Malo periculosam, libertatem quam quietam servitutem.



September 2014

Is Government Threat of Punishment Keeping Private Universities from Cutting Tuition?

Written by , Posted in Big Government, Economics & the Economy, Education

Federal policies unquestionably deserve some blame for skyrocketing tuition costs. Washington subsidizes student borrowing, and colleges in turn raise prices to capture federal dollars. Higher prices put pressure on Washington to increase subsidies and the cycle repeats.

But there are obviously other forces at work as well. In a typical market you would expect competition to drive prices down, for instance. However, cutting prices doesn’t have the expected effect. Ike Brannon explains:

[W]hy don’t private colleges simply reduce tuition and reap the benefits? Indeed, a few colleges have done precisely that, and have been rewarded with a sharp spike in applicants the first year or two afterwards.

However, the gains from such a tuition reduction are short-lived: the typical pattern from a unilateral price cut is that by the third year the market has forgotten the gauzy rhetoric behind the price reduction and perceives the cut-rate tuition as an indicator of an inferior good, and applications decline.

Colleges in this way act as a Veblen good, meaning demand is proportional to price, rather than inversely proportional as we would expect from the law of supply and demand. Colleges with higher tuition are perceived as more prestigious and of higher quality and afford their alumni bragging rights. Thus, slicing tuition in a vacuum can reduce demand.

But one college president proposed a solution that would benefit consumers. Unfortunately, the government sprung to action and threatened him with legal repercussions:

Private colleges can cut tuition and avoid such a death spiral, but only if they do so in concert. However, the specter of a few dozen private colleges organizing to reduce prices — which might seem like an unmitigated good to parents — risks the ire of the Justice Department, which launched an investigation when a college president suggested such an idea at a public conference. College presidents don’t like being told by an officer of the government that they’re risking jail time, and any nascent discussions quickly ceased.

The government has criminalized “price fixing” in the name of protecting consumers. But as we see here, good intentions mean little once government bureaucrats with tunnel vision are brought into the equation. Regardless of the rule’s intent, prosecutors are prepared to punish colleges for potentially agreeing to lower tuition despite both its obvious benefit to consumers and the action’s alignment with stated policy goals.

Government policies helped create the problem of exorbitant tuition costs, and now it is actively working to prevent others from solving it. To quote Ronald Reagan, “government is not the solution to our problem; government is the problem.”