It's interesting that the Democrats are attempting to roll two of their highest priorities into one bill this month. The labyrinthine legislative legerdemain called health care reform now includes a reconciliation package that would fold in student loan reform. And by reform, the Democrats mean increasing direct lending to students by the federal government.
Though the two issues may seem utterly unrelated, they do have this in common -- both health care and higher education are realms of American life in which government has undermined the operation of market forces and caused artificially high prices. These are two arenas in which the Democrats now propose to do exactly the wrong thing. Their reform reinforces old errors and will infinitely compound the problem of rising prices.
In health care, as Andrew Biggs outlines in National Review, the third-party-payer problem (created when government made health insurance deductible to employers) has insulated consumers from the true costs of their purchases. Whereas 47 percent of health care purchases were out-of-pocket in 1960, only 12 percent are today. In addition, programs like Medicare and Medicaid are on autopilot, automatically increasing expenditures in response to demand without further appropriations from Congress. When someone else is paying, whether the federal government or the employer, consumers are heedless of cost. Have you seen the TV ads for The Scooter Store? "My scooter didn't cost me a dime!" exults a customer. "Medicare and my insurance covered the whole thing." Multiply that by several million and you have a sense of the incentives.
But the world of supply and demand, competition and price is alien to the Democrats. Their explanation for rising health care costs is the greed of insurance companies.
They don't seem to ask themselves why health care costs have risen so much faster than other costs -- that is, faster than the overall rate of inflation. Are health insurance companies greedier than computer makers, restaurateurs, airlines, or other businessmen? Devotees of free markets don't deny the existence of greed, but simply want to make it work for the consumer through increased competition. And that brings us to student loans.