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Student Debt Is a Public Choice Problem

by Craig D. Schlesinger, published

Independent voters who truly want an independent, confirmation-bias-free approach to public policy have every reason to familiarize themselves with the behavioral economic science known as public choice theory:

Public choice applies the theories and methods of economics to the analysis of political behavior, an area that was once the exclusive province of political scientists and sociologists. Public choice originated as a distinctive field of specialization a half century ago … revolutionized the study of democratic decision-making processes. [P]ublic choice is “politics without romance.” The wishful thinking it displaced presumes that participants in the political sphere aspire to promote the common good. In the conventional “public interest” view, public officials are portrayed as benevolent “public servants” who faithfully carry out the “will of the people.” In tending to the public’s business, voters, politicians, and policymakers are supposed somehow to rise above their own parochial concerns. In modeling the behavior of individuals as driven by the goal of utility maximization—economics jargon for a personal sense of well-being—economists do not deny that people care about their families, friends, and community. But public choice, like the economic model of rational behavior on which it rests, assumes that people are guided chiefly by their own self-interests and, more important, that the motivations of people in the political process are no different from those of people in the steak, housing, or car market. They are the same human beings, after all. As such, voters “vote their pocketbooks,” supporting candidates and ballot propositions they think will make them personally better off; bureaucrats strive to advance their own careers; and politicians seek election or reelection to office. Public choice, in other words, simply transfers the rational actor model of economic theory to the realm of politics. Two insights follow immediately from economists’ study of collective choice processes. First, the individual becomes the fundamental unit of analysis. Public choice rejects the construction of organic decision-making units, such as “the people,” “the community,” or “society.” Groups do not make choices; only individuals do. The problem then becomes how to model the ways in which the diverse and often conflicting preferences of self-interested individuals get expressed and collated when decisions are made collectively. Second, public and private choice processes differ, not because the motivations of actors are different, but because of stark differences in the incentives and constraints that channel the pursuit of self-interest in the two settings.

Student debt is no exception and a perfect illustration of what occurs when the government intervenes in a given market to make a good (like a college education) more affordable. The inevitable results are ironically market distortions and perverse incentives that drive up prices and have left students saddled with toxic debts.

Unfortunately, it all starts with the best of intentions and ends buried under a mountain of unintended consequences. First, a problem is identified and countered with a proposed solution. In this case a bunch of technocrats get together and develop a plan to ensure everyone a college education by guaranteeing that all student loans are backed by the full, faith, and credit of the federal government.

Now all those teenagers unable to foot the tuition bills themselves or obtain loans from a bank no longer have to worry. Crisis averted, right? Not quite. Blinded by cavalier, self righteous palm pressing and back slapping in the wake of “solving” another quandary, public choice problems rapidly boil over the surface.

By usurping the market for student loans, universities’ incentives to compete with each other, create new mechanisms to deliver education, and lower costs to make their schools financially attractive are replaced with a series of perverse incentives such as unchecked, arbitrary increases in tuition, the number of newly admitted students per class, and the creation of a resort style atmosphere.

Why? The loans are all guaranteed, so why ask why? Just sign on the dotted line. Now students are graduating college unable to find work, like being strapped with a home mortgage, minus the home. Wait just a minute– that was never part of the plan!

But the outcry for government intervention was overwhelming: Everyone that wants to go to college must be able to go! Sounds familiar, right? Home ownership experienced the same phenomenon, as the ownership society mentality was used to justify Washington's meddling in that market. Now look where we are today, a sequence of bubbles, constantly throwing more money at the problems, and all the while preventing the true cost of such goods and services from being accurately priced by natural market actors.

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