Category Archives: Unintended consequences

Unionvergnügen

In the words of Bob King, President of the United Autoworkers Union (UAW), the UAW has no long-term future if they cannot expand their membership into Southern auto plants. And it looks like that day may come sooner than anyone expected: workers at the Volkswagen plant in Tennessee recently voted by a margin of 53-47% against joining the UAW. The loss is even more stunning considering that VW welcomed and actively encouraged the UAW with open arms. Why were they so welcoming? Not only do labor interests make up half of the Germany based VW board, but VW was also keen to establish a German-style “works council” in their American plants. However, American labor law barred them from doing so – unless workers were unionized. Oh the irony; anti-union laws actually induced a company to invite unionization. Talk about unintended consequences!

But all is not lost. Perhaps if Bob King and the rest of the UAW were to adopt a more libertarian stance toward labor laws and thus began a push to have all such laws repealed, the UAW might actually have a fighting chance. Why do I say this? Consider the vote; 47% of the workers actually WANTED union representation, but, as with union voting and democracy the “majority rules” so the desires of the minority are simply squashed and ignored. But what if the 47% that wanted to join were simply allowed to join and the 53% that didn’t want to join did not? Would the sky fall? VW could deal with the 53% just the way they always have and then also deal with the newly unionized 47% however the union wished to proceed. If the union could accomplish those things it claimed for the workers then more workers would join of their own free will. And if the union failed to deliver, then workers would be free to leave as well. If VW wants to establish a “workers council” then let them. Why should some law stand in their way? But this law slashing cuts both ways. If the UAW approached say a Toyota plant but Toyota wanted nothing to do with the union then that is also their right. There should be no law forcing Toyota to negotiate with a union just as there should be no law forcing an employer to hire certain people. Freedom to choose with whom you associate is a fundamental natural right and it should not be abridged for wholly arbitrary and misguided notions of “fairness” implemented by sore losers that didn’t get their way.

Now some might say “oh that could never work, the non-unionized would “free-ride” off the non-exclusionary benefits of union backed negotiations.” Beyond better candy in the vending machine or more comfortable climate control settings I’m not really sure what these benefits could be, but even if that were the case, surely the value of the exclusionary benefits should vastly outweigh the trivial non-exclusionary fringe benefits of union proximity. One may derive some personal enjoyment benefit from viewing the country club’s grounds but such benefits pale in comparison to the amenities that the paying members may enjoy. If that is not the same situation with a union then that is one pathetic union.

In order for everyone to exercise their right of free association all laws relating to unions and labor must be repealed. Laws that compel union membership are as injurious to liberty as laws prohibiting it.

Risky Business

When Nancy Pelosi said “we have to pass the bill so that you can find out what’s in it” she wasn’t kidding! Four years later the adventure into this 906-page behemoth continues. Apparently taxpayer funded bailouts of insurer losses is one little tidbit they tried to sweep under the rug. This provision is part of the innocuous sounding “Section 1342. Risk Adjustment.” This section of the bill is intended to insure the insurers against their own bad decisions. This is achieved by compelling all insurers to participate in the “risk corridor” program. This program requires them to fork over progressively larger portions of what the government deems to be “excess profits” to offset any “excess losses” by their competitors. The idea is that robbing Peter to pay Paul will keep the program revenue neutral. This neutrality rests on the dubious assumption that the distribution of excess funds from company A will always offset the deficit from company B. Even if that assumption were true, the goal here is flawed. This program will engender a government run cartel of insurance carriers with zero incentive to reduce costs. Too efficient? Make too much? Sorry, we’re gonna’ give it to your competitor. The insurance industry essentially becomes a single federalized fascist monopoly; administered by the federal government but held by private entities. The veneer of private ownership in name only is maintained only to fool the “useful idiots” into believing we still have a “free” market.

Even if one is a proponent of Obamacare, it should be recognized that this provision will do more harm than good in terms of reducing cost. In fact it will have the opposite effect: it will drive the best insurers out of business while subsidizing the worst, thus ensuring ever-increasing costs. Only free competition can have the correct effect: drive the worst out while rewarding the best. Any well-run business maintains capital reserves from flush years to offset potential future losses in lean years. In other words a well-run business will take care of itself. Forcing such a business to hand over its reserves to its more profligate competitors and expecting those prodigal siblings to change their ways is naïve at best, willfully ignorant at worst. But wait, there’s more!

As is typical for such bills there is an underlying assumption that nothing could ever go wrong, therefore it lacks any provision to cap how much the feds may have to dole out under this program. In other words the American taxpayer will be obligated to write an unlimited blank check to cover health insurance industry losses (the program is slated to only run from 2014-2016, but you can be certain industry lobbyists will ensure it is renewed in perpetuity). The moral hazard arising from this program will incentivize insurers to steal business away from their competitors by undercutting them on premium. The better-run insurers won’t cut as far and will lose customers; the more poorly run insurers will cut deeper (counting on a bailout if they go too far) and gain customers. Eventually, once the more prudent insurers are all out of business, all that will remain will be the insurers counting on their annual bailout. There is no free lunch. Premiums may decrease on the front end, but when April 15 rolls around or your inflation riddled dollar buys you less, you’ll be paying it on the back end (I leave it to the reader to decide if that metaphor is figurative or literal).

Ignore the Cause and Suffer the Effects

The Washington Post recently published  a retrospective account of the deaths of 91 children in 2012 to highlight the one year anniversary of the senseless shooting rampage at Sandy Hook Elementary in Connecticut in December 2012. Clearly this article was intended to strike an emotional chord that would resonate with any sane person. The media revels in painting emotionally charged landscapes in the hopes that it will rouse the public to call on their saviors in government to save us from ourselves. And while the stories are indeed heart wrenching they actually undermine the narrative that these deaths are entirely a consequence of the prevalence of guns in society. Although the deaths were indeed the direct result of gun fire per se, the stories broadly fall into two categories of causation that have nothing to do with guns themselves being the causative agent of death. The first category is the most heart wrenching: that of the child’s parent or paramour of the parent being the killer. These were not accidental shootings; these were clear and deliberate murders of these children at close range. Had there been no guns available in these situations clearly a knife or any large blunt object would have done the job. In other words, absent guns, the outcomes for all of these stories would have been tragically identical.

The second category is that of accidental crossfire in drive by shootings or other gang activity. Obviously distance based killing is more easily facilitated by guns, however consider the fact that gangs are simply groups composed of criminals (people who already ignore all laws) so how could one reasonably expect even a total ban on all guns to have affected such activity? Criminals are no more going to obey laws banning guns than they obey laws against murder or theft. However, it is important to step back for a moment and ask why do these terrible drive by shootings occur? What is the source of so much gang violence? Drugs, or rather the prohibition of drugs. The prohibition of an economic good drives up its price and thus the incentive for people to engage in providing that economic good to those wiling to pay the high price. However, being outlawed, the trade of such goods lacks any formal legal protection, therefore those parties involved in its trade have no choice but to resort to violence in order to settle their disputes. The result? Far more innocent people being killed by drug prohibition related violence (as well as wrong-address-no-knock police raids) then have ever or could have ever been harmed by the drugs themselves.

If we are truly desirous of decreasing not only gun violence but all violence we must address the causes and not simply attempt to put band aids on the effects. Absent drug or other economic goods prohibitions all gang violence would cease insofar as most if not all gangs would dissolve as their central raison d’être (exorbitant profits from the sale of prohibited goods) would cease to exist. In terms of violence committed by parents against their children it is immaterial to question the means by which such violence is perpetrated: gun, knife, rope, hands – you can’t ban them all. All we can do is resolve to be more engaged with our neighbors in order to see the signs of potential violence.

If we wish to change the society we live in, we must individually act to be part of that change. It is our responsibility, not government’s. Delegating our wishes to government is the act of the indolent and cowardly; too lazy to try and persuade and too afraid to carry out the violence needed to force your neighbors to follow your worldview.

Obamacare Kills the Family Farm

Obamacare is poised to put the family farm out of business. Although not directly applicable to the food industry, it has spawned sibling legislation whose ends are aligned with the Obamacare mandate of lowering health care costs for the nation – by any means necessary. Toward that end the “Food Safety and Modernization Act” was passed in 2011 which has now spawned a new round of FDA rulemaking known as proposed rule “Current Good Manufacturing Practice and Hazard Analysis and Risk-Based Preventive Controls for Human Food.” The primary stated goal of this proposed rule (according to the FDA) is to “reduc(e) the public health burden of foodborne illness associated with contaminated produce.”  A worthwhile goal, I’ll grant that. However setting aside for now the question of constitutionality of a federal agency laying down rules to govern activity that is wholly intrastate in nature, there are a number of problems with both the implementation, results and costs associated with this end goal.

Some of the more absurd components of this proposed rule include (a) WEEKLY testing of water “before it touches the surface of any fruit”, (b) where manure has been spread one must wait 9 MONTHS before harvesting, and (c) the maintenance of DAILY clipboards of records of every event that takes places on the farm related to food production. As with any regulation there is a cost involved. Irrespective of the industry it is always the large entity that has the advantage relative to its smaller competitors in terms of bearing the additional costs of new regulation. Therefore it should come as no surprise that this proposed rule would have the effect of putting many small farmers out of business (there are exemptions for “small” farmers, however these merely delay the timeframe of implementation). But don’t take my word for it, you can read the comments of such farmers themselves at the FDA’s comment site.

Now at this point the progressive may be protesting, “But, but, this rule will save lives and if some small farms must be sacrificed to achieve that goal then as long as the greater good is being served this is an unfortunate side-effect.” Although seeing as how most progressive types are proponents of buying locally grown produce (itself not a bad concept) I imagine their heads will explode when they realize this “greater good” will have the net effect of putting so many small farmers out of business it will all but kill the “buy local produce” industry.

Even by FDA’s own best estimates this rule would potentially reduce the incidence of food borne illness by 2-5% (i.e. save no more than 67 lives per year or about $14 million per life). And while I would gladly spend $14 million to save the life of a loved one, I don’t have $14 million nor do I (or anyone) have the right to use government to fleece my neighbors pockets for that $14 million on the off chance it might save a life I care deeply about.

The emotional response of “we can’t put a value on a human life” runs afoul of the economic law of diminishing returns. Whenever a brand new type of regulation was introduced (pollution, car safety, etc) we witnessed massive improvements – because nothing existed before that (not that such regulation was necessary however, seeing as how these types of regulations were merely a response to prior government induced market distortions). As a hypothetical example, seeing that $1 billion in regulatory costs reduces deaths from 1 million to 1 thousand legislators naturally will assume even tighter regulations costing another $1 billion will do the trick – but it doesn’t work like that. Those new regulations reduce deaths to only 900, another billion to 850 and so on. The low hanging fruit was picked with the initial round of regulation; the minuscule amount of fruit at the top takes exponentially more effort to pick.

Ok, fine, you may say, a human life should not have a dollar value attached – we should spend and spend to stop all deaths. Although publicly we may profess such sentiments, our actions speak very differently. If our safety were paramount to the exclusion of all monetary and non-monetary costs then we would either choose to drive at 1 mph at all times or spend hundreds of thousands of dollars to drive a military grade armored tank. But we don’t do that because safety is a luxury and we can only afford luxuries to the extent we have produced above more than the bare essentials. This, by the way, is why human conditions were so much less safe years ago and are so in third world countries today – not due to any lack of government oversight but rather due to lower productivity, which puts luxuries (such as safety) out of reach. So although we are bound by our productive capacity when determining how much we personally want to spend on safety, government knows no such bounds. Whether it might cost $100 billion or $100 trillion to potentially save one life is of no concern to those that bear none of the costs.

Where’s the beef? Sorry, it’s been banned.

This past week the FDA proposed an outright ban on artificial trans fats in prepared foods.  Trans fats occur naturally and artificial ones have been used for decades in foods. As a foodstuff they are safe insofar as they don’t make you sick upon ingestion and have known physiological benefits in proper amounts (and known harms if consumed to excess, which is the case with all food components). The FDA is not banning some new dangerous unknown substance. They are banning something that has, in large part, already been voluntarily reduced in the past few years to the point that average US consumption of trans fats is now half of what the American Heart Association recommends as being safe. So if it’s already hardly used, where’s the harm in a ban you might say? Setting aside the ethics of the ban, the direct type of harm that can be envisioned would be a situation wherein the use of trans fat solves a problem for which there is no good substitute. Furthermore any substitutes might very well themselves be more harmful than the trans fat. That’s called “unintended consequences” and occurs with every single government mandate ever issued.

Some examples where trans fats are used include cake frosting, microwave popcorn, frozen pizzas and various fried foods. These are mere treats, things eaten a handful of times in a month if even that (how many cakes have you eaten in the last month?). But given the government’s penchant for quixotic battles against virtually riskless activities (trillions of dollars spent fighting terrorism even though jaywalking kills more people each year than terrorism) it should come as no surprise that Uncle Sam would relish the role of micromanaging the minutiae of our lives (“exactly how many calories are in the candy bar sir?”).

Lifelong dependency of the citizen ensures eternal power for the state.

 

There is nothing wrong with the FDA educating the public about the healthiness or lack thereof of certain kinds of foods (although forcing the public to pay for such education through taxation rests on ethically dubious ground). However, the outright banning of this or that substance crosses a line. The metric upon which prohibitions have been based (such as drug prohibition, however ill conceived) is one of “imminent harm”, i.e. if someone is about to jump off a bridge we can plainly see their free will is immediately deleterious to their own well being therefore one could argue intervention is justified. However, the bar has been moved from “imminent” to “eventually possible” i.e. should we tear the bridge down so as to make it impossible for anyone to ever jump off it? Should we now ban every conceivably risky activity?  If so, that’s going to be a mighty long list! Nearly every action in our daily lives carriers some level of inherent risk.

The FDA’s justification for this ban is a mere estimate (i.e. best guess) that it will result in 20,000 fewer heart attacks and 7,000 fewer deaths each year. The rationale is of course the “Greater Good” argument. This ban will naturally lead to lower health care costs for the nation. Why stop there? Perhaps the FDA could implement other policies that have the net effect of lowering health care costs. Perhaps they could ban foods that naturally contain trans or saturated fats (all meat, cheese and dairy). Next they could ban all foods that are not considered to be “healthy” (according to the whim of whoever happens to be in power at the FDA). These directives would surely save more lives, so how can one object? Eventually the government could require all citizens join a gym and exercise each day… because this would lead to fewer deaths each year… so how can one object? Oh, and what of those that refuse to do their quota of exercise? Well, we’ll just levy a fine, err, I mean tax on those that refuse the directive of the collective.

This trans fat ban is just the first step in sacrificing the individual on the altar of the collective state. If you agree to take what the collective offers (free or subsidized health insurance), then you must submit to having your life directed by that same collective. Children accept the care of their parents and thus are obligated to follow their rules. Likewise government demands we follow their rules because they view us as but children. Lifelong dependency of the citizen ensures eternal power for the state.

Changing the Rules of the Game

September 1 will mark the end of an era, at least in Georgia anyway. This is the date that Amazon.com must begin collecting sales tax in Georgia. Some day you will wax nostalgic and regale your grandchildren with stories of how there was once a place where people could escape the clutches of intrusive government: the Internet. This was a place where anarchism reigned and yet everything worked without any rules or leaders. But slowly government began to stamp out the embers of this freedom bit by bit. First it was taxes, then it was privacy, and next it will likely be access. Internet license, please. As Nature abhors a vacuum, so too does government abhor freedom. Big Brother the busybody knows no boundaries. Big Brother demands his “piece of the action” in every transaction, no matter how small. Just as the mafia feels they have a right to a slice of any economic activity that occurs within their self-proclaimed “territory” so too does government operate upon an identical principal.

So how is it that this has come to pass in Georgia? Has Congress managed to stealthily pass the “Tax Fairness Act”? Fortunately no. This current state of affairs is the result of Georgia House Bill 386 passed on March 20, 2012. This bill follows the Orwellian mantra that if conventional definitions of words aren’t working for you, then simply write new definitions. This bill redefines a term called “nexus” in order to dragoon Amazon and similar entities into becoming uncompensated tax collectors for the state of Georgia. Nexus is a tax term which means “a connection” i.e. if a company has a physical presence (office, warehouse, employees, equipment, etc) then they are said to have a connection to the state sufficiently similar to a resident so as to make them liable for the same taxes a resident would be liable for. But this bill has now turned that definition on its head by broadening the term to the point where merely having a business relationship with an entity in Georgia will confer “nexus” upon the foreign entity. It is hard to see how those who voted for this bill did not recognize the perverse incentive buried within it, namely that companies outside of Georgia will choose to NOT establish any business dealings with companies inside Georgia lest they become entangled with the Georgia Department of Revenue.

As if loss of business opportunities and higher taxes wasn’t bad enough, it gets even worse. Nexus and residency have always had a common shared characteristic: physical presence. Not anymore. Now that nexus is based on the most ephemeral of connections to the state how long is it until the residency definition undergoes a similar metamorphosis? If the two are indeed linked in their common purpose of establishing tax liability, then a change in one will invariably result in a change in the other. Therefore Georgia may one day establish that residents of other states are also in fact Georgia “residents” for purposes of income tax. Once that precedent comes to pass then what is to stop others states from likewise inflicting such taxes upon Georgians? Perhaps some day you’ll get an income tax notice from Florida because you vacationed there once. “You enjoyed the generous state benefits of roads and municipal services while here, so certainly you should be paying your fair share” will be the justification. Each blow of the precedential ax upon the tree of freedom accumulates damage until finally one day that tree is felled.

Naturally this new sales tax collection is being heralded by the economically illiterate as a boon for the “brick and mortar” stores. The initiation of sales tax collection will have ZERO effect on expanding local sales in Georgia. Why? People aren’t ordering on line to avoid a few bucks in taxes. They are ordering online because it is convenient. The lack of sales tax is just a perk. Removing that perk is not going to change people’s behavior. It is however going to reduce what people can spend to the tune of $16 million. This will only harm the individual as well as local businesses they are already shopping at. Increased taxes reduce the individual’s capacity to spend – everywhere. This is supposed to help the economy?

 

Rage against the machine

Imagine that you are a pioneer of the old west. Over many years you have worked hard to establish a home and a farm. Now imagine that a marauding gang of thieves has begun to harass you. They destroy your crops. They threaten your safety in order to extort money from you. When you are away they vandalize your home and poison your livestock. Year after year it continues. You are peaceful and do not resort to violence. You follow all legal remedies attempting to end the persecution, but it is all for nothing. Judgments in you favor are simply ignored. You soon learn the marauders in fact want what you have created; they want your land for their own use. You offer to sell it to them if only to end the nightmare. They refuse. They would rather scare you off so they can simply take what is yours.

Sounds pretty terrible? Surely this is a scenario for which we need government? Sadly, it is government itself that is the villain in this story. This story is true. It took place in our own backyard in Roswell, Georgia. The gang of marauders is none other than the local code enforcement office and police department of the city of Roswell. This is the story of Andrew Wordes (aka “the chicken man”) and his fight against an intransigent bureaucracy. When you battle an implacable foe something must eventually give.

The details of this story are sufficient fodder for a feature length film. To read a more detailed account please see this report or to hear the story in Mr.Wordes own words please listen to this. In synopsis: In December 2008 Andrew Wordes was cited by the Roswell zoning department for having chickens on his property (even though the ordinance specifically permitted such chicken husbandry). The mayor of Roswell actually stepped in to help but the city bureaucratic “machine” ignored all attempts at reason. Even former Governor Roy Barnes represented Mr. Wordes in his suit against the city (being a chicken farmer Mr. Barnes was partial to his plight). They won the suit against the city. In response the city rewrote the law so that he could only keep chickens if the city fixed a drainage problem that the city itself was responsible for: they refused to fix the problem. Then the harassment really began. He was constantly in court due to numerous petty citations (e.g. improperly stacked firewood). The city’s police department routinely waited outside his house in order to follow him and issue citations for minor infraction. The city (illegally) pressured his mortgage holder to foreclose on the mortgage. Someone poisoned all his chickens when he was away one weekend. He was jailed for 3 months for minor zoning violations (grading himself to try to fix the problem the city refused to fix) and while in jail had to file bankruptcy. While jailed his home was burglarized. He spent his life savings legally fighting every instance of this unwarranted harassment. On March 26, 2012 he was to be finally evicted. The police showed up and after multi-hour standoff he instructed them all to move back. Seconds later he lit the match that ended his life and engulfed his home in a fireball.

They pushed him to the edge. And for what? Turns out that the “Roswell 2030 Plan” includes a parks area that just so happens to be centered on his property. Imagine that. Perhaps the scariest part of this story is that even with the political clout of the mayor and a former governor on his side he remained helpless against the onslaught of harassment from those truly in power: the faceless machinery of the “state”. When even elected officials cannot help the average citizen in their fight against unelected bureaucrats we are well on our way on the road to serfdom.

All the world is a game…

Perhaps one of the best metaphors for the free-market and good governance is that of team sports. I recently came upon this revelation as I was watching my eldest son’s soccer team playing. Two teams on the pitch are a microcosm for society. Markets are represented by the presence of both competition (between teams) and cooperation (within teams). Any player not acting in the best interests of the team is rapidly replaced so that the efforts of the team are not affected. Governance is represented by the presence of simple rules understood by all and which are enforced through the mutual consent of all via the arbiter of said rules (the referee). All players are governed by these rules and any transgression results in an equivalent punishment (equal protection) for all. However not all players are equal in skill. Even on this elite team there is a bell-curve distribution of natural skill and earned abilities. On an elite (non-rec) non-professional team ability is rewarded with that which is most sought by these young players: playing time. In other words, playing time is the currency that all seek to maximize.

Two teams on the pitch are a microcosm for society.

Let us now test proposed policies on our model to see the outcome. To test “minimum wage laws” we will propose a minimum playing time rule whereby a coach is not required to play an individual but if he does they must play a minimum amount. What effect would this have? The weakest players (those this rule was trying to help) would never be played because the team could not “afford” to have such a weak player on the field for that long. All other players would then have greater playing time (same time but fewer players).

Now test income redistribution in the name of “fairness”: Let us propose a “player equalization” (aka “maximum skill”) rule. Since we can’t “take” skill away we will artificially limit skill to a maximum level by using weights, elastic restraints, etc. What effect would this have? Would it make the less skilled players better players? No. It would slow the game down thus making it less productive (fewer goals per game). It would also decrease any incentive a player has to improve his skill set beyond the maximum mandated level.

Now, onto governance: Let us propose that the referee be granted absolute authority to conjure up any new rule he desires and enforce it in any way he desires (remember the referee embodies all branches of government) which is what we see today with lawmakers completely ignoring the constraints on power found in the Constitution. The referee could write up hundreds of new rules. Rules as arcane as “players may only wear green socks” are strictly enforced even though they have absolutely no relevance to the game. The referee feels he knows best because green socks will cut down on grass stains therefore he feels it is in everyone’s interest that this rule be enforced for the “good of all.” A rule of “all players must pay the referee” whatever sum the referee deems necessary would not be far behind (remember he has absolute authority on the field in ALL matters). Anyone who questions the magnitude of said fee would be targeted with the straw man argument of “you do not value the service I perform” even though it is not the service being performed but the size of the fee being demanded that is questioned (i.e. “fair share” is whatever I say it is).

If an issue can be sufficiently abstracted such that it can be applied to this “team” model and the outcome is obvious at the team level then it logically follows that the same result will occur in the larger sphere of society from which it was abstracted. People are people and incentives will be followed no matter the scale.

Bubbles…

The higher education bubble will soon burst. Like the popped housing bubble, higher education prices are being distorted by massive government subsidization. Subsidization causes prices to increase at a rate dramatically above what they would have otherwise increased absent subsidization. It is true that bubbles can occur “naturally”, but these are called “crazes” or “manias.” The most well known example is the “Tulip mania” in Holland in 1636-37. It is the first recorded example of a speculative bubble, but it lasted only 6 months. These “natural” bubbles are limited in scope and size by the limited savings of those involved. Government bubbles are different. The earliest government influenced bubbles were the bank “panics” of the 19th century. They were the result of legalized embezzlement otherwise known as fractional reserve lending (it was thought that a Central Bank (The Fed) would solve these panics but it only made them worse (e.g. the Great Depression and every recession since then)). Government bubbles grow quicker and longer than natural bubbles. Government bubbles can grow over decades because they have no built in monetary constraints. Governments are free to tax, borrow and print as much money as they desire.

Government has no feedback mechanism to limit the bubble because they “have no skin in the game”, that is, it’s not their money.

To understand why prices go up in a government induced bubble we must first understand how normal economic transactions occur. Actor 1 (Buyer) wishes to obtain a good or service from Actor 2 (Seller). What Seller can charge is constrained by the willingness of Buyer to pay (max price). Likewise, how much Buyer can purchase is constrained by the willingness of Seller to sell (min price). A pricing equilibrium is maintained through the efforts of both parties to maximize their self-interest. However, when government gets involved (Actor 3) they insert themselves in the middle of the transaction. Actor 3 now pays Seller for what Buyer wants (typically by stealing from Actor 4). The shackles of price restraint are severed and thus Seller is free to perpetually escalate pricing because (a) Buyer doesn’t care about price because Buyer isn’t paying and (b) Actor 3 doesn’t care about price because it’s not their money. Likewise nothing inhibits Buyer from limiting their consumption because (a) price increases don’t affect Buyer and (b) Actor 3 doesn’t care because it’s not their money. In a free market an increased demand by Buyer upon Seller would drive prices up, however that would attract new providers who, through competition, would drive prices down. However with the presence of Actor 3 this feedback is disrupted. Increased prices do attract more providers however not for purposes of competition. They are joining everyone else at the government trough of largesse.

Government has removed the price barrier to education by providing grants and guaranteed loans. Students don’t worry about price because someone else is paying for it right now, and the schools have no constraint on limiting price increases because they know the government will subsidize whatever tuition is charged. College education costs have gone up at nearly 5 times the rate of inflation. To put that in perspective, health care costs have gone up “only” about 3 times the rate of inflation.

To underscore the point that costs are driven by government subsidization – cosmetic surgery, which is not subsidized nor paid for by insurance – has actually gone DOWN relative to inflation.

Education costs are doubling about every 10 years. In 2011-12 the average cost of tuition and fees for in state four-year college was $8,244/year. Private college tuition and fees average $28,500/year. Based on present trends I predict the education bubble will burst around 2025-2030. So clip and save this article so that you may impress your friends with your ability to predict the future… it will happen, just as the tech stock and housing bubbles burst, so too will the education and healthcare bubbles burst. Apparently the old aphorism is true, “Those that fail to learn from history are doomed to repeat it.”

Do carts push the horse?

President Obama remarked in the recent state of the union address that he is “proposing that every state require that all students stay in high school until they graduate or turn 18.” A laudable goal (for students to finish school) however the idea that this goal must be forced upon the student by the state is a symptom of how some confuse cause with effect. The effect they wish to see is a “successful” adult and they mistakenly assume that completing school causes this. Motivated individuals will complete schooling just as naturally as a fish swims in water (it is inherent to their nature). Forcing unmotivated individuals to graduate will no more make them successful than does teaching a man to swim make him a fish. Besides, what is the plan here? Jail or fine the student or parents if the kid doesn’t graduate?

Before college tuition costs had ballooned out of control it was only students that had a genuine interest in expanding their knowledge and skills that went to college. These individuals were naturally driven to be successful; going to college was simply a way station on the road to success. Those in government looked at the statistics and saw that successful people had gone to college and thus they confused correlation with causation. Government enabled more and more to attend college each year and thus the floodgates opened to not only ever increasing tuition costs but also a new generation of students where college is no longer viewed as an opportunity to grow one’s knowledge and skills but rather a rite of passage that one is obligated to endure in order to assure “success”. Those that simply endure it exit with a degree and a slightly greater perspective on western culture than your average high school graduate, but that’s about it (oh, and the morale crushing debt burden).

The ultimate goal of government subsidization of college education is nothing short of 100% college education for every citizen. But it should be obvious that were this to be achieved nothing will be gained. If everyone has a college degree then how is that supposed to lead to a high paying job? Salaries depend directly on the number of people capable of performing the desired task. That’s why janitors don’t make much money (everyone can clean) and brain surgeons make a lot. If everyone has a college degree then you’re competing with everyone… that’s a lot of people! So wages will go down for jobs that formerly required a college degree (over supply of labor). Wages will remain high for those that excelled in college (constrained supply of labor). But those were the people that used to be the only ones going to college. So nothing will change, wage disparities will remain since wages are driven by supply and demand. If you don’t believe me then just look at the unemployment levels among recent college graduates, the stories of college grads living with their parents, or college grads working at low paying jobs because they can find no other work. These are all symptoms of oversupply, in this case one that is artificially driven.

It’s not the student’s fault. They’ve been duped by promises of the moon if they can just cross the finish line. So they waste their time on useless (for real world jobs) degrees (i.e. anthropology, women’s studies, etc) that have no value to an employer. However, as with most government policies, the unintended consequences of subsidizing college education are coming home to roost. Turns out there is a large labor shortage in this country: a shortage of skilled trade labor. Because culturally and governmentally we look down on such trades there are fewer and fewer capable of performing these jobs. I suppose when a plumber makes as much as a lawyer the tide will turn naturally, but the point is this “bubble” of unemployable college grads would not exist if government had not meddled in the higher education market.