developed world, nations are coming to terms with the fact that the social-democratic welfare state is turning out to be untenable. The reason is partly institutional: The administrative state is dismally inefficient and unresponsive, and therefore ill-suited to our age of endless choice and variety. The reason is also partly cultural and moral: The attempt to rescue the citizen from the burdens of responsibility has undermined the family, self-reliance, and self-government. But, in practice, it is above all fiscal: The welfare state has turned out to be unaffordable, dependent as it is upon dubious economics and the demographic model of a bygone era.

(HT:National Affairs)

So that was awesome-sounding mumbo jumbo. We’ve even got a retro Pop-Culture reference thrown in for those who don’t assiduously try to forget the 1970’s any time that particular decade gets regurgitated into the public conscious. But how does any of this actually impact my Pell Grant? It does, through a long chain of unintended consequence.

When the government pours in subsidy dollars, it becomes the dominant payer. It also becomes a payer that is real-time ignorant of the impact of price on budget line. Payers who don’t spend their own dollars don’t feel, if you will, how expensive things are. Thus, they are not motivated to put a ceiling on pricing. This gives the seller of any good or service an unnaturally enhanced pricing power. Give any rational economic animal pricing power, and they will take the money down off the table. Haylye White, an undergraduate student at Arizona State University, reports what most of us already know below.

Students have every right to be angry about the state of college tuition. In the past 20 years, “tuition increased twice as fast as the overall cost of living (Larson, 63).” Between 1980 and 1990, the average cost of attending public and private colleges increased by 109% and 146%, respectively (Hood, 10). To put these figures into perspective, we can compare them with other rising costs during the same 10-year period. For example: medical care costs rose 117%, new home costs went up 90%, and the cost of a new car went up a mere 37%; meanwhile, median family income only grew by 73% (Hood, 10).

(HT:Haylye White)

So Ms. White stopped being sadistic enough to keep score back in 1990. Has it gotten any better since? Sings are pointing to a big, fat NO. Thus, what Ms. White said about tuition increases vastly outpacing consumer income probably still holds true.

In a free market, the tuition growing by 146% in a decade over the median income increase of 73% would constitute a margin squeeze. That would lead rational consumers to ditch college and acquire their occupational credentials in some other fashion. This is where we see the evils of the malfunctioning subsidy rear its ugly head.

Colleges can raise their prices oblivious to the impact of that price on consumers. This is because the expense is temporarily or permanently subsidized by financial aid. Nobody pays full tuition to The Ivy League. The Ivy League collects every dollar they charge. The delta between the tuition level and the income level of the student is bridged by aid or borrowed money. The Colleges therefore have no reason whatsoever not exploit this pricing power.

So again, what is the problem with this social model? We go to Harvard, we make other people pay. We have our cake and eat it too. Didn’t God populate the Earth with taxpayers so that we could enjoy our subsidized lifestyle within the safe confines of The Blue Social Model?

This is where the scratchy Boz Scaggs 45 needs to grace the dusty turntable. US public Debt is equal to over $14T. The O&M costs of the dying Blue Social Model come a cropper with reality. This happens as 1 month, just one (Redacted) month, of Federal largesse in 2011 costs as much in future debt as 12 months did as recently as 2008.

So again, what does that have to do with my Pell Grant. What are you, anyway? Some sort of Rethuglican? As Meghan McCain would Tweet it. “Like, um, well, Yeah!”

The hard times flooding the America not receiving a subsidized ticket to The 4-Year Beer Drink, betide the Pell Grant. Noble intentions do not ensure perpetual financial stability. Congress ponders reducing the size and scope of the free tuition program that has grown by 57.6% since President Obama came into office. The program is $10.7B of budget neutrality and budgeters sharpen their knives.

Yet mere cuts, alone, will not do more than delay the inevitable failure of this decently-intended Federal Program. Colleges will charge tuitions directly linked to the level of free monies that Federal appropriators permit them to vampire. Thus, the Pell Grant Program will not guarantee greater access to college for the poor and dispossessed. Nor will it guarantee that anyone will want to hire these graduates if the influx of new diplomas devalues the symbolism of the degree. Pell Grants must limit what colleges are allowed to charge recipients, or they will only fuel an endless tuition-inflation problem that will make college completely unaffordable to anyone not on the Federal dole. That is all.