This post originally appeared in Forbes. You can read it there. It is a follow up to the last post. Ideally, you will read them together.
Every time a person uses the phrase “price controls,” I’m fairly certain the fire alarm goes off at the Cato Institute and the soundtrack to “Requiem for a Dream” starts playing in the lobby. A bunch of policy interns saddle up horses and ride through Washington holding lanterns to alert all of the members of Congress and the news media that someone has proposed the idea.
Yet the best plans for actual higher education reform are centered on exactly that: a system of regulations to control prices. Last week, President Obama proposed to tie federal financial aid to colleges’ performance based on a new college ratings system that takes into account the number of low-income students in attendance, tuition prices, and even outcomes like graduation rates and future earnings of students. Yet the President stopped short of more overt price controls, instead preferring to use the college ratings system only to provide incentives to schools that perform well.
The response from many policymakers and college officials has been to cry foul at the government going too far to intervene in the economy. The President’s plan, however, doesn’t go far enough: if we want to tackle the skyrocketing cost of higher education, price controls are the best option we have for keeping college affordable. [Cue fire alarms at Cato].
This idea might sound radical, but it’s not new at all. Rather, it looks eerily similar to a 2003 proposal by Republican House Members – including John Boehner – that called for a “College Affordability Index” and threatened to eliminate federal subsidies for schools that failed to improve their status. It can’t be that radical of an idea if House Republicans were the ones that were pushing the idea a decade ago. Nor are these types of regulations a new idea in the economy at large: prices for public utilities like electricity and water are set by the public sector, as are the fee schedules for Medicare.
Neither President Obama nor John Boehner will ever use the phrases “price controls” or “price regulation.” The phrases elicit a rather unpleasant visceral reaction, akin to the smell of a well-aged stilton. But they are crucial. Tying federal subsidies to something and using public leverage to stop the upward pressure on prices would finally get at the root causes of price increases in higher education. Continue reading