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Price Controls: Obama’s Higher-Education Agenda, Part 2 of 8

The newest part of President Obama’s agenda for higher education is his plan to limit tuition increases by punishing those that increase their prices too quickly. He enunciated this in a speech at the University of Michigan on January 27, 2012, a few days after his State of the Union address.

Two weeks ago in Obama’s Higher-Education Agenda I said I would in a series of posts examine the eight major components of that agenda, and then try to put them together as a whole. Last week, in part one of the series, Supersizing, I reviewed the President’s dream of ushering in a gargantuan expansion of higher education. That dream has already run into practical obstacles, the most daunting of which is the dizzying increase in college tuitions—increases that have not only outpaced inflation in the last thirty years but have spiraled up faster than even the cost of health care during that period.

The point is often underscored by this graph. I have taken a version from The Washington Post that in turn took it from the Freakonomics Web site. It goes out only to 1978 and includes tuition and fees only at private four-year colleges, based on data from the College Board and the Department of Labor. Versions that include public colleges and more recent data, however, show very similar trends.

Another calculation from InflationData.com tracks inflation in consumer prices from 1985 to 2011 as 115.06 percent vs. the college education inflation rate in that period as 498.31 percent.

Obama’s proposal to impose a kind of price control on higher education comes as an emergency response to a situation he seems not to have anticipated. Until his State of the Union speech and University of Michigan follow-up, he had never made a public statement suggesting that he favored limiting the tuitions that colleges and universities charge.

O’ Balm A

The emergency is, of course, political. Large numbers of Americans view college as indispensable in their quest for their own and their children’s future prosperity. They worry that college will be priced out of reach or that they will have to compromise by attending lower-cost institutions that provide less prestige and a lower chance of obtaining good employment after receiving a degree. The zooming prices combined with the growing sense of diminished rewards has also created a growing fear that higher education is in the midst of a bubble, like the recent real-estate bubble.

President Obama’s turn to a form of price control is a risky expedient meant both to calm the anxieties of those who fear being priced out and to nudge higher education away from its increasingly unsustainable business model.

It is a risky path for Obama because the higher education establishment—until now a rock-solid and fiercely activist part of his political base—is aghast at the idea of price controls in higher education. Call them what you will: “disincentives” for tuition increases, etc.

But what exactly is the President now proposing? When he released his proposed budget on February 13, he included some additional detail (page 5):

In this Budget, I also propose a series of new proposals to help families with the costs of college including making permanent the American Opportunity Tax Credit, a partially refundable tax credit worth up to $10,000 per student over 4 years of college, and rewarding colleges and universities that act responsibly in setting tuition, providing the best value, and serving needy students well.

And (page 50):

In addition, the Budget proposes to reform the formula for distributing approximately $10 billion annually of Campus-Based Aid to reward colleges that act responsibly in setting tuition, providing the best value, and serving needy students well.

And still more on Pell Grants, support for community colleges, and other items (page 96).  The White House Web page on higher education provides a summary under the title, “Making College More Affordable.” (If you have more than a passing interest, copy the page. White House links can disappear quickly.)

In a speech on February 13, announcing the budget, Obama explained:

They [Congress] also need to take the tuition tax credit that my administration put in the budget over these last few years—a tax credit that saves families thousands of dollars on tuition—and we need to make that permanent. It shouldn’t be temporary, it should be permanent. (Applause.)

So between the increases we’ve provided in Pell grants, these tax credits, keeping interest rates low—all that is going to help. And millions of students across the country have benefited from that. But students and taxpayers can’t just keep on subsidizing skyrocketing tuition—we’re going to run out of money. So that’s why I’ve asked states and colleges to do their part to keep costs down.

We’re putting colleges and universities on notice: You can’t just keep on raising tuition and expect us to keep on coming up with more and more money. Because tuition inflation has actually gone up even faster than health care. That’s hard to do. (Laughter.)

So what we’re saying to states, colleges and universities—if you can’t stop tuition from going up, then funding you get from taxpayers will go down. Because higher education cannot be a luxury; it is an economic imperative that every family in America should be able to afford. That’s part of the American promise in the 21st century. (Applause.)

Allergic Reactions

A few days earlier, the Chronicle of Higher Education covered the chagrin of college presidents and the heads of Dupont Circle organizations as the idea began to sink in that the President seriously meant to interfere with “tuition going up.” In “Obama Aims to Make Colleges Cut Costs,” Goldie Blumenstyk, Michael Stratford, and Beckie Supiano quoted a gallery of officials, from the nervous-sounding Cynthia A. Littlefield, director of federal relations at the Association of Jesuit Colleges and Universities (“We still don’t have all the details, right?”) to the more belligerent David Warren, president of the National Association of Independent Colleges and Universities, who made it clear that the college presidents he represents do see Obama’s plan as “price controls” and view those controls as a threat to their independence.

The Chronicle reporters found:

Even sterner attacks came from some university presidents. The University of Washington’s Michael K. Young, invoking Jeremy Bentham’s famous invective, decried the ideas as “nonsense on stilts” and denounced Mr. Obama’s ideas as “political theater at its worst.”

Obama presumably calculates that he can absorb the ire of higher-education officials, who are, after all, unlikely to seek solace by turning to Mitt Romney, Newt Gingrich, or Rick Santorum. And if he can appear to be tough on the higher-education executives who keep raising tuition, he just might rekindle some of the fading enthusiasm in his college-aged base and their parents.

Osawatomie Blues

But this part of Obama’s higher-education agenda has an ad hoc quality. The problem of skyrocketing college prices seems to have come into focus for him after the fall season of “Occupy” protests, which in many cases brought out college students and recent graduates protesting the amount of student loan debt they had acquired. High debt and poor job prospects created a new grievance issue. It was not just the one-percenters and the banks that were ripping off the “99 percent.” It was also the universities that kept relentlessly increasing their prices. Nowhere was this issue more explosive than in California, where the state government was continuing its slow withdrawal of subsidies from the University of California system. University officials made up for losses in state funding through tuition increases.

Obama has merged this grievance with the protesters’ broader grievance over income inequality. Most notably in his December 6 speech in Osawatomie, Kansas, he made overcoming “inequality” part of his core agenda. “This is a make-or-break moment for the middle class,” he declared and he associated that epiphany with “the people who’ve been occupying the streets of New York and other cities” as an expression of “the defining issue of our time,” i.e. income inequality.

“Income inequality” points directly at disparities in income but it has a much wider resonance than simply announcing that George Soros and Warren Buffet have a lot more income than you or I. It also embeds the recognition that large numbers of people can no longer afford “goods,” such as college degrees, that they regard as the sine qua non of middle class status.

This in turn makes Obama’s long-stated (if highly implausible) goal of vaulting the United States to the position of the nation with the world’s largest percentage of college graduates even less reachable than it already was. Something has to give. College prices would have to diminish as if by magic. Or the personal income of most Americans would have to multiply all of a sudden. Or somehow the federal government would have to intervene to offset higher education’s runaway train of price increases.

At Osawastomie, Obama didn’t say which of these roads he would walk. The first hint came in his State of the Union, followed up by the Michigan speech, and then the budget. The road to middle-class security, as Obama now pitches it, is through a leveraged increase in federal student aid and other support for colleges and universities—leveraged in the sense that to get the new money (and presumably to keep the federal funds they were already getting), colleges and universities will have to limit tuition increases to some yet-to-be-announced ceiling.

An Illusory “Promise”

Obama’s new plan aims to block the approach taken by California and many other states in their efforts to transfer more of the costs of higher education to its beneficiaries. The situation at the state level resembles those cases in which some third-world government decides to withdraw subsidies for bread or fuel oil, and the public reacts with riotous indignation. Obama is now positioned to veto the elected state leaders by withholding crucial federal funding to those state universities that try to repair state cutbacks by increasing their tuition.

The indignation of the protesters would be better focused on the long succession of U.S. presidents and Congresses that have contorted American higher education with subsidies and misaligned incentives for generations. The two basic problems have been (1) the false promise that almost everyone should go to college, and (2) the use of non-means-tested federal financial aid to make college “more affordable.” President Obama in that February 13 budget speech neatly combined them as “the American promise in the 21st century”—

Because higher education cannot be a luxury; it is an economic imperative that every family in America should be able to afford.  That’s part of the American promise in the 21st century.

Higher education is not an “economic imperative for every family.” For many families is it a large, unnecessary expense. Individuals can get good jobs and achieve financial security without a college degree. For others, it is indeed a “luxury,” or more specifically, a prestige good, valued more for what it signals than for what it actually is. And as I explained in Supersizing, Obama’s oft-repeated claims that giant increases in college-degree attainment would translate into greater national competitiveness are flatly contradicted by comparisons to other developed nations.

The Bennett Hypothesis

The goal is spurious, but the ways that Obama (and previous presidents) have proposed to achieve the goal are even worse. Federal subsidies that are available to all or to nearly all are one of the key accelerants to tuition increases. No sooner does the federal government attempt to make college “more affordable” with something like Obama’s “$10,000 per student over 4 years of college,” than college officials revise their calculations of what families can afford to pay—and raise their tuitions accordingly.

This practice of capturing federal aid by increasing tuition leaves students and their families running in place. If the federal government pours money into the financial aid bucket faster, colleges drill the hole in the bucket a little larger. Faster still? Larger still.

This no-win situation was described a quarter of a century about by then Secretary of Education William Bennett and became known as the “Bennett Hypothesis.” Various economists have tried to test it, with mixed results, but as it happens just this week a major new study was released, “Introducing Bennett Hypothesis 2.0.” The author is Andrew Gillen, research director of the Center for College Affordability and Productivity, which is my fellow Innovations blogger Richard Vedder’s organization. Gillen offers a refined and more nuanced version of the idea that takes proper account of the differences between financial assistance available to all-comers and aid limited to those who have very limited financial means. He also draws in mitigating factors, such as “price discrimination,” (i.e. charging different people different prices for the same thing.) The result is a much sturdier “hypothesis”—which, because such economic models are virtually untestable, remains just beyond the reach of dispositive empirical proof.

It is, however, a pretty good fit with reality, as I’ve written on Minding the Campus.

So what Obama is now proposing is a way, in principle, to plug the hole in the bucket—or at least to take the auger out of the hands of college officials so they can’t drill the hole even bigger as he pours in still more money. The theory is that this time, at long last, the cycle will be broken and college really will become more affordable in response to increased federal largesse.

Will it work? We probably won’t get a chance to see, since it is highly unlikely that Congress will pass Obama’s budget. Would it work if it were enacted? I doubt it. Higher education has a million motives and nearly as many techniques to evade a regime of price controls. It would just find more circuitious ways to capture the increased aid. And that probably would be OK with the President, as long as people believed for a while in the recycled illusion that they were getting a price break.

Of course, Obama could impose his regime of price controls by regulatory fiat even without the carrot of increased student financial aid. And some of the aid he proposes comes in the form of means-tested Pell Grants, which as Gillen shows, are immune to Bennett-style capture in the form of tuition increases. So it is possible that parts of Obama’s carrot-and-stick price control-regimen will roll into place in the coming months.

Lying behind Obama’s dream of superszing higher education and expediting the path to a college degree through a combination of increased federal aid tied to institutional price controls is his recurrent idea that everyone, or nearly everyone, should go to college. I’ll take that up in part three of this series. (Laughter, Applause.)

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