Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.
Let’s imagine a new business offering a service, priced significantly higher than many available alternatives, that somehow manages to get the US Taxpayer to front-up its operating costs in the form of loans to its customers up to 90% of total revenue, and then uses that Federal subsidy to fund not only the basic service cost but in may cases an even greater amount of spending on all manner of advertising to drown out its competitors with expensive national media campaigns and call center operations rivaling the heyday of the sub-prime mortgage industry with misleading sales tactics recently uncovered by Federal agents shopping in disguise. To top it off, the taxpayer is stuck with any default losses on those customer loans, which must be repaid even if the customers don’t get the full economic benefit of the services they paid for up-front. And let’s add that this taxpayer- underwritten business model generates profit margins about 300% higher than the typical Federally-funded defense contractor.
Would The Wall Street Journal not rail against this model as a classic, Fannie Mae case of privatizing gains and socializing losses? Would the WSJ not conclude that paying the taxes on such extraordinary earnings is the least this business could do to compensate the taxpayer for taking the risk of funding its marketing campaigns? Would the Journal not lecture us that separating economic risk from reward is particularly inconsistent with your core free-market principles?
Yet this is the very same business model followed by many of the for-profit colleges and universities you conclude are being unfairly scapegoated by the Obama Administration. Would taxpayers not be far better served by focusing their subsidies on customers of public (and private) educational institutions that charge lesser (or even equivalent prices) for educational services where the vast bulk of the public money (and risk) supports the cost of education rather than a crescendo of questionable advertising?
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