It has become common knowledge to today’s college students that possessing a bachelor’s degree is almost worthless in terms of starting a career, particularly outside of highly technical STEM fields.  As the image below (ironically brought to my attention because of a share on Facebook by a supporter of Bernie Sanders) shows, there is a common sense that the bachelor’s degree isn’t really worth anything to future employers.


This was not always the case.  If one asks someone who went to college a few decades ago, the college degree was incredibly important to the start of their career.  It signified a milestone accomplishment; operated as a distinctive sign in the job market.  So the question is clear: why has the apparent value of a college education dropped so much that it almost seems worthless now?

Subsidies and the Student

Ostensibly, the goal of subsidies, grants, and other government-provided aid for college students is to make it easier for people to get these important degrees and start off a successful career.  This is certainly a laudable intention (although, as previously noted in other cases that good intentions don’t necessarily mean good results), and the logic seems pretty straightforward: bachelor’s degrees are good and subsidies lead to more of something, right?

The trouble is that this simplistic explanation of subsidies doesn’t provide a whole picture of the results they bring about.  In fact, there are two kinds of subsidies: supply-side (where an organization is paid to produce more of a good) and demand-side (where people are provided funds with which to purchase a good or service).  In an otherwise free market, the supply-side subsidy increases supply, which reduces prices and increases demand until a new equilibrium is reached, and the demand-side subsidy increases demand, which increases prices and encourages more production until a new equilibrium is reached.

With the case of college education, however, supply is not very elastic. To qualify for students to obtain federal aid, colleges and universities must be accredited by third party organizations recognized by the Department of Education.  Building a university – particularly one that can compete with the amenities provided by the small cities that many universities have evolved into – is a costly affair, and one that would be entirely fruitless if the accreditation boards did not recognize your school.  Additionally, with greater increases in the price of tuition, the very aid that caused the tuition hikes itself increases, creating a feedback loop.

As this Federal Reserve study1 illustrates2 :

Changes in sticker-price tuition have a coefficient of 0.40 on the change in Pell Grant amounts (column 1) and this effect is significant at the 5% confidence level. The economic magnitude of this coefficient is large and implies that a dollar increase in Pell Grants going to an institution is associated with a higher sticker price tuition of about 40 cents. The effect of an increase in subsidized loan amounts is higher, at about 63 cents on the dollar, and this effect is estimated to be statistically significant at the 1% confidence level. Finally, we see the effect of a change in unsubsidized loan amounts on sticker price tuition to be smaller at about 25% but still highly significant.

Why Not Make It “Free”?

Given that subsidies, then, make the problem of affording college worse, why not do as Bernie Sanders advocates and make higher education “free” (i.e. totally paid for by government action)?  Then the market price is irrelevant, right?  Government can just set the price and pay what the state deems acceptable!  That will surely fix the problem, no? In short (as has been argued elsewhere), no.  Such an expansion of federal aid amounts in practice to two policies paired together: a 100% subsidy and a price control.  The 100% subsidy on its own would have the same effect as the current subsidies, just to a greater degree.  The apparent cost to the student would, of course, be zero, but the money the government must spend would continue to increase exponentially as the feedback mechanisms described above took effect.  This can be easily illustrated by looking at the cost of state-provided education from K-12 over time.  As seen from the table of expenditure per student presented here3, in constant 2013-14 dollars, in 1959 the cost of education per pupil was $3,000 while it rose to around $12,000 by 2009 (a four-fold increase in 50 years!).  In the end, there simply isn’t any such thing as a “free lunch”. As pointed out by Robert Heinlein in his seminal workThe Moon is a Harsh Mistress4, “anything free costs twice as much in the long run or turns out worthless”.

To counteract this effect, the government often sets a maximum price that it will pay.  This price control does nothing more in practice than to limit supply below the quantity demanded of the good. As a result, a shortage of higher education would result with people demanding access to colleges and universities without the government willing to pay the necessary cost for them to attend.  Without the price mechanism to result in a tendency to an equilibrium matching supply with demand on an open market, the incentive and resources needed to increase supply in response to the demand increases from “free” education don’t exist. The end result is that even fewer people attend school, and getting in becomes based much more on connections and class than the results of mere affordability of tuition (supplemented with scholarships from businesses and schools looking to have the best students).

Moreover, the subsidies don’t only make the price higher, but the push for everyone to go to college make the actual degree one obtains worth less and less, particularly relative to the debt burden one gains as a student.  The restriction of supply beyond the amount demanded reduces the quality of the education5 that is provided (as competing on quality becomes less and less important to obtaining students as customers) and the increased supply of college graduates (particularly in fields selected without consideration of the availability of future careers involving them, as college is now “cheap” or “free”) that does arise reduces the value of the degree once it is obtained. In the end, the impression that college might just not be worth it to employers also becomes accurate, as this article shows6:

Since graduating, 60 percent have full-time jobs, nearly 36 percent have moved back home to live with either their parents or relatives and nearly one-tenth are carrying more than $60,000 worth of debt. Of those who have jobs, more than two-thirds were making less than $35,000 a year and 45 percent were earning $15,000 or less.

Then What Should Be Done?

In the face of this problem, then, the answer is not to double down on subsidy and government control, but the opposite.  Universities should be divorced from state funding entirely.  While this sounds radical, it would actually allow both rich and poor to more easily afford higher education without the result of a spiraling debt bubble.  Without the ever-increasing source of funding from government-backed loans, grants and other aid mechanisms, colleges would be forced to compete not just on prestige and amenities and the “college experience”, but on price as well.  As a result, prices would have to almost immediately drop for almost all universities to enable them to attract enough students to “keep the lights on”, as it were.

Additionally, accreditation would no longer be required to be performed by state-endorsed agencies, as the benefit of obtaining federal student aid would no longer exist.  With more possibility for schools to become accredited, it becomes easier to increase the supply of higher education such that prices would fall even further.  This competition and supply increase results in an ever lower price over time, rather than the currently ever-rising tuition prices.

The answer to the problem of funding education is found not in government, but in the workings of the free market.  The sum total of the voluntary interactions of human beings is more than capable of solving the problem.  We have only to remove the government restrictions and control and let freedom work.  To quote Frederic Bastiat 7, “[N]ow that the legislators and do-gooders have so futilely inflicted so many systems upon society, may they finally end where they should have begun:May they reject all systems, and try liberty; for liberty is an acknowledgment of faith in God and His works.

  1. Credit Supply and the Rise in College Tuition: Evidence From the Expansion in Federal Student Aid Programs, Federal Reserve Bank of New York, Staff Report #733, David O. Lucca, Taylor Nadauld, Karen Shen, July 2015
  2. The choice of the word “illustrate” here is intentional.  Per Austrian economic theory, empirical data can neither prove nor disprove an economic law, only illustrate the effect in the real world.  This is due to the a priori logical nature of the science of economics, the inconstant nature of the human will (people can change their preferences, desires, and choice of action despite the situation being identical), the ability of human beings to learn from experience, and the impossibility of obtaining empirical data in controlled environments as one would with physics or chemistry experiments.  This conception differs from the mainstream economics profession, which tends to have an infatuation with mathematics and empiricism.  From Robert Murphy’s recent book Choice:

    Turning back to economics, Mises’s viewpoint – which nowadays is definitely in the minority among professional economists – is that economists operate more like mathematicians than physicists, in the sense that they deduce theorems from the starting point of human action.  All the student of economics needs to grasp such demonstrations is an understanding of the concept of action and the patience to follow chains of logical deduction.  The economist cannot “prove” economic laws by pointing to historical outcomes or even statistics concerning prices, unemployment, and other items.  For Mises, this would be as nonsensical as a geometry teacher telling her class to go out and measure hundreds of right triangles to establish the truth of the Pythagorean theorem.  At best, such an activity would illustrate Pythagoras’ result, but under no circumstances could a student come back with measurements that would prove the teacher either right or wrong.

    For more information, I recommend this article. 

  3. SOURCE: U.S. Department of Education, National Center for Education Statistics, Biennial Survey of Education in the United States, 1919-20 through 1955-56; Statistics of State School Systems, 1957-58 through 1969-70; Revenues and Expenditures for Public Elementary and Secondary Education, 1970-71 through 1986-87; and Common Core of Data (CCD), “National Public Education Financial Survey,” 1987-88 through 2011-12. (This table was prepared July 2014.)  
  4. The Moon is a Harsh Mistress, Robert A. Heinlein, 1966 
  5. My Bachelor’s Degree Means Nothing, Steve Patterson, August 7, 2014 
  6. College’s Value Added, Amanda Fairbanks, New York Times, January 7, 2011 
  7. The Law, Frederic Bastiat, 1850