Explained well by analogy in this post by Omid Malekan (via ZeroHedge):
Imagine for a moment that you are the owner of a popular restaurant located on a street with many restaurants. You do your best to provide the best experience to your customers while staying ahead of the competition by keeping your prices down. You try to avoid spending too much on labor, and do as much of the work yourself as you can, often putting in long hours. Although there is a good wholesale market nearby, you drive an extra hour to another market just to get your ingredients a little cheaper.
One day a wealthy patron who is a big fan of your cooking announces a new idea. Because he wants as many people as possible to enjoy your food, he is going to pick up the tab for most of your customers. You can just go on doing what you always do, but when the check arrives for many tables, this wealthy patron will pay the tab. The next day, your waitress complains that there are too many tables and you should hire more help. What would you do?
Normally, you would try to find a way to avoid hiring another person as it would eat into what little profits you make. But now you realize there is another solution. You can just raise prices. Since most of your patrons are not paying for their meals, your place will still stay popular and you won’t have to worry about losing business to your competition. So why not hire another waitress? While you are at it, why not hire a manger so you don’t have to be there all time, and stop driving to the further market?. Whatever increase in costs you suffer you can make up for by raising prices more and more.
Now imagine all your competitors also have wealthy benefactors picking up the check for many of their customers. You can all raise prices constantly without losing any sleep – or business.
This scenario is effectively what America’s higher education financing system has turned into. There are many reasons why college tuition is rising faster than virtually anything else, from more applicants than ever to state budget cuts for public universities, but all of those factors are allowed to persist because often times the person getting the degree is not the person paying the tab – not for today anyway.
Presently over 60% of all undergraduate students receive some sort of Federal aid for their education, and the amount of money the government has shelled out for student loans is now over a trillion dollars, double what it was just 7 years ago. Like the hypothetical wealthy patron in the example above, the government doesn’t ask for much when it gives out the money – neither from the student nor the University. If our wealthy patron had said “I will pick up the tab so long as you keep your low prices” then we would have a reason to keep prices down. But by fully removing the value of what customers get from the equation, all incentives point towards inflation.
This is exactly what’s happening at America’s major colleges and universities. As shown by the chart below, which was put together by the American Association of University Professors, since the 1970s positions for non-faculty professionals have seen the highest growth for jobs at American Universities.
Meanwhile, University Presidents and other executives have been giving themselves big raises while leaving the professors and their assistants in the dust.
The peculiar places tuition money has been flowing to is further discussed in this fascinating paper by the Delta Cost Project.
We could debate all we want about how much a University should spend on professors, secretaries, sports facilities or free unlimited Nutella, but that would be a waste of our time, just as it would be for the patrons of a restaurant to debate how many waitresses there should be.
Imagine if suddenly our wealthy restaurant benefactor declares he’s going to stop paying for peoples meals. Given our now sky-high prices, our tables would be empty and given all these new expenses, like more waitresses and shopping at the closer market, we’d go out of business. To survive, we’d have no choice but to get leaner and enter the murky waters of business uncertainty, where every decision is complicated and viewed through the lens of “what can I get away with?”
As long as the majority of the cost of college education is not born directly by students but rather by Government loans and grants, our institutions of higher learning will not be forced to adapt and find innovative ways of delivering quality education to more students at a decent price. They will go on keeping supply low, tuition higher and expenses growing. If we care about our children and want them to stop taking on more and more debt to get a degree for a tougher and tougher job market we need to break the current cycle.
The kindest thing our government might do for our kids is to stop throwing money at inefficient Universities in their name, or at least demanding more from those institution in return for that money. Imagine for a second if college loans were given to the school and not the student, and tied to metrics of success, like whether the student graduates and how good a job they land afterwords. Much like our restaurant, in such a world the school’s focus would then shift to keeping prices down while offering good value.
Students in recent years have been shafted by this easy-financing debt scheme, and student loan debt is now a staggering $1 Trillion in the US, mostly held by Uncle Sam, and the debt per student debtor has risen to $27,000 on average. Students who have graduated into careers in high-paid fields like medicine and business have manageable if burdensome debt, but millions of people were induced by financing to start college and fail, or to get degrees in fields with low salaries and minimal demand. College administrators have expanded their empires and salaries while the student debt burden prevents many former students from buying homes and starting families. Currently about half of Federal student loans are 90+ days delinquent or in deferment or grace periods. Some politicians promise to make the problem worse by increasing student loans and lowering rates, meaning even more Federal subsidies will flow to bloated college budgets. None of these schemes get at the underlying problem: only stopping the subsidies will open up space for innovation to bring quality higher education to more people at lower cost.
Addendum: Reason discusses the harm easy access to loans without evaluating credit risk of the proposed program does to poor or easily-misled students, as well as the colleges that have marketed to them.
Also, read this Atlantic article on why less privileged students take so long to graduate, if they graduate at all, and how this fact makes their spending on even community colleges almost as high as a 4-year degree in the Ivy League.
Death by HR: How Affirmative Action Cripples Organizations
[From Death by HR: How Affirmative Action Cripples Organizations, available now in Kindle and trade paperback.]
Corporate HR Scrambles to Halt Publication of “Death by HR”
Nobody gets a job through HR. The purpose of HR is to protect their parent organization against lawsuits for running afoul of the government’s diversity extortion bureaus. HR kills companies by blanketing industry with onerous gender and race labor compliance rules and forcing companies to hire useless HR staff to process the associated paperwork… a tour de force… carefully explains to CEOs how HR poisons their companies and what steps they may take to marginalize this threat… It is time to turn the tide against this madness, and Death by HR is an important research tool… All CEOs should read this book. If you are a mere worker drone but care about your company, you should forward an anonymous copy to him.
More on education and child development :
Student Loan Debt: Problems in Divorce
Early Child Development: The High Cost of Abuse and Neglect
Child Welfare Ideas: Every Child Gets a Government Guardian!
Free Range Kids vs Paranoid Child Welfare Authorities
“Crying It Out” – Parental Malpractice!
Brazilian For-Profit Universities Bring Quality With Quantity
The Affordable, Effective University: Indiana and Mitch Daniels
Real-Life “Hunger Games”: Soft Oppression Destroys the Poor
“Attachment Parenting” – Good Idea Taken Too Far?
Real Self-Esteem: Trophies for Everyone?
Public Schools in Poor Districts: For Control Not Education
YA Dystopias vs Heinlein et al: Social Justice Warriors Strike Again
Steven Pinker on Harvard and Meritocracy
Social Justice Warriors, Jihadists, and Neo-Nazis: Constructed Identities