Sen. Pell, Architect of Unpleasant Side Effects

The Senator that drove college costs through the roof.

On Jan 2, 2009, Reuters reported the death of Senator Claiborne Pell:

Claiborne Pell, an aristocratic Rhode Islander who spent 36 years in the U.S. Senate and was best known for championing better education for the poor, died Thursday, the Providence Journal reported.  Pell, who was 90, served as a Democratic senator from Rhode Island from 1961 to 1997.  He was the architect of a grant program that bears his name and has helped tens of millions of Americas attend college.

Reuters quoted Vice-President-elect Joe Biden's tribute to Senator Pell:

Because of Senator Pell and the Pell Grant, the doors of college have been opened to millions of Americans -- and will continue to be opened to millions more.  That is a legacy that will live on for generations to come.

When "Pell Grants" were first offered in 1972, college graduates earned a great deal more money than people who did not attend college; sending people to college seemed like a good way to increase the amount of income tax they would pay over their lifetimes and was thus a worthwhile public investment.  Unlike the Stafford student loans which are administered by a different program, Sen. Pell's grants do not have to be paid back.

We're not talking about trivial sums of money.  According to the US Department of Education web site, the amount of student aid available in 2008 was $16,428,110,000.  When your eyes stop rolling, you'll realize that it's in the billions with a B.  The web site explains:

Amount of Aid Available represents the amount of funds awarded to participants in the Federal Student Aid programs.  Depending upon the program, this total may include federal appropriated dollars, institutional or state matching dollars, and federal or private loan capital.

The department anticipated making 5,578,000 new awards averaging $2,945, and ranging from $400 to $4,731; the web site didn't say how many students were already getting grants.

Pell grants helped a number of people go to college who otherwise might not have been able to go, but they had an unintended, undesirable, but perfectly natural side effect - college tuition went up.

I graduated from college in the pre-Pell era.  Tuition for one term was $1,750, a sum burned eternally into my consciousness by the necessity of scraping it together dollar by dollar at various forms of employment.  Although it was difficult and fatiguing, it was perfectly possible for a student to "work through college" and many did.

You could tell the students who were paying their own way by the way they hustled through the halls and never missed a class.  Given that it took us many hours to earn enough to satisfy the bursar and tuition was the same no matter how many classes we took, those of us who paid their own freight tended to take overloads: more bang for the buck.

Government Grants Raise Prices

According to the college web site, tuition is now $17,484 per term. Tuition has gone up by an order of magnitude in 40 years.

The US Department of Labor's online inflation calculator says that $1,750 in 1970 has the same buying power as $9,581 in 2008.  Adjusting only for inflation, tuition at my alma mater should be $9,581 instead of $17,484.  Value for value, tuition has gone up by a factor of 1.82 more, or nearly twice as fast as inflation.

Why did my college raise tuition so much faster than their costs went up?  For a very simple reason - they could.  When government made billions and billions of dollars available which students had to spend on college tuition, students took the money and colleges all over the country licked their chops and boosted their fees.  Faculty salaries went up, other wages went up, colleges built more buildings, and the good times rolled.

Student wages haven't risen nearly as much as tuition, of course, so there's no way a student can pay his or her own way now.  Thus, government aid for college students had the usual effect of changing the overall system such that students become more dependent on government aid and less able to cope for themselves.

Where once it was possible for students to work their way through college, it now pretty much isn't; rare indeed is the student who is able to earn enough to pay his own way without recourse to your tax dollars for assistance.  Of course, for every student who earns a degree at your expense, there's another who is not quite poor enough to qualify for grants and has to borrow the money instead - with the result that, on graduation, they start out the race of life several hundred yards behind, thanks to decades of government-enabled tuition increases.

With government making billions and billions of dollars available to help out, say, GM, are the wages GM pays going to go up or are they going to go down?

Now we come to the key question - when government makes a lot more money available for health care, are costs going to go up or are costs going to go down?  Health care costs are already growing faster than inflation.  What will happen when government dumps more fuel on the flames?

Government Grants are Based on Rules and Procedures

Price controls aren't the answer.  On page 20 of the January 12 issue, Forbes reports that India faces a shortage of vitamin C.  The Indian government imposed price controls in an effort to make the vitamin more affordable.  When it cost more to make the pills than the rules let the manufacturers charge, companies stopped making vitamin C.

Democrats in our Congress believe that price controls will lower the cost of drugs here.  Price controls are supposed to be "fair" and avoid situations where only rich people can have advanced drugs, but controls have a way of creating conditions so that nobody can have any without political connections; well-connected Indians can get all the vitamin C they'd like one way or another, but ordinary Indians must do without entirely.  Is that what we want?

The Pell Grant program illustrates the rule-based procedural nature of bureaucracy.  The DOE web site explains the criteria for getting a grant; if you miss the cutoff by $1 and don't have political connections, you can't have a grant and have to take out loans instead.

We see this sort of rule-based decision-making playing out in the British medical system. The Times of London tells of a Mr. Baker who thought he was having a heart attack and dialed the local equivalent of  911.  The ambulance attendants arrived while the 911 tape was still running.  The article said:

A police source, who asked not to be named, said that the ambulancemen were then heard discussing Mr Baker and saying "words to the effect that he was not worth saving".

The ambulance attendants have been "detained on suspicion of willfully neglecting to perform a duty in public office, contrary to Common Law" because they let Mr. Baker die rather than trying to resuscitate him, but arresting these men is utterly hypocritical.  The British health service stays within its budget by routinely refusing medical procedures to people whom the rules say are too old or too ill to get enough benefit to justify the cost.

These trade offs are made quietly unless there's a 911 tape running, but as a practical matter, people who are too old to benefit "enough" from kidney dialysis die untreated, arthritis patients can't get advanced drugs, and so on.  The National Health Service is limited by its budget; there is no possibility of anyone being laid off.  Since there is more demand for medical care than the budget can supply, jobs are never at risk no matter how many patients die.

In our fee-for-service system, in contrast, doctors get paid for whatever they do. The more procedures the ambulancemen tried, the more drugs they used, etc., the more their employer would be paid.  This can, and does, get expensive, and sometimes it's a waste - but there's vastly less incentive to let people die and much more incentive to do the research needed to find new treatments.  There's nothing so overpriced as a new miracle cure - except having to go without it because it doesn't exist.

The HillaryCare plan so roundly criticized during President Clinton's first term was filled with provisions for denying care to people whose quality of life would not improve "enough" to justify the cost of treatment.  Being in government herself, of course, Hillary realized that the system would always assume that any treatment would improve her life; she had no worries personally about being denied treatment.

As a practical matter, just as the Pell Grant system has rules which determine who gets a grant and who will not, any system which provides medical care for which patients do not pay their own way must have rules and procedures for deciding who receives treatment and who's denied treatment.  So long as people aren't paying directly for the health care they want, there will be bureaucracies whose job is to deny medical service to people who want it and stay within budget by not permitting treatments that are "too expensive."   The question is, would we rather those decisions be made by private insurers whom we can sue or by government bureaucrats whom we can't sue?

Sen. Pell's well-intended effort to widen the availability of college education instead resulted in the world of today, where most students start out life in hock up to their eyeballs and our cities abound with overeducated baristas and waiters who cannot find jobs in their degree fields.  That's inefficient and expensive; but all it costs is money.  Let's not make the same mistake in health care, to be paid for with people's lives.

Will Offensicht is a staff writer for and an internationally published author by a different name.  Read other articles by Will Offensicht or other articles on Economics.
Reader Comments
Totally irrelevant to the point of the article, but the other side of the education aid is another unintended consequence.

By handing out diplomas like candy to almost anyone, the value of the diploma itself was reduced. It's not uncommon now to see a office paper pushing job at $10/hr demand a bachelors.

Not only did the free government aid drive the cost of said diploma go up, it pushed value down as well.
January 5, 2009 8:53 AM
This is so good, it's not even funny. Very profound the long term effects of well-intended gov. welfare.
January 5, 2009 8:57 AM
I'm paying over $50k/year for my school. Thanks government!
January 5, 2009 5:20 PM
An old friend of mine said that the problem with medical costs is that nobody wants to buy the first pill. The first pill of a new drug costs at least a billion dollars, the second pill costs about ten cents. Everybody wants the second pill; nobody wants the first one.
January 7, 2009 10:25 AM
College May Become Unaffordable for Most in U.S.
Tuition and fees increased 439 percent from 1982 to 2007, while median family income rose 147 percent.
January 8, 2009 1:02 PM
Research seems to suggest that the interests of universities and of grant recipients are not always the same. This study


If nothing else, a quick history of the Pell program reveals that student and university interests do not always align in regards to the generosity of the Pell program.

In this light, we discuss one particular misalignment of student and university interests that has come to be known as the Bennett hypothesis (after former Education Secretary William Bennett) that contends that federal aid can create an incentive for universities to rent-seek at the expense of students. A summary of the empirical evidence shows that the Pell program can yield upward pressure on tuition that could offset the potential access and persistence effects of Pell aid. However, contrary to the Bennett hypothesis, some empirical evidence suggests that universities may well price discriminate in order to improve access of the neediest students. Nonetheless, this literature shows that supply-side impacts of federal aid programs cannot necessarily be ignored and could potentially offset the intended demand-side effects of the program.

Imagine that! Government activity has an effect on both supply and on demand! Upward on pressure on tuition! Could it possibly be that colleges would raise prices just because there's more money available?
January 10, 2009 1:31 PM
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