While economists are trained about the value of free markets, they are also trained to spot when markets can’t work alone and government intervention is required.
A classic example is pollution. Factories and cars that spew toxins ruin the air for everyone. Pollution is what economists call a “negative externality”: Drivers get the benefits of the gas they burn when they drive to work, but everyone else gets the bad emissions. Economists recommend governments use taxes and regulations to minimize this negative externality.
Another way that government facilitates the functioning of markets is by helping consumers get clear information. People can make informed choices only if they know a product’s qualities and price, whether it’s a car, a mortgage or a college education. That is why automakers are legally required to disclose their cars’ fuel efficiency, lenders have to use standard forms to describe the terms of a mortgage, and the federal Education Department’s College Scorecard reports the graduation rates and earnings of colleges’ alumni.
In most markets, in fact, economists advocate striking a balance between free competition and regulation. While they vary considerably in where they would strike that balance, it’s unusual for an economist to claim that private markets can serve every need without any government intervention at all.
In elementary and secondary education, the right mix of competition and regulation can produce impressive results. Charter schools, which are publicly funded but privately operated, provide competition for traditional public schools. In Massachusetts, where urban charters have delivered spectacular results, the state closely reviews charter application and renewals, closing poor performers.
But some supporters of charter schools disagree with this approach, arguing that parents, not government, should be the sole judge of school quality. In Michigan, Ms. DeVos fought legislation that would have provided tighter government oversight of charter schools.
Excessive faith in the power of free markets can lead to infeasible policy proposals. The Republican platform recommends expanding the role of private banks in student loans, with the goal of enhancing financing choices for students. But making student loans a competitive, private-sector market is an unattainable goal. In economics textbooks, student loans are the example used to show there are some products that markets will never provide on their own.
In a classic business deal, an entrepreneur puts up collateral to get a loan for a potentially profitable investment. But a teenager can’t walk into a private bank and receive a loan for tens of thousands of dollars based solely on her academic promise, even though a college education is (on average) an extremely lucrative investment.
This is a capital-market failure: Private lenders won’t provide liquidity for profitable investments. Because of this failure of private markets, across the world it is governments that provide student loans.
You might object that there is a private market for a product called “student loans.” But these private loans are not open to any student seeking an education, as are federal loans; they require a co-signer, often a parent, with a strong credit record.
There is a lot to fix in the current student loan system. Getting private banks back into the heart of the loan program is a solution to none of these problems, and will be costly to taxpayers. Until 2010, when a change in the law restricted their role in the loan program, banks had a sweet deal: They earned generous profits while the government assumed virtually all of the risk. Instead of bolstering banks’ bottom lines, that money is now plowed back into education programs such as the Pell Grant for low-income students.
Unswerving adherence to free, private markets will not solve the problems faced by our education system. In elementary and secondary education, market competition has produced impressive results when charter schools are given the freedom to innovate and held to a high standard of quality. In the case of loans for college students, the chimerical goal of creating a competitive market distracts from the real problems faced by colleges and their students.