College Inflation and market distortions

The problem is incontrovertible. Every year, the price of a college education rises. But not only does it rise, it rises significantly above the nation’s general rate of inflation, as measured by the federal Consumer Price Index (CPI). Since 1980, the average price of a college education has outpaced the CPI by at least 160 percent. The problem is so severe that American families are said to have accumulated more college debt during the first five years of the 1990s than in the previous three decades combined.

To ascertain the cause of this pronounced inflation, it is necessary to comprehend market forces by grasping the theories of economics. In this case, since price increases are the only concern, the fundamental “Law of Supply and Demand” is a particularly useful model. Implicit in this Law of Supply and Demand is the Law of Demand.

The Law of Demand addresses the negative relationship between price and quantity demanded. This theory states that prices will rise as demand mounts and fall as demand diminishes, all things being equal.

In the case of the college education market, demand has consistently remained high. And as the demand for a college education continues to expand, prices will undoubtedly also remain high.

The Law of Demand accounts for the excessive inflation in the post-secondary education market. Had there been limited national demand for a post-secondary education, prices would have inevitably declined. High demand tends to produce higher prices; low consumer demand tends to produce lower prices.

The free market, however, eventually tends to drive prices toward a market equilibrium, rendering prices neither too high nor too low, and thereby allowing a sufficient number of goods and services to be made available to consumers. This naturally occurs for two reasons. First, when demand gets too high, prices also get too high; and when prices get too high, demand then tends to falter, for the rather obvious reason that the product or service then becomes too expensive to be desirable (i.e., in demand). And, second, when demand slows, prices fall. But when prices fall, demand tends to surge because the product suddenly becomes less expensive and therefore more attractive than before, at the higher price.

In the case of the price of a college education, however, this natural market tendency to head toward market equilibrium has not resulted, as the inflation rate for this service continues to surge substantially ahead of the general inflation rate. Why has the post-secondary education market resisted market equilibrium?

Under the general theory of demand, as college demand rises, prices should also rise. This part has most certainly occurred. However, the next step–a return to market equilibrium–has never materialized. After market demand increases tuition rates to discouraging levels, market demand should subsequently fall right along with prices. Yet this never happened in the education market.

Obviously, some market distortion must therefore be taking place, skewing the natural cyclical progression of supply and demand. In a completely free market with perfect competition, the Law of Supply and Demand would hold: no single buyer or seller could influence prices.

Yet we do not have a completely free, laissez faire system in the education market; instead, we have a system tainted and, indeed, corrupted by massive government intervention in the form of federal, state and local education subsidies. These government subsidies come in the form of grants, loans and tax credits. This year the
College Board reported that a record $64 billion in government-sponsored financial aid was made available to nine million college students last year.

The enormous political demand for college education is not likely to decrease in the foreseeable future. Indeed, the demand is only likely to increase (along with tuition hikes). As prices continue to surge with demand, more government subsidies (market distortions) will ironically be offered to help the voting public cope with the high cost of college tuition. Yet this artificial political demand is the very cause of the inflation itself.

The only solution is to eliminate such market distortions altogether, so that natural market equilibrium can finally be attained. This can be readily accomplished through the swift elimination of all government educational subsidies. Once this government-induced market distortion is eradicated, the Demand cycle may complete its natural course: (1) High demand increases prices; (2.) high prices reduce demand; (3.) lowered demand reduces prices; (4.) reduced prices raise demand to the balanced, acceptable market level (equilibrium).