One of the failings of our public school systems is the lack of basic economic literacy of so many of our students.  I am afraid this has infected our political discourse and policy making to a degree that is frightening and deeply disheartening.  One prime example of this, are attempts to ignore basic things like supply and demand when making public policy.  In my humble opinion, Democrats are guilty of this more than Republicans but a depressing amount of Republicans follow this path as well.

A good example is a hot topic these days: student debt. This is a subject I have some inside knowledge about having acquired far too much student debt in order to achieve an advanced degree from a fancy Ivy League school (fine, a MA from a MAC school, but that is beside the point).

This is also a classic example of politicians blindly declaring something a universal good and then making policy that not only ignores economic reality but undermines the economy and harms people (see, housing policy).  We blithely declare that everyone should go to college and set up a system that allows anyone breathing to borrow large sums of money with no consequences or connection to reality and wonder why the system doesn’t function.  Soon we have millions of people with massive debt and very little to show for it.

The sad thing is that these people are now protesting in the streets and asking for what? More hair of the dog that bit them – more government intrusion and less economic reality.  And it appears President Obama is happy to oblige them.

You don’t have to be a economics major to understand a basic principle: if you make something cheap or easy to acquire, you will get more of it.  And if you have high demand with a limited supply prices go up. Hard to argue with these, right?

Well, these two very basic ideas explain most of what is wrong with the cost of tuition and the staggering student debt load that is being carried in America.  Through student loans and subsidies America has set a policy of pushing everyone no matter what their educational preparedness, emotional or financial stability, nor their future career prospects to go to college; and allow them to borrow money heavily to do it.

There is no need to provide any indication that you can or will pay it back. No connection to any sort of economic calculus whatsoever. You can get a PhD in “Gender Stereotypes in New England Cookbooks” and borrow $100,000 to do it. You can accumulate more debt that you could ever hope to pay back in your lifetime and the government will not blink an eye. And if you default on that loan, quite frankly there are not any catastrophic consequences.

Now, what do you think this does to college tuition? High demand thanks to a cultural assumption that college is required (and honestly a middle class bias against trade and technical schools), and some truth to the fact that post-high school education means more money, means a system where the institutions of higher learning have the upper hand. Thus rising tuition.  Demand is high and there are very few barriers to entry (notice I said entry not completion. It is easy to borrow money and start school, not easy to finish with a degree let alone a marketable one).

So what are we talking about now? How to reform the system so that it better conforms with economic reality? How to develop a system that helps students make better career choices and think about the wisdom of acquiring massive amounts of debt? Educating the public on basic economic realities so that families are forced to make choices and higher education has to serve the needs of students rather than just gobble up money handed out by the federal government?

No, we are talking about how to forgive student debt. Despite the very real burden these debts impose, again I know about this all to well, this is not going to help anyone long term nor is it going to get us out of the whole we are in (and no, it won’t stimulate the economy either). First rule of holes and all that.

Michael Turk posted today on this issue and has a great deal of wise things to offer. He proposes two changes to being to bring economic reality to bear on student loans: 1) Capping student loans and 2) restricting using student loans to actual education. This is reform that acknowledges economic reality and supply and demand, etc.  I highly recommend you read the whole post.

But I want to ask a higher level question: is universal college education really the universal good we make it out to be and is subsidization by the federal government really good policy? I would answer a no to both of those.

Instead, I think we should recognize that in a high tech and information world education is important but it is not the level of education that is important but the matching of education to the type of career you want, have the aptitude and drive to obtain, and is likely to provide the necessary income you need. In other words, we need a market drive system that allows people more choices but with the caveat that economic reality informs, and in many ways drives, those decisions. Students shouldn’t be shuffled off to State U without thinking about what they are going to do for a living. Graduate shouldn’t be allowed to just jump into grad school with no idea of getting a job or paying back their loans.

Second, I think we need the laboratory of states if you will, or at least push decision down to a more local level, to play a much bigger role in this arena. Instead of handing out blanket subsidies to students everywhere through loans, grants and tax policy at the federal level we should allow institutions and states to decide how best to  structure their systems. In perfect libertarian world their would be no subsidies just students and families making choices and the market making adjustments based on those choices. But in reality, states and localities might feel it is in their best interest to help students get the education and training they need – as economic development and as part of a larger educational system.

Fine, but let’s do this based on supply and demand. Let’s help the less fortunate, yes, but not by ignoring the job market or their ability to pay back debt.  If you are a bright student who wants to go into engineering or science education or nursing (or some other field with a clear need and a career path) but can’t afford it I am open to scholarships and incentives. But if you want to get an advanced degree with no plan or idea on what type of career you want and no plan to ever be able to pay back your gargantuan debt, then no you can’t borrow money.

We need to push back against the idea that acting as if the basic facts of economics and human nature don’t exist is good policy or in any way compassionate. Radical, I know, but worth thinking about …