When you subsidize an activity, you don't lower the price, but raise it.
In Iowa, they decided to go with this ill-advised "school voucher" deal which is a big piece of welfare for the wealthy. It is a wealth transfer from public schools (which the poor use and desperately need) to wealthy private school parents, who can afford to pay tuition at private schools as it is. Proponents of voucher systems claim that it will allow poorer parents "choice" in their children's schooling, as the vouchers will allow them to send their kids to private school.
One proponent of this plan was shocked when, after the plan was passed, the local private school promptly doubled their tuition which meant that private school was still hopelessly out of reach for her children. That was kind of the point. You can't have the poors sending their kids to prep school, can we?
But this experience illustrates the folly of subsidies and how they usually backfire. One of the largest subsidies - again of the wealthy and middle-class - was the exemption of home loan interest from taxation. If you bought a home, you could deduct the interest payments from your income, which meant that effectively, you were saving as much as 30% on your mortgage payments, if you were in the top brackets and at the early stages of your loan - when every payment was mostly interest.
The market reacted by raising prices. The home mortgage interest deduction became factored in to every home buyer's purchase decision. People buy homes based on monthly payments - particularly first-time buyers and middle-class buyers. Rich people pay cash. So, for example, if a young couple can "afford" $3000 a month for a mortgage, and they are in a 30% tax bracket, they can afford to spend 30% more for the home and still come in under that $3000 a month limit. Since they are bidding against other buyers in the marketplace (who are similarly situated) they bid up the price of houses in their area.
Tariffs work the same way. Obama signed a tariff agreement on tires - ostensibly to protect the American tire industry. The American tire industry reacted - by raising their prices to match the tariff prices of imported tires. They saw a one-time windfall profit and the price of tires skyrocketed - for a few years. Eventually the tariffs ended and the price of tires came down - and today, most of the tires on the American market are made overseas. All the tariff did was raise prices. It didn't "protect" domestic industry at all.
So when they passed this "voucher" scheme (and it is a scheme, created by schemers) all it did was raise prices, which was entirely predictable. For example, let's assume that tuition at the born-again flat-earth private school is $1000 per semester, probably wildly inaccurate, but a number for the purposes of discussion. They set their price based on how much parents are willing to pay - and thus achieve the best balance of number of students versus income. They know their current crop of parents will pay this much.
Now the State institutes $1000-a-semester vouchers. The school knows the parents will pay that much already, so it makes "sense" to raise tuition to $2000-a-semester as the parents can afford it and with the voucher, are effectively paying the same price. With the extra money they can attract better teachers, or improve facilities, or build that football stadium they have always dreamed about. And as an added bonus, doubling the tuition keeps the poor people from even applying. There are only so many classroom seats they can sell, so it makes sense to keep tuition as high as the market will bear.
In other words, the school isn't being "greedy" but realistic. They would be fools to keep the tuition low and make it effectively free for their students. They would be flooded with applicants and not have the money to expand to accommodate them. Better off to stay small and make big bucks. Or as my GMI professor once said, "We can sell one car for a billion dollar profit, or one million cars for a thousand dollar profit each - the net result is the same, but the former takes less effort!"
So, school vouchers don't work on two levels. First, they strip away a lot of funding from public schools and transfer it to private ones. Second, the students at the public school are not "leaving" to attend private schools, because - as the Iowa example illustrates - even with vouchers, it is still not affordable for most parents. So the public school has as many students as before, but less money with which to educate them. Public schools are thus gutted - but that was the point, wasn't it? We can't have an educated populace voting in elections (as Jefferson envisioned) can we? They might vote us out of office and see through our "social issues" campaigns!
Sadly, this sort of thing is gaining steam, and it sounds - on paper - like a good idea, much as charter schools sounded, back when they were proposed. Privatize public schools! Break the iron grip of the teacher's unions! But the end result has been the opposite - public schools lose funding, which leads to more problems in public schools. The charter schools and religious schools turn out to be a real nightmare in some cases, as their teaching standards are often lacking. Even traditional private "prep" schools often provide worse educations than a well-funded and properly administered public school - as I experienced firsthand.
But beyond vouchers, the same rule applies - subsidize an activity or product and you raise the prices. And sometimes that is the intent. Crop subsidies are intended to raise prices so farmers make more money. As we saw in the run-up to 1929, crop prices could plummet to the point there it wasn't even worthwhile to harvest your crop and ship it to market. Better off to let it rot in the field!
Similarly, $7500 tax credits to buy an electric vehicle were intended to make the cars more affordable. Instead, it just allowed manufacturers to raise prices and make more money, which they needed in order to break into this new field of Engineering. When the subsidies vanish, the price of the car has to come down, or people can no longer afford it (or they flock to a competitor who still qualifies for the subsidy!).
And so on and so forth. When governments meddle in markets, oftentimes the net result was the opposite of what was intended. Which is a good reason to think hard about attempts to meddle in markets!
