Episode 6: The Problem with Government Subsidized Free-Tuition Plans
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Government-subsidized, free-tuition plans are popular with both politicians and higher ed institutions. After all, who doesn’t like a free lunch? The problem is that these programs remove incentives for institutions to compete, innovate, and work toward truly affordable and sustainable solutions.
Economists use the term rent-seeking to describe situations in which companies use their resources to generate greater wealth not by being more productive or competitive, but by manipulating the economic environment in which they operate.
A popular example of rent-seeking is when companies spend their money on political lobbyists to gain government legislation or some form of protection that will benefit them financially. This could be in the form of a government subsidy for a product it produces or through tariffs levied by the government on foreign competition.
In such an example, while the company is spending money on lobbying to grow its wealth, it is not increasing its actual productivity or being innovative in ways that benefit society.
The problem with rent-seeking is that it protects companies from competition and, in doing so, eliminates their motivation to continue to innovate their products, services, and pricing.
Rent-seeking also distorts market signals in a way that makes it difficult to understand what consumers really want or need.
For example, when we offer subsidies for a product, then the price that consumers pay is artificially low. That makes it hard to determine whether or not consumers really want the product. Are they buying the product because they want it or because they want the subsidies? Is the product in its current form worth producing?
If you’re wondering why I’m talking about rent-seeking and subsidies, it’s because they’re at the heart of the recent wave of government initiatives to offer free college tuition to students in the U.S. The intended outcome of these plans — providing equitable access to a college education — is certainly laudable and definitely needed. Unfortunately, the mechanism for achieving this outcome — i.e. federal and state-funded subsidies — is fraught with problems.
First, by subsidizing or underwriting college tuition at the current prices set by public institutions, we’re actually eliminating any pressure on those institutions to find new and innovative ways to make their operations more efficient and their tuition rates more affordable.
In addition, while free-tuition plans can make a college education accessible to more people, they will also remove incentives for colleges and universities to continue innovating their products and services. In effect, with such programs, we’re saying that the current system works fine as it is and can meet the diverse needs of our population.
Now I’ve got to admit, given the scope and need, and the number of underserved populations in the U.S., I really have trouble thinking that everything’s just fine as it is.
So, instead of free tuition programs, why don’t we focus instead on solutions that are truly affordable and sustainable? Ones that institutions must support through their own innovation and competition? Why don’t we encourage higher ed institutions and organizations to innovate their operations and products so that they can deliver high-quality learning experiences at tuition rates that even lower-income students can afford?