Iraq about to face free market realities

Published 9:00 pm Saturday, July 3, 2004

The transfer of sovereignty to Iraq shows a remarkable faith in the value and power of freedom. It is a coincidence, of course, that the transfer took place so close to our own Independence Day celebration. But perhaps that coincidence will serve as a reminder of the effort and sacrifice that are the price and continuing cost of freedom. We already know this. For the Iraqis it will be a new experience.

Security and dominion over violence will undoubtedly occupy much of Iraq’s thoughts and energy for some time. But, eventually, if Iraq is successful, it will move from a battleground existence to one where freedom is pursued and defended on a different front: economics.

The partnership between freedom and free markets is well documented, and while we still may not understand all there is to know about either, we do know that they depend on each other.

The influence of markets on freedom is pervasive and powerful. In a truly free market, price rules – and the market itself neither knows nor cares about such things as age, race, religion, sex, ethnic background or political affiliation. This is, in its own way, the kind of freedom and equality our Founding Fathers might have dreamed of.

At the same time, a free market is a cold, uncaring thing. As market participants we have no human identity or qualities beyond the opposable thumbs needed to hold a credit card or sign a check. As a free society that values the worth of individuals, sometimes we see the coldness of the market as injustice. And, often we see this injustice as something we can and should correct – by tinkering with the market.

We should get high scores for good motives. After all, we are human beings first and market participants second. When we tinker with a market, though, there are almost always unpredictable effects, not just on the market itself but also on our freedom.

An increasingly vivid example of just that kind of impact on our freedom can be found in what is happening in the economics of higher education.

A national newspaper’s recent analysis of the costs at public universities in the United States produced the headline, “Tuition burden falls by a third. 80 percent jump in aid offsets price hikes.”

There is no reason to doubt the accuracy of the research, which found that, since 1998, tax changes, along with federal and state grants, came to a total of $22 billion a year. This reduced the effect of tuition increases so that the net apparent cost to send a student to a public university actually went down – on average – over the past few years.

The term “net apparent cost” has to be used because the actual net cost hasn’t gone down at all. It has gone up, dramatically. What we have done is take some of that cost and spread it out more broadly across the taxpaying public, reducing the financial burden for the individual student and his or her parents, and increasing it for other Americans.

We did this because the cost of higher education was increasing so rapidly that many students were being “priced out of the market.” And, since higher education is considered so important to our nation’s global competitiveness and economic prosperity, we began to dream up ways to tinker with the higher education market.

We have apparently achieved our objective. The tuition burden for students and their parents has been eased, and enrollment at public universities is up. But in the process we have created a maze of tax break laws, financial grant eligibility rules, loan application paperwork, and education finance bureaucracies beyond the navigational ability of most ordinary mortals. A profitable consulting industry has arisen just to provide pilotage between the Scylla and Charybdis of fine print and procedures for harried parents and students.

More important than the mess itself is the unintended effect of our tinkering on the education market and on our freedom. In order to get the benefits of lowered net cost, you have to “fit the suit” designed by federal and state authorities. You are no longer a free market participant but one whose qualifications have been screened and approved, dependent now on the whims and politics of government largesse. Students and parents must exchange some of their liberty and independence for financial aid.

Still, as we celebrate Independence Day this year, we might remind ourselves of how lucky we are. While our market tinkering has made a mess of higher education economics, it is a manageable problem. We can fix it. And if, years from now, the Iraqi people find themselves concerned about similar problems, their dreams, and ours for them, will have come true.

James McCusker is a Bothell economist, educator and consultant. He also writes “Business 101,” which appears monthly in The Snohomish County Business Journal.