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Congressional price fixing (Scripps Howard News Service) April 2, 2003

Posted by daviddavenport in Newspaper Columns/Essays, Op/Eds.
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Washington has spawned a new breed of politician that deserves careful watching: the Big Government Republican. Elected on a free market platform, this dangerous species catches Potomac fever and proceeds to regulate and tax to fix society’s ills.

The latest Republican leader to contract the disease is Congressman Buck McKeon from California. As chair of the Higher Education Subcommittee, the influential McKeon has proposed government price controls for America’s colleges and universities, announcing he will introduce a bill to limit increases in tuition to two times the rise of the Consumer Price Index (CPI).

Curiously the last political leader to implement widespread government price controls was another Republican, Richard Nixon. It did not work well for Nixon in 1971 – he later admitted, “it wasn’t one of our better ideas” – and will not work in higher education today. We can only hope that Congress will listen closely to several voices of reason before using this blunt instrument on such an important driver of the American economy.

One group Congress should listen to is antitrust economists. These experts teach that price fixing – which is what the law calls price controls – has two economic consequences: It increases demand and reduces supply. You spell that “shortage,” which is the last thing we want in higher education with a tidal wave of baby boomer children already filling up limited college spaces. Fixing a maximum price also becomes a target, so that campuses will shoot for the new government-approved tuition hike.

Another voice Congress should hear is that of higher education economists. They will explain that while college tuition has gone up significantly in recent years, so have the costs colleges must pay. Higher education has always been labor-intensive, with two-thirds of university budgets going to its people. With technology they now must become capital-intensive also and staying on that leading edge is expensive. In fact, the Higher Education Price Index, which reflects the special goods and services colleges must pay for, would be a far more relevant index than the Consumer Price Index. Otherwise, capping prices will likely lead to an erosion of quality in a market where American clearly leads.

Educators and campus administrators should also be in line to speak to Congress. They will remind the regulators that, as David Warren of the National Association of Independent Colleges and Universities pointed out: “Colleges and universities are already dealing with significant cuts in state budgets, endowments, corporate philanthropy and alumni gifts.” At private colleges, 84 percent of students receive financial aid and, while high-priced colleges get the headlines, most students at 4-year colleges pay only $4000 per year in tuition and fees. And how will the legislation address schools with special needs, like the California community colleges that, in difficult budget times, are asked to raise tuition 100 percent, but will still be well below the national average?

Finally, Congress would do well to listen to broader voices that are not inside the system. The world market, for example, says that American higher education is of high quality and well priced, since it sends far more students to study here than any other country. Or maybe they should ask health care consumers what they think about government intervention to fix costs in that industry. The consensus is that health care prices have not been controlled and quality has declined.

Price controls are seductive but they do not work. As a free market conservative, Congressman McKeon should know better. But, as the noted economist Milton Friedman said, one of the greatest enemies of free markets is the businessman who wants free enterprise for everyone else, but seeks a special tariff or government regulation in his own market. The chair of Higher Education Subcommittee would doubtless oppose price controls elsewhere, and he should not be allowed to have them in the industry he most closely oversees. Let’s hope his bill prompts discussion of an important issue, but no price fixing.

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