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The Perfect Business Model

Imagine that you are currently the president of an old, prestigious firm. We’ll use that old economics term and suppose that you are the maker of the mythical “widget.” Your business was originally founded to provide widgets to the clergy, but that was almost 400 years ago and you’ve expanded considerably since then. Your product is indispensable. One still cannot enter the clergy, or become a doctor, lawyer or engineer without first acquiring a widget. There are other companies that make widgets, but yours is the oldest and arguably most prestigious manufacturer of widgets in America. Let’s call your company “Harvard Widgets, Inc.”

For many years, your company churned out quality widgets. In fact, the sons and grandsons of your customers would return to purchase their own widgets. Some of your customers went on the become millionaires, found large companies of their own, even become presidents. Demand was always steady, but manageable.

After World War II, demand for widgets increased considerably. Your original customer base was wealthy white males, but as society progressed, you progressed right along with it. Now, women, minorities and people from lower incomes also seek to purchase your widgets. Naturally, your prices have increased along with demand and inflation.

Demand for widgets continued to increase. Politicians sang the praises of your product. Popular culture focused on your product and the culture surrounding it. Owning your product became the pathway to financial success. Not possessing your product became a mark of personal shame.

As the 20th century ended, demand was at an all time high. Companies began to require widgets for all employees (even when the widget provided no actual value to the job.) Cab drivers, bar tenders and baristas all possessed them. Naturally, you did what any business owner would do when selling a product for which there seemed to be limitless demand: you raised your prices. You hired more staff. You gave yourself a raise. In fact, every president of every widget manufacturer in the country earned a 6 figure salary. You expanded the variety of widgets sold.

But because you made the very best widgets, your product was one of the most expensive. In fact, right now you’re charging over $270,000 for them. And people are paying it! Next year you will charge more. And why wouldn’t you? You have so many people wanting your widgets you actually turn down 95% of the people who request one. And the people you reject can go to one of the other widget makers.

Sounds like the perfect business model to me.

Except, we’re not talking about fictional widgets. We’re talking about the American system of higher education.

As good conservatives, we shouldn’t care what a private business charges for its product. I don’t care how much Prada purses or BMW’s or Starbucks lattes are. But my tax dollars aren’t subsidizing those things. They are subsidizing college tuition.

How does Harvard get away with charging so much? Because of the massive “financial aid” packages available to most of its “customers.” Why on earth would a bank loan money to a 17 year old kid with no job, no credit history and no income? Because the loans are guaranteed by the tax payers.

I intend for this to be part one of a series on student loans and what we should do about them. I hope you’ll continue reading.

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