The Rent-Seekers in My Mailbox

Hardly a day goes by without some junk mail from the student-loan industry - why are they so eager to get me to "consolidate" my loans? Because they are subsidized by the government: in the New Yorker, James Surowiecki looks at the political economy of this strange public-private hybrid. He writes:

...it’s four times as expensive for the government to subsidize and guarantee private loans as for it to issue those loans itself. In other words, the current system is not just corrupt. It’s also inefficient. So why are we stuck with it?

In part, it’s ideology, and the dominance of what you might call the privatization mystique—the idea that anything the government can do, the private sector can do better. Often, this makes sense: the free market is more likely to come up with efficient ways of creating and distributing products and services than the government is. But the student-loan market isn’t a free market in any meaningful sense of the term, because the government effectively determines prices, insures against losses, and subsidizes volume. In this environment, most of the competition among private companies is really just squabbling over how to split up the spoils. Economists call this behavior—when a company seeks to manipulate economic conditions rather than actually create value—“rent-seeking.” It’s common in areas where the fetish for privatization has taken hold, such as the outsourcing of homeland security to private contractors and the boom in private Medicare insurers. (The private insurers are less efficient than Medicare and receive billions in subsidies from the government.)...

More than just ideology, though, has kept student-loan companies in their lucrative niche. Economic power has also had something to do with it. Since the mid-nineteen-nineties, the federal government has offered direct student loans, making it unnecessary for students to go through private lenders. The loans are significantly cheaper for the government, but, from the start of this program, private lenders have done all they could to limit its reach. They’ve worked to keep the Education Department from offering discounts and rebates to borrowers. They’ve lobbied against interest-rate cuts on student loans. And they’ve offered colleges millions of dollars to drop out of the direct-loan program...

There are services that most of us believe should be available either universally or at least more broadly than unfettered markets would provide - education and health care being the prime examples. It is an open question (in my mind, at least) whether the public or private sector can deliver them better. In the student loans and medicare cases, it seems like the government does better, but we don't really know how the private sector would do without subsidies. To find the answer, we need to let public and private compete on a level playing field - if the private sector cannot compete without subsidies, let it wither away (and if the private sector can outperform the government, without subsidies, hooray for them).

One reason for my exasperation in the post below with the "first best" economists is that "free markets" are often used as a cover for rent seeking behavior, especially these days. To be fair, any economic ideas are subject to abuse in Washington (and other capitals), so it is important to distinguish between the idea, and the actions taken in the name of the idea. I would imagine there are some similarities in the feelings of true free marketers now about the Bush administration (and late Republican congress) and those of true Marxists about the Soviet Union.

Incidentally, the Democratic congress is making progress on the student loan issue.