By Richard Vedder
After my rant a couple of days ago about President Obama's address to the nation, and after giving a slightly milder but still somewhat corrosive comment to the Associated Press yesterday, I vowed late yesterday afternoon to swear off, at least for a few days, Obama-bashing and criticism of the Administration's higher education policies. But then came the budget, which cries for analysis.
Actually, analysis is difficult to give since most of the budget details will not come for a couple of months. I cannot fault the President for that --forming a budget takes months, and the Administration has not been in power for long. But there is enough in it for me to agree with Terry Hartle that, if enacted, this would be the most sweeping change in higher education policy in decades --maybe since the Higher Education Act was passed in 1965.
The President wants to put private lenders out of business, not surprising for the most liberal president in American history who is clearly a socialist trying to nationalize significant parts of the economy, as the partial takeover of Citigroup today symbolizes (a banker told me yesterday that all his banker friends that took TARP money want to give it back). Obama wants to expand the Perkins program to more people. He wants to make Pell Grants an entitlement not subject to annual congressional review --part of a broader effort to increase presidential power, I suspect. He wants to make permanent a college tax credit that is far more generous than the one it replaces, even giving money to those who do not pay taxes in some cases. He wants to spend, spend, spend, with no indication of the dangerous implications of financing trillion dollar deficits over multiple years, clearly a very likely prospect. The notion that we can finance deficit reduction by removing troops from Iraq and especially by taxing the rich is sheer fantasy, as FDR found out with respect to rich-bashing in the 1930s. Never in modern history have we seen a president who so visibly hates successful people more, and wants to confiscate their wealth to help those who are less successful and productive. Doing that is feasible (as Joseph Stalin, Adolph Hitler and Pol Pot demonstrated), but it comes with serious and always adverse consequences. Trying to divide up the pie more evenly almost always leads it to shrink.
What makes me so depressed about all of this is that I recently read my colleague Andy Gillen's marvelous analysis of federal student assistance programs, which we are going to publish soon. Andy argues --and I agree--that the Pell Grant is the most defensible of all programs, since it does help lower income persons attend college without greatly augmenting the academic arms race. But the Gillen analysis also shows both theoretically and empirically that government assistance programs for others than the truly poor is counterproductive, because it leads universities to successfully capture much of new student aid through tuition increases. Under some scenarios, the net cost of college stays roughly the same for some, rises significantly for others, but falls for virtually no one. The cost to society as a whole unambiguously rises. That inevitably will happened here, I predict, unless stopped by price controls and all the problems that they create --shortages, quality decline, underhanded ways of raising prices (charging for the use of campus restrooms, for example).
There is an argument for the government stopping the subsidy of private lending. Indeed, CCAP has long wanted the Feds to get out of the student lending business. But there is no compelling argument to REPLACE such lending with more direct federal loans -- to try to create a Soviet-style monopoly in the student lending business. Next the president will propose making it a felony for a private citizen to lend money to a college kid, perhaps subject to severe penalties, such as being locked up in a hotel room with Nancy Pelosi for a week.
From the narrow perspective of the colleges, it may appear that they are big winners. Vast increases are proposed in research grants, aid to students wanting to go to college, and even, indirectly, institutional subsidies indirectly via stimulus money for state and local governments. But I suspect this will be fully overcome by the negative macroeconomic consequences of the President's policies. Financing massive deficits will ultimately lead to higher interest rates and/or inflation. The 1970s was the bad period for higher education, as real tuition fees fell as inflation rose faster than college's ability to react. The President's capitalist-bashing policies are depressing an already suffering stock market, and real endowments are plunging, and with that, private gifts. The elite private schools are particularly imperiled.
Other than that, everything is fine.