Why Central Planning In Higher Education Doesn’t Work

In an excellent policy brief for the Niskanen Center, Robert Orr explains that the high cost of health care in the United States is a function of the relatively low number of new doctors that our higher-education system produces every year. The shortage of physicians is no accident. Instead, it is the result of deliberate pressure by the federal government and other bodies to reduce the supply of medical school graduates in response to a perceived “physician surplus.”

The episode and its disastrous consequences are a reminder of how using the heavy hand of government to steer various sectors of the economy usually creates more problems than it solves. This is especially true in higher education, where political interventions with the aim of achieving specific economic outcomes continue.

Between 1980 and 2005, Orr writes, “a series of ill-judged reports by the federal government warned of an impending physician surplus. These reports ushered in a period in which both private and public actors took actions to constrain the supply of U.S. physicians.” Under federal pressure, medical schools established a moratorium on new institutions and froze enrollment at existing ones.

As a result, the number of new medical degrees conferred froze at roughly 15,000 per year. In 1986, U.S. medical schools conferred 66 M.D.s per million population. By 2006, that number had fallen to 52 per million, and it has yet to fully recover.

Nowadays, the “physician surplus” narrative has been discredited, and many analysts are predicting a physician shortage instead. According to the World Bank, the number of physicians per capita in America lags behind the average in other high-income countries. The limited supply of doctors has pushed up the cost of health care, hurting Americans all over the economic spectrum. My colleagues at the Foundation for Research on Equal Opportunity calculate that the fiscal sustainability of the U.S. health care system is among the worst in the developed world, partially due to high public health spending driven by the soaring cost of care.

A widely-held but mistaken belief—that the U.S. was experiencing a physician surplus—became a part of government policy during the 1980s, and Americans have been paying the price for it ever since. To be sure, federal pressure was not the only factor in the creation of today’s physician shortage, but it almost certainly made things worse.

Today, politicians of both parties endorse more federal intervention in higher education, with different goals. At the beginning of his first term, President Obama pledged to raise America’s college degree attainment rate to the highest in the world. The ensuing policy focus on increasing bachelor’s degree attainment has led to a proliferation of credentials whose value does not justify their cost. Republicans have also surrendered to the temptation to centrally plan. Red states such as Kentucky and Arkansas have funneled extra funding into educational programs in fields politicians like, such as STEM and manufacturing.

The problem is that policymakers cannot foresee changes in labor-market needs, just as they didn’t foresee that the physician “surplus” would become a shortage. High-paying fields such as petroleum engineering are in vogue today, but there’s no guarantee the labor-market need for petroleum engineers will persist forever, particularly if concerns about climate change continue to grow. If governments intervene to support or hinder particular educational credentials, they will find themselves dealing with unintended consequences as economies change and policy doesn’t keep up.

Governments cannot predict the future. Of course, colleges and universities cannot either. Even in the absence of government intervention, colleges may still make the wrong call when it comes to scaling up or shutting down particular educational programs. But being closer to the industries they supply with graduates, colleges are at least somewhat likelier to react appropriately when a labor-market trend becomes apparent.

Rather than intervene to bolster the number of petroleum engineers or reduce the supply of doctors, policymakers should give universities and trade schools stronger incentives to identify and react to the economy’s changing educational needs. For instance, accreditation reform can put more pressure on sluggish incumbents in higher education to innovate. In addition, institutions that depend on taxpayer-funded aid should face penalties if their graduates do not earn enough to justify the student debt they accumulate.

These reforms will encourage institutions to emphasize majors and fields that have high earnings today, but also inspire them to watch out for trends in the labor market and cultivate programs that might come into demand in the near future.

With physician salaries in the stratosphere, a higher-education system more attuned to earnings trends and labor-market needs would almost certainly produce more doctors. Rather than depend on politicians to predict the future, we should exploit the power of a free and flexible market in higher education to prepare the next generation for the economy of tomorrow.

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