Economist Vernon Smith, 2002 Nobel Laureate (and my thesis advisor) said in “Trust the Consumer!” in today’s WSJ:

Health-care costs doubled over the decade ending in 2004, in fact reaching an all-time high measured as the share — 16% — of GDP; and they continue to greatly outpace inflation. Similarly, education costs from primary levels up through college continue to grow faster than other categories of national spending. Why?

Here is a bare-bones way to think about this situation: A is the customer, B is the service provider. B informs A what A should buy from B, and a third entity, C, pays for it from a common pool of funds. Stated this way, the problem has no known economic solution because there is no equilibrium. There is no automatic balance between willingness to pay by the consumer and willingness to accept by the producer that constrains and limits the choices of each.

I am not sure that an education subsidy is a bad idea. The nation’s take from higher tax revenues from graduates may well cover the cost at the margin. Graduates earn $25k/yr more than non-graduates mid career. If we can get the health industry to extend work life, a subsidy might be justified there too. But paying 60% of what the service costs instead of a 20% co-pay or a politically-set tuition would surely create a higher quality, lower cost product.