August 27, 2007

Econ 101 for Politicians

Posted in Uncategorized at 3:12 pm by Ian

It may be unreasonable to think that most politicians can take time out of their busy reelection schedule to learn some basic economics. But is it so much to think that they have someone on staff willing to point out some of the more obvious idiocies? (Note to any Congressional aides who happen to read this blog post: I am available as a consultant.)

Recently, I received an email from my Congressional Representative, Lois Capps, who was brimming with excitement over the student aid package the House had just passed. Among other things, it would

  • Increase money for existing grants
  • Decrease student loan interest rates
  • Add some more grants

It was claimed, in the email, that this would reduce the cost of college.

It will not.

The reason that college costs a lot is that more and more people keep wanting to go to college, and the number of quality colleges is not increasing nearly as quickly. Reducing the cost of college would require either convincing fewer students to go or building more colleges. Providing cheaper money for college in the form of grants and subsidized loans will increase the money supply, increase the number of students trying to go (some who would have been dissuaded by economics no longer will be), and cause further increases in the cost of a college education (some of which will now be borne by the government).

For more examples of this kind of thinking, see the Hybrid tax credit that was offered a few years ago. At the time, Priuses were so in-demand that people were paying thousands above sticker to get them. Congress came up with an innovative plan to give every car-shopper an extra couple thou to spend on a hybrid, which caused them to pay even more over the sticker price, thus efficiently transferring $3000/Prius from the US Treasury to Toyota. Also, note the housing market of the last several years, which amazingly failed to become more affordable when interest rates dropped to historical lows.

Speaking of housing, Congress has a brilliant plan for that, too. John D. Dingell (D-Mich.) wants to eliminate the mortgage tax exemption for ‘McMansions’. Any house larger than 3,000 square feet would lose the mortgage exemption. Without going into too much detail, I’ll simply say that this is an excellent plan to solve the crushing problem of a dearth of 2,999 square foot houses that currently plagues our nation.



  1. JT said,

    I’m always in tune to how saying the same thing with different words really says something different. I’m sure your congressional representative really meant to say that it would help make college more affordable, rather than reduce the cost of college, since that would help her argument much more.

    For example, if my college costs $20,000 a year, and they gave me a grant for $10,000, that makes it easier for me to pay for college. If they increase that grant amount to, say, $15,000, it makes college much more affordable for me, since I now have to only come up with $5000 instead of $10,000. The college can then, in turn, use my admission (as well as many others) as justification to raise tuition to $22,000 the next year. I will now need $7000 to pay for college the next year, which is still more affordable for me than the original $10,000, while at the same time increasing the cost of college.

    So, really, I don’t think her problem is so much economics as it is language presentation. Which I would also be happy to help her (or anyone else) for a nominal fee.

    On an uninteresting side note, I would have been quite happy if the government had actually paid me $15,000 to attend my college. Now that would’ve gotten me somewhere.

    How much you want to bet Mr. Dingell owns one or more houses at slightly under 3000 square feet?

  2. Ian said,

    She may well have said “affordable”. I was paraphrasing. However, when I say “cost”, I mean effective cost to the student, not sticker price.

    I realize that grants actually do make school cheaper for a few students. And I have nothing against that. The part of this plan that is misguided is reducing interest rates across the board. The vast majority of college students take out loans (I think it’s 80+% at this point), so subsidizing interest will just drive the price up for almost everyone.

  3. JT said,

    Point conceded.

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