Subsidies increase prices

Jan. 12, 2006
Conventional wisdom tells you that the price of an item won't rise if you subsidize it adequately. But housing, autos, and education are all markets where prices have risen even though they have seen appreciable subsidies.

passed away late last month after a long illness. Ron wanted to continue writing editorials "to the bitter end," as he put it. We are honoring his wishes. This is Ron's final editorial. Ron also wrote his own obituary which you will find starting on page 14. Our first issue in February will carry a tribute to Ron. Readers who would like to comment can do so online on Ron's blog pages at — Leland Teschler, Editor

Ronald Khol, Editor Emeritus


In the 1960s, my family was in the building business, and at that time most people paid around 30% down when they bought a house. Lenders felt that anything less was too risky. Let's start at the low end of the market. If I had a $20,000 house I wanted to sell you, and the mortgage lender wanted 30% down, we could close a deal if you had $6,000.

Then the government decided that subsidized housing was the best way to spur the economy. So the FHA was established to boost the housing market. And it allowed loans with down payments of 10% or lower.

The expectation was that the lower down payment would let more people buy houses. But people with $20,000 homes knew potential buyers would sink their entire $6,000 in a down payment. So all of a sudden sellers viewed their houses as being worth $60,000 because they expected low-end buyers to max-out their mortgages, and $60,000 became the new asking price. That is an exaggerated example, but after a few years of expectations catching up with what the market would tolerate, it is exactly what happened.

Even today, we have people with $300,000 of mortgage money in their hands chasing houses that sold for $150,000 four years ago. In many cases, the mortgages will be paid off by offspring, not the parents who initially made the purchase.

As an aside, both mom and dad have to work to afford the mortgagedto-the hilt houses that are now the fashion. The resulting lack of quality time brings guilt that the kids exploit.

To be better pals with their children, parents shower material goods and lavish allowances on them. It is all part of an emotional subsidy paid by parents, and it makes luxury consumer items expensive.

Automobile manufacturers are also forced to inflate the price sticker on cars because nobody will pay the listed prices, and there has to be room for large discounts. This forces the initial asking prices of automobiles into the stratosphere.

The worst case of subsidies driving costs is in education. The cost of teaching K to 12 or even college material can't come close to the inflated prices colleges have been asking over the past 30 years. The problem is that if college tuition isn't high, schools are perceived as being inferior. If the ranking of a university in consumer magazines isn't in the prestigious category, students don't want to enroll.

This couldn't happen if students actually had to pick up the tab. But with government grants and loan subsidies readily available, education has become a seller's market with buyers receiving large subsidies to sign up. The picture is even worse when it comes to living amenities on campus. The main place competition is found is in the schools trying to provide country-club living arrangements. So universities are forced into expensive upgrades in dormitories, all funded by government grants.

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