Subsidizing demand won’t fix real problems

When things in life get expensive, government seems to have only one answer: Subsidize Demand!

It never works, but the government keeps trying it. College tuition is too high? Hand out federal grants and subsidized student loans! Housing costs too much? Give tax breaks for mortgages! And nowadays, the Biden administration wants to subsidize child care, promising they will provide safe, reliable day care for $10 a day.

These proposals all ignore history and basic economics. In the end, subsidizing demand doesn’t make anything more affordable—it does the opposite.

Think about it: The price of a thing is determined by supply and demand. This is the most basic fact in economics.

If the government gives people money for the purpose of paying college tuition, then it is increasing those people’s ability to pay for college. Ability to pay is part of demand. So tuition subsidies, mortgage subsidies, and daycare subsidies generally drive up the demand for college, for homes, and for daycare.

College, health care, and housing are three of the most subsidized products in the American economy, and it’s no coincidence that they have seen the greatest price increases over the past couple of generations.

One study of for-profit colleges last decade found, in the words of economist Veronique de Rugy, “institutions that are eligible for federal aid raised tuition by about 78 percent more than institutions that are ineligible.”

Economists generally agree that the mortgage-interest deduction doesn’t make more people into homeowners—it either drives up the purchase price of homes or causes folks to buy bigger homes.

So what about the Biden administration’s plan to subsidize daycare demand?

They are copying Canada, where the Trudeau administration has also promised ten-dollar-a-day child care. Up there, this program has led to shortages and record waitlists.

The Biden folks haven’t given the details on their plan, but you can be sure the subsidies will come with regulations—regulations not mostly about safety but about union labor.

And here you begin to see who benefits from demand subsidies—not only the politicians who claim they are trying to make things more affordable, but the institutions that pocket the subsidies.

That is, the real beneficiaries of mortgage subsidies are lenders and realtors, the real beneficiaries of college subsidies are administrators and contractors, and the real beneficiaries of the Biden daycare plan are the Democrat-aligned labor unions that want a monopoly on caring for kids from birth to age five, just as they have a K-12 monopoly.

This is how to understand subsidies like this: They don’t help customers as much as they help the politically connected providers.