Outrageous Education Costs Caused by School Subsidies

 

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by Mike Holly

American Against Monopolies

September 30, 2020

The monopolies and oligopolies of non-profit schools dominating America's elementary and secondary (K-12) and higher education take advantage of a lack of competition to cheat students and the country by demanding outrageous and skyrocketing prices, even while offering dubious quality. Politicians have suppressed competition by awarding their favorite non-profit public and private schools with preferential subsidies, mainly appropriations and tax breaks respectively. Instead, government should foster competition by assigning equal subsidies for each student and granting them only to the school of each student’s choice.

Non-profit schools, who are supposed to serve society to justify receiving special benefits, lack the profit motive and competitive pressures to expand supply to educate enough students, especially from low- and middle-income families, compete on price and quality, and innovate with new educational technology. For example, teachers tend to write lecture notes, select textbooks and design on-line learning that does not present the material in a readily understandable way. Meanwhile, entrepreneurs and for-profit private schools have been incentivized by subsidy disadvantages to seek quick profits through slick sales jobs for increasing enrollments while providing lower-budget schooling.

American education serves the interests of politicians engaged in a battle for political power. Those on the left back increasing taxes and favoring public schools with government appropriations, while those on the right support reducing taxes and favoring non-profit private schools of religions and the rich through tax breaks. This is typical of many industries, with the left backing monopolies in the public sector (socialism), and the right supporting monopolies in the private sector (corporatism). Politicians are elected with help from political donations from those who preferentially gain from the monopolies (e.g., public school teachers) at the expense of competitors and consumers. Schools of the left and right even politically brainwash students.

Economists serve politicians and monopolists on the left and right by largely ignoring the problems with subsidies that create monopolies and oligopolies. For example, education economist Clive Belfield defines competition without even mentioning school subsidies: “Competition exists when multiple providers of a service, who all must adhere to the same legal rules and regulations, are available to meet the demands of consumers.” However, the United Kingdom’s Office of Fair Trading admits: “An unintended consequence of subsidies is that these can distort competition between firms undertaking similar activities, particularly when subsidies are large and only available to a selection of the firms that compete with each other.” Market distortions create market failures.

Democrats, liberals, socialists and bureaucrats tend to promote non-profit public schools through government appropriations. They claim markets of private schools cannot provide a good educational system. The economists of the left often theorize markets fail in service industries like education due to market imperfections like consumer ignorance, the influence of high-paid professionals like teachers, the length of commutes, limited building capacity, and/or student snobbery. Although teachers clearly have more knowledge than consumers (information asymmetry), especially in the K–12 market, recent work by Michael Lovenheim of Cornell University and Patrick Walsh of St. Michael’s College suggests school choice may be part of the solution. The problem is the government has failed to put private schools on a level playing field of subsidies with public schools when testing them side-by-side. 

Leftist economists, like Nobel Prize winner Paul Krugman, and politicians, like Bernie Sanders, claim the cost problems at public K-12 schools and colleges have been caused by reduced government funding to many schools. But virtually all public K-12 schools have been funded generously, even in indigent districts. They claim one cause of increased tuition at state colleges is the reduction of state and federal appropriations to many schools, causing the institutions to shift the cost over to students in the form of higher tuition. However, that doesn’t explain the skyrocketing total costs. Many Democrats, including Presidential candidate Joe Biden, threaten increased budget deficits by promising increased spending at many public schools, including free education at public colleges, without promoting competition to reduce costs and improve quality.

Republicans, conservatives, corporatists and even many libertarians tend to not only promote non-profit private schools of religions and the rich through tax breaks, but also incentivize for-profit companies to fail with subsidy disadvantages. They claim to favor “school choice” but won’t make that choice a real one by providing equal subsidies to schools. Politicians and economists of the right and libertarianism tend to falsely blame high costs on students. Many blame K-12 problems on the family life of students.

Professor Daniel Lin of the Department of Economics at American University explains: “Why is Higher Education So Expensive? It is basic supply and demand. We’re seeing enormous increases in demand for higher education….the payoff from a college education has been growing over time, and….federal and state governments have been giving subsidies to students, most notably through government-backed student loans but also grants and tax credits.” Dr. Lin claims: “Since most Universities can’t keep up by increasing supply, tuitions must rise.”

Like many on the right, including President Trump, Dr. Lin concludes that government should limit subsidies to college students, especially loans, while failing to explain why colleges can’t increase supply. However, prices wouldn’t rise if the increased demand created by students was met with a countervailing supply response by schools. The problem is the supply of public schools is limited by funding from politicians, non-profit private schools have limited funding sources that can utilize tax breaks, and for-profit schools are extremely uncompetitive due to huge subsidy disadvantages.

Although Nobel Prize winning economist Milton Friedman recognized that competition was distorted by appropriation subsidies granted to public schools, he failed to consider the tax subsidies granted to non-profit private schools. The right and libertarians tend to seek to reduce taxes by providing tax breaks to the private schools of religions and the rich, even though it tends to create oligopolies. They also seek to reduce spending at public schools even though that could result in denying many students access to a quality education. Many Republicans, including President Trump, threaten to lower the accessibility and quality of education by reducing spending without promoting competition with a level playing field of subsidies for all schools.

Since the end of the 19th century, the government has provided subsidies for most of K-12 and much of higher education. Government subsidies are driven by the assumed and likely legitimate market imperfection that children and young adults are often unable to educate themselves, pay others to teach them, or rely on their parents to pay for their schooling. However, instead of subsidizing education directly through students, government has provided most funding indirectly through non-profit schools that form oligopolies. If all subsidies were to follow students, they could still receive a free education and competition to be their school of choice could put downward pressure on prices offered by schools. This is significant since U.S. education now costs about $1.3 trillion annually. 

K-12

K-12 education costs about $650 billion annually.

Non-profit public schools enroll over 90% of K-12 students. Public schools have outnumbered private counterparts since the Progressive era of socialism started in the 1890s, because they are free to students. Funding is provided by the government, now 45% local, 45% state, and 10% Federal. Because revenues come largely from local property taxes, children living in wealthy communities receive more funding, despite recent state reforms meant to equalize it. The children of the wealthy also receive higher test scores, admissions to better colleges and eventually more wages.

Non-profit private schools enroll less than 10% of K-12 students. In the nation’s infancy, schooling was provided mostly by small private schools established by the Catholic Church. Today, private schools for churches and the wealthy benefit from tax breaks, including on donations, earnings on past donations, and past donations converted to long-term assets like buildings.

About three-quarters of these, or 7.5% of total K-12 students, are enrolled in parochial schools. They offer a bit smaller class sizes and more personal attention than public schools, but pay teachers less. Costs are reduced by large support from churches, which receive tax-deductible charitable donations and tax-exempt earnings from endowments. Annual tuition is about $8,000. Tuition is not directly deductible from federal income taxes, but is deductible in some states.

The remaining one-quarter of the 10%, or 2.5% of total K-12 students, are enrolled in non-sectarian schools. They often enjoy expensive facilities and tend to have far more children from high- than low-income families. Costs are reduced through tax-deductible donations and tax-exempt earnings from investments within endowments. Still, annual tuition is over $20,000. In 2017, Trump’s tax reform started allowing parents to deduct up to $10,000 per child from income or capital gains taxes through 529 plans whose regulations tend to favor the wealthy. Tax benefits in some states have also catered to the wealthy.

For-profit private schools have been unable to achieve a significant share of the independent K-12 market. Before 1890, the masses couldn’t afford to send their children to school, largely because incomes were stifled by mercantilist economic policies favoring monopolies. Since 1900, socialistic government appropriations have promoted domination by public schools. In today’s corporatist America, large subsidy disadvantages discourage for-profit entrepreneurs from even trying to compete in the long-term. Promoters are incentivized to form unsustainable sham for-profit private schools, sometimes called “voucher mills,” that focus on good sales jobs for short-term success at increasing enrollments while providing lower-budget schooling.

Since 1965, the number of elementary school students requiring subsidization has remained between 27 and 35 million. Meanwhile, national spending per student on K-12 has more than tripled even after adjusting for inflation (Figure 1).

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Although the government keeps giving the public K-12 school oligopolies more money, average scores for U.S. high school students on standardized math and reading tests have not improved much since the 1970s (Figure 2).

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The U.S. is now spending more on elementary and secondary education than virtually all countries except Norway. Yet, math scores are significantly below those of students from most countries in Asia and Europe, and also Canada. Only six of 78 educational systems tested have a greater measurable difference between top and bottom math performers than the U.S.

Government has promoted school choice pilot programs that have provided vouchers or other subsidies to low-income families to pay for their children’s education in a private school. Studies have shown randomly selected students have had even lower test scores than those from public schools. However, the subsidies have been awarded to private schools only temporarily and at funding levels far below that provided to public schools. Vouchers typically range from only $4,000 to $5,000 per student for the school year. The left has falsely used the pilot programs as evidence that competition doesn’t work.

During pilot programs, public schools have been forced to improve their quality when confronted by competition from private schools. But only enough to discourage competition, likely because private schools lack the subsidies to compete in the long term. For-profit private schools are at an even greater subsidy disadvantage than non-profit private schools. Politicians have failed to foster level playing fields of subsidies for long-term competition to lower costs and improve quality.

At the 2017 Value Voters Summit, President Trump told religious conservatives that “my plan will break the government monopoly and make schools compete to provide the best services for our children. The money will follow the student to the public, private or religious school that is best for them and their family.” Trump even devised a plan to provide each student with vouchers totaling $12,000 per year, although less than $1000 would come from the Federal government with the rest coming from the states. Moreover, continued tax breaks would favor non-profit private schools of religions and the rich. In 2019, Trump unveiled Education Freedom Scholarships, which raised funds through voluntary tax credits totaling only $5 billion.

Higher Education

Higher education costs about $450 billion annually.

Non-profit public colleges and Universities enroll 60 to 75 percent of higher education students (i.e., depending on the course load considered necessary to define a student). Government funding started with the Morrill Act of 1890. Public colleges are now funded by about 40% state and local governments, 12% federal, and 48% tuition. States spend $95 billion, or $7,500 per student. Public colleges also receive tax-deductible donations, earnings on past donations, past donations converted to long-term assets like buildings, and Federal research grants.

Non-profit private colleges enroll 20 to 30 percent of students. Typically, they originated before 1900 as religious schools funded with donations from churches and the wealthy (e.g., robber barons of the Gilded Age of mercantilism). Many have built huge endowments over time by soliciting tax-deductible money and other financial assets from donors, and investing to generate tax-exempt earnings for future expenditures. They also benefit from past donations converted to long-term assets like buildings, and Federal research grants.

Current expenses at non-profit private colleges include grants and scholarships awarded to most students, according to financial need and academics, averaging $14,600 per student. When subtracted from tuition, these private colleges become more affordable, although still not nearly as inexpensive as public colleges. These colleges tend to enroll students from wealthy families that can afford higher tuitions. And tutors.

Because non-profit private colleges often have larger endowments benefiting from tax deductibility and exemptions, and also receive more Federal research grants, some are even more subsidized than some public colleges.

  • Tax Deductions and Exemptions. In 2018, donations to educational causes including higher education was nearly $60 billion and continued to exceed all other types of charitable giving except to religious congregations. Donors can reduce their taxes by deducting personal donations from income. Moreover, the investment income from endowments is exempt from federal tax. In 2017, the 40 or so colleges with endowments worth at least one-half million dollars per tuition-paying student were required to start paying a token 1.4% tax on their net investment income, apparently as a penalty for failing to educate more low-income students. This compares favorably to the capital gains tax rate of 20%. Since these schools likely earn at least $25,000 in investment income for every student, they probably paid taxes of about $350 per student for a subsidy of $4,650. Non-profits are tax exempt on other sources of income, such as rents from school-owned housing. In addition, state and local governments exempt their facilities from property and sometimes sales taxes.
  • Research Grants. In 2013, the Federal government provided nearly $25 billion in research funding obligations paid over several years. The grants don’t have to be paid back, even though they provide for overhead expenses and intellectual property rights. Stanford has been benefiting from a federal research grant used to create search engine technology after they licensed the patents only to Google and the tech company used it to create monopoly power.

For-profit private colleges (e.g., the University of Phoenix) enroll the remaining five to 10 percent of higher education students. They emerged in the 1970s during the Deregulation era of corporatism. For-profits have usually been founded by promoters before receiving initial capital and low-interest loans from international banks, hedge funds and retirement funds. They have promised real-life training, on-line education and opportunities for students who couldn’t qualify to attend non-profit schools. But they don’t receive much direct subsidy and rely on tuition for 91% of funding. Students at these colleges are usually subsidized by loans and some grants from the Federal government. For-profit colleges started as the darlings of Wall Street, but about 40 percent have closed in the last few years.

From 1965 to 2010, college enrollments increased rapidly with higher percentages of high school students seeking better job opportunities (Figure 3). Since 2010, enrollments have started dropping back, likely due to diminished job prospects and increasing tuition.

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The number of four-year non-profit public and private colleges never expanded much to meet demand (Figure 4). They expanded total student enrollment, but never enough to foster competition. The number of for-profit private colleges and enrollments grew significantly until 2010. The recent loss of for-profit schools and students has likely been due to declining total U.S. enrollments and subsidy disadvantages rendering them uncompetitive with non-profit schools.

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Since the 1970s, the imbalance of supply and demand has led to a more than tripling of tuitions at non-profits even after adjusting for inflation (Figure 5). From 1965 to 2017, the Consumer Price Index increased 2653% for higher education, compared to 1877% for health care prices demanded by this other monopolized industry, and less than 900% for all other major items, including food and housing. Dr. Lin notes they have been wasting their excess revenues on administrative staff, fancy student centers, dining halls and athletic facilities. Tuition and total costs don’t even include at least $7,000 per year needed by students for room and board. According to the Organization for Economic Cooperation and Development (OECD), the U.S. spends more per student on colleges and Universities than every other major country in the developed world.

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Since the 1970s, states have responded to skyrocketing costs by reducing the percentage of college costs covered by appropriations, and colleges have returned to charging about half as tuition, like they did in the early 1950s (Figure 6). But shifting about 15% of the costs from government back onto students doesn’t begin to account for the 200% rise in tuitions.

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National spending per student at public colleges by both government and tuition has quadrupled since 1965 even after adjusting for inflation (Figure 7). Since the percentage of total spending by government increased from the 1950s and then decreased since the 1970s, total spending has accelerated more consistently than tuition.

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Since the early 1990s, the Federal government has responded to skyrocketing tuitions by providing students with more loans, grants (e.g., Pell Grant) and tax credits (Figure 8). But grants favor increasing numbers of students from low-income families, who still require loans, while the middle class is forced to rely mostly on loans. Since graduates are often unable to secure financially-rewarding jobs, many become burdened by debt and some default on loan repayment, especially students attending for-profit schools. College enrollments are declining among the middle class.

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American non-profit colleges and Universities receive among the highest rankings in the world from U.S. News. However, the highest ranked are usually private and some public colleges benefiting from the largest tax-advantaged endowments and also federal research gifts. Unsubsidized for-profit private colleges are considered lower quality.

Top-rated colleges, especially through their economics departments, have favored their donors and graduates by promoting the monopoly power that has dominated virtually all industries within America’s evolving economies since the nation’s birth: mercantilism before 1890, socialism until the 1970s, and corporatism since. In 1965, colleges started the ongoing health care crisis by limiting the supply of medical professionals while demand has been increasing. Graduates donating to their alma mater are supporting monopolism, elitism and pseudo-meritocracy, enhancing school prestige and cronyism, and gaining favoritism for their children’s admissions and scholarships. Non-profit schools help justify meritocracy and wealth disparity for the monopolized economy.

Government caused for-profit colleges to fail. They provided for-profits with some short-term opportunities by limiting enrollments at non-profits, but denied them the opportunity to compete against the non-profits in the long-term by leaving them with subsidy disadvantages. Government loans to students of for-profit schools do little to improve the competitiveness of the schools. The lack of competitiveness incentivizes for-profits to seek quick revenue and profits through slick sales jobs while providing lower-budget schooling. The more subsidized schools have improved just enough, for example adding on-line education, to prevent for-profit schools from competing in the long run. The left has falsely used for-profit colleges as evidence that competition doesn’t work.

Edtech

Education technology (Edtech) companies represent less than one percent of the total education industry. The government encourages the public schools to buy products and services from for-profit companies. However, non-profit schools lack the competitive pressures needed to overcome internal resistance to solutions that could threaten their oligopolies.

Many families don’t like on-line education offered by non-profit schools. Studies have shown computer usage has not improved math scores, and has lowered those for reading. Bill Gates and other tech billionaires have invested over a billion dollars into failed educational reform for low-income students based on monitoring teacher effectiveness. Such bureaucratic control has not been effective either.

The current coronavirus pandemic is increasing the need for social distancing, the demand for on-line education, and opportunities for for-profit and technology companies. However, on-line education will likely continue to fail as long as the government creates oligopolies with subsidies favoring non-profit schools.

Recommendations

During the 1950s, Milton Friedman proposed vouchers that could be used by students to pay tuition at private schools, and in turn could be redeemed by the schools for payment from the government. He sought “a means to make a transition from a government to a market system” by enabling “a private, for-profit industry to develop that will provide a wide variety of learning opportunities and offer effective competition to public schools.” Unfortunately, vouchers have been awarded discriminately, temporarily, at low funding levels and to non-profit private schools already benefiting from tax breaks.

Vouchers should effectively and systematically follow all K-12 and higher education students. Voucher amounts for for-profit private schools should be commensurate to subsidies granted to non-profits. Students attending for-profit schools should even temporarily receive a bit higher accompanying payment to level the playing field for past subsidies converted to long-term assets like buildings at non-profits. Equalizing school subsidies with vouchers would force all colleges to compete for students to increase educational opportunity, lower prices, improve quality and incorporate new technology. The use of vouchers should continue at least as long as preferential policies favoring monopolies in all industries is creating wealth disparity.


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  • Mike Holly
    published this page 2020-09-30 19:26:34 -0500
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