Vive La 49 ?

A recent article in Business Week highlights one inefficient byproduct of over-reaching French labor legislation.  The article reports that, in France, there are 2.4 times more companies with 49 employees than with 50 employees.  The article convincingly contends that there is a reason for this apparent statistical anomaly, namely, regulation.  Under French labor law, any company that employs 50 or more individuals is suddenly subject to certain onerous requirements.  Such companies must create three different "worker councils," inaugurate profit sharing, and submit proposed "restructuring" plans to the worker councils if the company plans to lay off employees for economic reasons.  (See this treatise for additional details of this regulation.)  (It is not clear whether employees of covered firms must also share losses with the a covered firm's owners.)  As Business Week reports, French entrepreneurs often seek to avoid such requirements by dividing what would otherwise be a single company of more than 50 employees into several companies with 49 or fewer employees, thereby avoiding altogether the onerous regulations explained above. 

It should go without saying that this artificial restructuring of economic activity to avoid regulation reduces the economic welfare of the French people, other things being equal.  For one thing, entrepreneurs must incur the real costs of organizing and incorporating more than one business entity.  These same entrepreneurs must also manage several nominally separate concerns, in some cases hiring additional and economically redundant managers to do so.  Such entrepreneurs must also forgo whatever economies of scale they might otherwise realize by expanding a single firm beyond 50 employees.  Finally, some entrepreneurs might forgo the benefits of vertical integration by dividing input suppliers and downstream customers into separate firms even if the combination of such entities would reduce the cost of economic activity.  Simply put, predictable efforts to avoid regulations applicable to firms with greater than 49 employees divert economic resources from productive to less productive uses thereby reducing economic welfare.

The sort of conscious regulatory avoidance just described does not exhaust the negative impact of the distinction between 49 and 50 person firms.  To the extent that the labor regulations just described increase the cost of economic activity, firms with 49 or fewer employees will, other things being equal, incur lower production costs and thus possess a competitive advantage vis a vis larger firms. 

Of course, the mere fact that firms will incur costs to avoid regulation does not necessarily counsel repeal of such regulations.  Such regulations might themselves increase welfare, by eliminating inefficient externalities or combating other sources of market failure such as monopoly.  Moreover, larger firms may pose a greater risk of the type of harm that the regulation seeks to combat and/or be better able to absorb the cost of such regulations.  In these circumstances, limiting such regulations to a subset of a nation's firms --- particularly its larger firms --- may constitute an optimal regulatory strategy.  If so, the costs of regulatory avoidance detailed above may be the unavoidable and incidental price of regulations that, on balance, create wealth.

Still, the labor regulations in question do not seem to combat any externalities or other market failure and thus themselves distort the allocation of resources and reduce welfare.  As a result, the costs of regulatory avoidance detailed above simply compound the inefficiencies resulting from the regulation itself and thus, along with many other anti-growth policies, help account for France's sluggish growth and high unemployment.  Indeed, some estimate that, by 2050, France's GDP, now 6th in the world and ahead of the United Kingdom's, will rank 11th,  behind that of Mexico and the United Kingdom.  Regulatory policies have consequences, and the consequences of the policies imposed by France are negative.

The Obama "Recovery" is Even Weaker than We Thought

Led Strong Recovery

Did Not

Yesterday's disappointing report that the economy only added 125,000 jobs last month confirms what many have been saying for some time now --- the present recovery, from a very deep recession, is far less robust than the 1982-83 recovery, also from a deep recession.  Thus, a story in CNN Money yesterday compared current job growth at this point in the Presidential election cycle to analogous growth during 1984, the year that an incumbent President Reagan was locked in a re-election bid against former Vice President Mondale.  According to the story:

"In April 1984  the economy added 363,000 jobs. In the first four months of 1984, employment growth hit 1,564,000. This year [2012], the first four months have brought about half that amount.   And the Reagan recovery sustained its momentum through the election, averaging 300,000 new jobs a month from May to October."

As the story explains, President Reagan went on to win reelection with a 525 electoral vote landslide, despite presiding over a deep recession early in his first term.

It goes without saying that, if job growth remains weak through November, the prospect of President Obama's reelection will remain comparatively dim, perhaps even dimmer than some might realize.  After all, comparisons like those just quoted, while instructive, actually understate the gap between the Reagan and Obama recoveries.  Simply put, the 2012 labor force is far larger than its 1984 equivalent.  According to these data from the St. Louis Fed, total non-farm employment was about 91 million when the economy peaked in early 1980.  In late 2007, by contrast, total employment peaked at just over 138 million.  (See also here for the late 2007 figure.)  Thus, any comparison between  the Obama and Reagan recoveries requires upward adjustment of the figures from the Reagan figures, to account for today's much larger denominator.

Such an adjustment would require the following "corrections" to the CNNMoney story:

"In April 1984 the economy added 363,000 550,000 jobs. In the first four months of 1984, employment growth hit 1,564,000 2,371,780. This year [2012], the first four months have brought about half that amount. And the Reagan recovery sustained its momentum through the election, averaging 300,000 455,00 new jobs a month from May to October."

Did Congress Employ the Commerce Power to Impose Individual Mandates in the 1790s? Of Course Not.

Recently some, including Eliot Spitzer (see here) and Einer Elhauge before him (see here) have invoked early maritime legislation in support of their argument that the Affordable Care Act's coercive individual mandate is consistent with the original meaning of the Commerce Clause, in part because so many of the Founders were members of Congress during the 1790s.  Both point to two such statutes:  First, a 1798 "Act for the Relief of Sick and Disabled Seamen," which required ship owners to collect taxes to support health care for seamen and second, a 1790 Act purportedly requiring ship owners to purchase health insurance for seamen manning their vessels.  Spitzer refers to Professor Elhauge's essay  as a "brilliant article" involving "spectacular historical reporting."  Professor Elhauge's tone, it should be noted, is far more nuanced and modest.

Invocation of the 1798 Act is not new in this context.  As early as January, 2011, Ezra Klein of the Washington Post invoked this statute in his blog, claiming that the Act constituted precedent for the Affordable Care Act's coercive requirement that Americans who can afford to do so must purchase health insurance policies whose terms are dictated by the National Government.  In so doing, Klein claimed that the 1798 Act "was, in essence, a regulation against a form of inactivity: You were not allowed to not do something, in this case, pay for sailor's health insurance."

Others issued effective rebuttals to this claim at the time.  (See this excellent January 2011 essay in Forbes by Avik Roy.) 

Neither statute provides precedent for the Affordable Care Act's coercive individual mandate.

The 1798 statute, for instance, was a quintessential regulation of interstate commerce.  By its terms, the statute only applied to vessels whose owners affirmatively sought licenses to engage the so-called "coasting trade," that is, the carriage of goods within the waters of the United States from one port to another.  According to Joseph Story, Congress's power over the coasting trade derived from the Commerce Clause, and "extends to the regulation of navigation, and to the coasting trade and fisheries, within, as well as without any state, wherever it is connected with the commerce or intercourse with any other state, or with foreign nations."  See Joseph Story, II Commentaries on the Constitution of the United States, Ch. 15, Section 1071 (1833).  Indeed, as Story explained, this power "extend[ed] to the regulation and government of seamen on board of American ships."  Id.

Indeed, it may be that the 1798 Act involved an exercise of the taxing and spending power.  As Matthew Franck has explained, the statute imposed a "payroll tax collected by shipowners from seamen’s wages for purposes of a federal spending program on caring for sick sailors."  Characterized in this way, the statute was not a regulation of commerce at all, but instead an exercise of the power to "lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States."   Of course, under a Madisonian view of the Commerce Power, such spending could only further the general welfare if it carried into execution  one of Congress's enumerated powers, such as the Commerce Power.

The 1790 Act provides no more support for the Spitzer/Elhauge claim.

Here is the relevant text:

"[E]very ship or vessel belonging to a citizen or citizens of the United States, of the burthen of one hundred and fifty tons or upwards, navigated by ten or more persons in the whole, and bound on a voyage without the limits of the United States, shall be provided with a chest of medicines, put up by some apothecary of known reputation, and accompanied by directions for administering the same; and the said medicines shall be examined by the same or some other apothecary, once at least in every year, and supplied with fresh medicines in the place of such as shall have been used or spoiled; and in default of having such medicine chest so provided, and kept fit for use,Penalty on the master for default. the master or commander of such ship or vessel shall provide and pay for all such advice, medicine, or attendance of physicians, as any of the crew shall stand in need of in case of sickness, at every port or place where the ship or vessel may touch or trade at during the voyage, without any deduction from the wages of such sick seaman or marine."

As Matthew Franck (again) has explained, the Act did not require vessel owners to provide health care as such.  Instead, owners only had to provide such care if they "default[ed]" on the statute's requirement to provide "a chest of medicines, put up by some apothecary of known reputation, and accompanied by directions for administering the same . . ."   Moreover, the statute did not apply to any and all vessels but instead applied only to those vessels "navigated by ten or more persons in the whole, and bound on a voyage without the limits of the United States."   Thus, the statute did not even apply to the so-called "coasting trade" governed by the 1798 Act.

In sum neither Act provides precedent for the Affordable Care Act's coercive individual mandate.  Instead, both regulate --- that is, prescribe a rule governing --- Commerce Among the Several States and with Foreign Nations.  Indeed, in  Gibbons v. Ogden, 22 U.S. 1, 197 (1824), a case often invoked by advocates of broad national power, Chief Justice John Marshall defined the power to regulate interstate commerce as the power "to prescribe the rule by which commerce is to be governed."   The two early statutes invoked by Spitizer and Elhuage do exactly that --- they impose a rule on individuals volutarily conducting interstate commerce.  Thus, the requirements of these statutes are indistinguishable from, say, a requirement that interstate railroads install particular safety equipment, allow their employees to unionize, or travel at certain speeds.  Examples could be multiplied.  Like so many other laws, all such requirements "mandate" that firms voluntarily operating in interstate commerce perform certain acts they would not otherwise perform. 

By contrast, of course, the Affordable Care Act's individual mandate applies to individuals as such, regardless whether such individuals are engaged in interstate commerce.  That is to say, instead of prescribing a rule by which parties conduct interstate commerce that already exists, such legislation conscripts individuals into engaging in interstate commerce in the first place.  The maritime Acts invoked by Spitzer, Elhauge and others no more support such an unprecedented expansion of Federal power than they would support, for instance, a ban on the possession of guns near a school.  See United States v. Lopez, 514 U.S. 549 (1995) (invalidating such a ban)  or the regulation of purely intrastate commerce.  See A.L.A. Schechter Poultry Corp. v. United States, 295 U.S. 495 (1935) (invalidating such regulation). 

Update:  After publishing this post I located a response by Professor Elhauge to a similar but briefer argument made by Randy Barnett.  The core of Elhauge's response is worth quoting in full, though I have highlighted key portions.

Although Barnett acknowledges that the early medical insurance mandates were exercises of Congress’ commerce clause power, he distinguishes them on the ground that they were imposed on actors who were in commerce, namely on shipowners and (in a third example he omits) seamen. His distinction thus means that he admits that these precedents show that if one is engaged in commerce in market A – here the shipping market or the seamen labor market – then Congress has the power to impose a mandate to purchase in market B – here the medical insurance market – even though markets A and B are totally unrelated. This concession conflicts with the argument of the challengers, which claimed that widespread activity in the health care market did not permit a purchase mandate even in the highly related health insurance market. Indeed, this concession seems to make the whole action/inaction distinction collapse because the fact that no relation between the markets is required means that commercial activity in any market – say, the market for employment or food or housing – would permit the Obamacare mandate. Because the Obamacare mandate applies only to those who have income that subjects them to income tax, it is necessarily limited to people who are active in some commercial market and thus his test would be satisfied.

Basically, then, Elhauge argues that the coercive individual mandate is constitutional because it only applies to individuals who earn enough income to subject themselves to the requirement.  As such they are "in commerce" with the result that Congress may require them to purchase products in an unrelated market, just as Congress required the owners of vessels to, for instance, purchase medicine.

Elhauge's argument ellides two distinct questions: (1) whether individuals subject to the mandate are engaged in commerce and (2) whether the mandate constitutes a regulation of that commerce.  Elhauge is certainly correct that individuals who work for employers and earn income are "in commerce" (at least according to the Supreme Court's modern case law.)   In this sense they are analogous to the vessels travelling in interstate commerce regulated by the statutes discussed above.  However, while the individuals are analogous to the vessels, the mandate is emphatically NOT analogous to the regulations of those vessels that Congress promulgated in the 1790s.   Simply put, given the definition of "regulate" announced in Gibbons and discussed above, the coercive individual mandate is not a "regulation" of employment or other income generating activity.  That is to say, the mandate does NOT "prescribe the rule by which commerce [earning income] is to be governed."  Instead, the mandate has nothing to do with that income-generating activity.

Indeed, if Professor Elhauge is correct, then choosing to enter the workforce would thereby subject an individual to any regulation of Congress's choosing.  Congress could, for instance, require all individuals to do a certain number of push ups each day, or ban exercise altogether.  It could ban poker or require it.  It could require all individuals to eat rice pudding or broccoli.  Nothing in the American Constitution grants Congress this sort of power.

Broccoli, Moral Hazard and the Regulation of Interstate Commerce

Official Photo of Federally-Endorsed Vegetable

In a recent essay in Slate Magazine, Akhil Amar, Sterling Professor of Law at Yale, contends that the rationale for the so-called "Affordable Care Act's" coercive individual mandate would NOT justify a national requirement that all Americans purchase and eat broccoli.  Several scholars and commentators have made similar arguments.  (See here and here.)

Amar's contention takes the form of a hypothetical response to a question that some Supreme Court Justices posed to the Solicitor General of the United  States at the oral argument over the law, that is, can Congress, relying on the Obama Administration's rationale for the individual mandate, also require all Americans to purchase and eat broccoli.

Here is the hypothetical exchange posited by Amar. 

"Q: What about a federal mandate to buy broccoli?

A: Thank you for that softball, Your Honor. There is no real, substantial, honest-to-goodness interstate spillover/externality problem with broccoli that I see at the moment. [pause]." 

After the "pause," Amar goes on to argue why, in his view, the coercive individual mandate, unlike a broccoli mandate, would address what he calls "interstate spillovers/externality."  I will return to this latter argument, that is, that "interstate spillovers/externality" justify the coercive individual mandate, later in this post.

I have enormous respect for Professor Amar. He is one of the nation's leading Constitutional Historians.  At the same time, I respectfully submit that his hypothetical response to the "broccoli question" is incorrect.   In fact, failure to purchase and eat broccoli creates obvious "interstate spillover[s]/externalit[ies]" that would, under Professor Amar's rationale for the individual mandate, justify a Congressional requirement that all citizens purchase (and eat) broccoli.

Simply put, individuals often purchase health insurance from out-of-state insurance companies (including "in-state" companies actually owned by out-of-state concerns) who insure individuals in several states, and even "in-state" insurance companies have out-of-state shareholders.   Many are employed by out-of-state companies that self-insure.  Moreover, millions of Americans receive health care via Medicare or Medicaid, both programs subsidized by the Federal Government and thus taxpayers throughout the country.  Coverage by private insurance and eligibility for Federally-subsidized care both create what economists have long called "moral hazard," that is, the incentive to take undue risks because someone else bears the cost of those risks if they materialize.   For instance, once an individual insures her home, she will have no incentive to take cost-justified precautions to prevent a fire knowing, as she will, that the insurance company will replace her home if such a fire occurs.  The result will be too few precautions and too many fires, reducing society's economic welfare.  In the same way, individuals who have purchased health insurance or are covered by subsidized programs do not internalize the full impact of their health-related decisions and will thus engage in risky behavior.  While insurance companies might attempt to control such behavior by contractual provisions requiring their insureds to alter their diets, such mechanisms could not fully replicate the more effective enforcement mechanisms available to the national government, including the deterrent effect of the criminal law.

Failure to eat broccoli is one such "risky behavior," like failure to exercise, sleeping too little, or driving too much or too fast.  As the national government reminds us, a well-balanced diet, including vegetables such as broccoli, is essential to good health.   Indeed, the Department of Agriculture recently sponsored a "Fruits and Veggies Video Challenge," whereby citizens submitted videos touting the virtues of eating lots of ..... fruits and vegetables.  More to the point, according to this September 2011 press release from the Department of Health and Human Services, the Affordable Care Act itself authorized grants to states and localities to "tackle the root causes of chronic disease such as smoking, poor diet and lack of physical activity" and encourage "1) tobacco-free living; 2) active living and healthy eating; and 3) quality clinical and other preventive services, specifically prevention and control of high blood pressure and high cholesterol."  (emphases added).  The Affordable Care Act also created a "National Prevention Council," chaired by the Surgeon General.  The introduction to the council's first report stressed that "preventing disease before it starts is critical to helping people live longer, healthier lives and keeping health care costs down.  Poor diet, physical inactivity, tobacco use, and alcohol misuse are just some of the challenges we face."  (emphases added).  Plainly the national government believes that poor diet, including insufficient consumption of vegetables such as broccoli, is bad for our health and increases the cost of health care, a cost not always borne by the individuals who make poor dietary choices. 

Of course, expenditures designed to encourage Americans, via education and moral suasion, to eat more broccoli are perfectly constitutional, given Congress's power to levy taxes or borrow and then spend the proceeds "for the general welfare."  However, Professor Amar claims that mandating the purchase and consumption of broccoli would exceed Congress's authority under the Commerce Clause, even if that authority includes the power to force individuals to purchase health insurance against their will.  However, as just explained, requiring each American to purchase and consume broccoli could thus counter-act the under-consumption of broccoli and reduce interstate spillovers, thereby justifying such regulation under Professor Amar's "externality/spillover" rationale.   That is to say, Professor Amar's case for the coercive individual mandate would equally justify a coercive broccoli mandate as applied to any American with private health insurance or any American entitled to Medicare or Medicaid.   Indeed, given the lag between bad dietary choices and poor health outcomes, Congress could presumably employ Amar's rationale to require consumption of broccoli before  individuals become eligible for Medicare and Medicaid. 

To be sure, the spillovers from failure to eat broccoli may not be that large for any particular individual.  However, precedent that Professor Amar does not question holds that Congress may regulate an entire category of commercial activities when the aggregate impact of those activities itself has a substantial effect on interstate commerce.  See Wickard v. Fillburn, 311 U.S. 111 (1942).  Thus, if the aggregate impact failure to consume broccoli is "substantial," as it surely is under governing precedents, then Congress could require such consumption under Professor Amar's rationale.   Indeed, if the aggregate impact of failure to eat broccoli is not substantial, then Congress could remedy this defect by requiring Americans to purchase and consume other foods as well, thereby increasing the impact of the mandate on individual health and further reducing the size of the spillovers.  That is to say, the more intrusive the food consumption mandate, the more likely the mandate would survive scrutiny under Professor Amar's rationale for the coercive individual mandate to purchase health insurance.

Indeed, insurance and subsidized health care is not the only source of potential spillovers in this context.  Many Americans work for corporations incorporated in other states and/or with shareholders in other states.  Poor health leads to reduced economic productivity because sick individuals miss work more often and are less productive when they do work.  Because state and national governments levy taxes on income, individuals do not internalize the full benefits of maintaining their health and thus their economic productivity.  (For instance, an individual who increases her productivity by $1,000 per year by remaining healthy will only realize $700 per year if her marginal tax rate is 30 percent.)  Here again, forcing Americans to eat more broccoli would counteract the tendency of such individuals to underinvest in protecting their own health.

Finally, it should be noted that the rationale for forcing Americans to buy and eat broccoli is in some sense stronger than the "externality/spillover" rationale that Professor Amar offers for the individual mandate.  Amar identifies two categories of spillover:

First, he notes that individuals without insurance may fall ill while in another state and receive care there, for which they may not be able to pay if they do not have insurance.  Second, he claims that individuals with insurance in one state might then develop a preexisting condition and that the existence of such conditions might deter these individuals from taking jobs in other states, because employers and/or insurance companies "discriminate" against such individuals.  As Amar puts it:

"Even if nothing I have said yet persuades Your Honors, my second commerce clause claim is that millions of Americans suffer from preexisting medical conditions. If they get a better job offer out of state, they should take it so that they can contribute more to their families and to the general economy.  But they will not be able to do so if the out-of-state employer discriminates against preexisting conditions.  This discrimination creates a huge lock-in of labor. It prohibits interstate mobility—the free interstate flow of services.  The core purpose of the interstate commerce clause is to allow Congress to remove interstate barriers—legal, physical, economic—such as this."

According to Amar, the remedy for these "externalities," is to coerce individuals into purchasing health insurance against their will.  This way, an individual who becomes ill in another state will be able to pay for emergency care herself and thus not impose the cost of that care on others.  Moreover, as explained previously on this blog, the individual mandate contained in the (so-called) "Affordable Care Act" forces individuals without pre-existing conditions to purchase insurance at rates that are higher than justified by their expected cost of health care, thereby making health insurance and health care LESS affordable for these individuals.  (For a more detailed explanation of how the so-called "Affordable Care Act" achieves this coercive cross-subsidy, see this essay by Mario Loyola, Richard A. Epstein and Ilya Shapiro).

Professor Amar's first argument does not even describe an "externality" or "spillover." Externalities or spillovers exist when individuals do not bear or "internalize" the full costs or benefits of their actions; the classic example is a polluting factory, which imposes costs on others (a negative externality) and a fireworks display, which confers benefits on spectators who do not pay to see it (a positive externality).  Individuals with pre-existing conditions predictably impose greater costs on insurance companies than individuals without such conditions, thereby explaining the sort of "discrimination" that Amar decries.  (Try obtaining low-cost life insurance if you have such a pre-existing condition.).  To be sure, the prospect of paying such high premiums may deter some individuals from taking new jobs in other states (if those states allow such "discrimination").  (At the same time, preventing such discrimination will force healthier individuals to pay premiums that are higher than before and thus deter THEM from moving to jobs in other states.) 

There is no doubt that individuals with pre-existing conditions will pay more for health insurance absent regulation of premiums.  However, so long as these higher premiums simply reflect the expected health care expenses of the insured, such premiums do not constitute or cause an externality or spillover and thus do not justify regulation under Professor Amar's rationale.

By contrast, the second argument DOES describe an interstate externality/spillover.  However, the externality and spillover does not come close to justifying the coercive individual mandate in its current form.  At the most, this argument would justify requiring individuals to purchase insurance that provides coverage for emergency medical expenses of the sort Professor Amar describes.  (Even this mandate would be overbroad, however, because some individuals are able to pay even emergency room expenses "out of pocket," without relying upon insurance.)  However, the insurance mandated by the so-called "Affordable Care Act" requires far more than coverage for the sort of catastrophic events that Professor Amar describes.  As Randy Barnett explains, the cheapest health insurance plan allowed by the Affordable Care Act will provide partial coverage for any number of garden variety health-related expenses and thus cost ten times more than the cost of a catastrophic policy that would address the sort of cost-shifting Professor Amar invokes.  Moreover, this cheaper policy is only available to individuals 30 years old or younger.  Thus, unlike the sort of moral hazard that afflicts dietary decisions, the prospect of interstate emergency expenses does not come close to justifying the so-called "Affordable Care Act's" coercive individual mandate in its current form.

Would Clint Eastwood Bail Out Super Bowl Losers, Too?

Bad Product = Low Sales

Did Not Receive A Half Time Bail Out

A Chrysler Super Bowl commerial featuring Clint Eastwood asserts that it is "halftime in America" and that firms like Italian-owned Chrysler are leading an industrial resurgence in the USA.  According to Eastwood:

"Detroit’s showing us it can be done. And, what’s true about them is true about all of us. This country can’t be knocked out with one punch. We get right back up again and when we do the world is going to hear the roar of our engines."

Oddly, Eastwood did not mention that American consumers delivered a knock-out blow to Chrysler, because of the poor products the company offered, like the Dodge Dakota pictured above.   Simply put, Americans preferred cars made by Ford, Toyota, Volkswagen and Honda, for instance.  (See this article in Forbes, which includes the Dakota and other Chrylser products among "the worst cars on the road.")  Then, American taxpayers bailed the company out, to the tune of $1.3 Billion, according to the Department of the Treasury.  (This does not include another $12 Billion in low-interest loans that the company received.)  During the same period, of course, 400,000 other businesses failed and received no such corporate welfare.  It's much easier to "get right back up again" after someone writes you a check for $1.6 Billion.

By contrast, when the New England Patriots underperformed last evening they lost.   There was no half time bailout for Tom Brady et al.  (Nominally, the Patriots were leading, but they were obviously struggling.)  That's the way competition is supposed to work in a free society.   Eastwood should know better.

President Obama's Upside Down Tuition Rhetoric

In his recent State of the Union Address, President Obama decried what he called "skyrocketing" tuition at American Universities and called on Congress to withdraw federal support from Colleges if such increases continue.  As the President put it:

"[L]et me put colleges and universities on notice: If you can’t stop tuition from going up, the funding you get from taxpayers will go down." 

The Administration subsequently explained that it will ask Congress to cut the availability of student loans in those states where public universities raise tuition more than the Administration would like.  This is upside down.  To be sure, tuition has risen significantly over the past few years.   However, colleges that have raised tuition have had little choice.  Across the nation, states responded to the recent recession by reducing financial support for higher education.  (This article describes this phenomenon in North Carolina.).  Colleges and Universities in such states have responded by raising tuition in an effort to maintain the quality of the product they offer, and tuition at such universities is still significantly below the cost of the education provided.  Moreover, many such universities have set aside significant portions of the proceeds from such increaes to support need-based financial aid that ensures the very sort of access President Obama claims to support.  California, for instance, recently set aside 1/3 of the proceeds from a tuition increase to expand the pool of resources available for need-based financial aid. 

In sum, state budget cuts have caused colleges and universities to raise tuition to protect the quality of the product they offer and generate sufficient funds for financial aid.  Instead of deterring future tuition increases, cuts to the Federal Loan Program will punish the very students harmed by increased tuition and likely cause schools to raise tuition even more to generate the financial aid necessary to ensure sufficient access.