Earnings of Young College Grads vs College Costs

Business Week economist Michael Mandel has made an excellent chart comparing the earnings of college costs young college graduates (between the ages of 25 and 34):

Looking at the graph above, you will notice that in the 1990s, pay for young college graduates rose at about the same rate as college costs.

But beginning in 2000, the two lines diverge. In real terms, college costs have increased by 23 percent since 2000. Real pay in the same period for young college graduates, however, has dropped 11 percent over the same period.

Nevertheless, this does not represent a need for government intervention. On the contrary, government is partly responsible for the tuition hikes.

Thomas Sowell explains that,

In any kind of economic transaction, it seldom makes sense to charge prices so high that very few people can afford to pay them. But, with the government ready to step in and help whenever tuition is “unaffordable,” why not charge more than the traffic will bear and bring in Uncle Sam to make up the difference?

Education, like all other products, follows the law of supply and demand. If the price increases beyond people’s means,  demand will fall and consumers (students) will purchase less of the product (education). Government intervention skews this relationship. In subsidizing higher education, universities can get away with increasing tuition since the price is covered by a third party. Would government remove education subsidies, tuition would likely drop.