Government Subsidies Drive Higher Prices in Education

Economists (and non-economists willing to devote about 20 seconds of thought) understand that when you subsidize something the demand for it and the nominal price will both rise. For some reason, though (maybe there are just a lot of people who don't have those 20 seconds), the causal link between subsidizing college tuition and higher prices for that product hasn't sunk in. The Federal Reserve Bank of New York has published a new study which documents this perverse relationship. They conclude:

"We find a passthrough effect of Pell Grants and subsidized loans on sticker price tuition of about 55 and 65 cents on the dollar, respectively."

This is obviously a vicious cycle where tuition subsidies beget higher tuition, which in turn leads to calls for even greater subsidies. This may be exactly what the Democrat party wants, but it's clearly not in the best interests of the public.

It is no coincidence that the product categories with the highest rates of price increases are the ones that are most heavily subsidize -- i.e. tuition and medical purchases.