The Higher Cost of Higher Education

[DeereMann]

MossRoad,

I hear you, but even saving early & often is not enough to overcomme 12% annual tuition, room, board & books cost increases. This insular college price bubble is waiting to explode. Notice I did not say "cost". COI index is not 12%.

 

[dave1949]

The Indiana minimum wage is $7.25/hr. SS 6.2% and Medicare 1.45%

Net hourly wage is ($7.25 - 0.4495 - 0.105125) = $6.695 per hour times 40 hours = $267.80 per week x 52 weeks = $13,925.60 per year.

$13,925 - $8,500 (annual tuition + books) = $5,425/52 weeks = $104.33 per week for everything else.

20 miles driving per day x 7 days = 140 miles per week @ 30mpg = 4.67 gallons @ $3.30/gal = $15.41 per week for gas.

$1000 per year auto insurance = $19.23 per week.

$30 per week for starving student food/packed lunches.

$39.60 per week is what remains of the $104.33 after paying just those three unavoidable costs assuming the need to operate (not own) a vehicle, and if a student can actually work a 40 hour week year around, and is attending a very low cost university.

 

[MossRoad]

Don't forgot the $20.00 per week that mom and dad are going to put in a 529 from the time a child is born until they turn 18.
$1000 per year for 18 years at 8% interest = over $40,000.

 

[MossRoad]

Then there's the tax savings for mom and dad. They won't pay taxes on that $40,000 dollar lump when the kid uses it either. Also, in Indiana, there's a tax savings on 529 contributions.
And if your kid doesn't use all of the money, you can use it for another kid, a grandkid, or even your own education.

 

[MossRoad]

MossRoad,

I hear you, but even saving early & often is not enough to overcomme 12% annual tuition, room, board & books cost increases. This insular college price bubble is waiting to explode. Notice I did not say "cost". COI index is not 12%.

Yes it is. You can do it. We did it. Twice. :thumbsup:

 

[smstonypoint]

Getting back to this discussion ...

First I think Greg Mankiw's piece is a stretch. He is looking very hard to find questionable gains in one income segment of the economy. Perhaps he should apply himself to the whole income spectrum? Married versus shacking up? Needing to make those sorts of distinctions is not a strong point.

I believe you are referring to his blog entry rather than his longer piece in the Journal of Economic Perspectives (JEP). His blog entry discusses other economists' research that examines the "economic health" of the middle class. See his JEP article for his broader perspective.

In my opinion, the major point of his blog entry is relevant to the discussion of "income inequality." "(H)as the middle class experienced stagnant real income (a mere 3.2 percent increase) or significant gains (a 36.7 percent increase)? It depends on which measure of income you look at."

I also don't think wage earners whose employers are paying more for health insurance is a valid wage gain either. The larger complaint seems to be that employees themselves are paying more too. That isn't a real wage gain, it is a further transfer of wealth to somewhere else.

What does distribution of total family wealth have to say about his opinions, for example?

Employee compensation includes wages/salaries and employer-paid benefits (leave, retirement, insurance, FICA, etc.) According to http://www.bls.gov/news.release/pdf/ecec.pdf, those benefits amounted to 29.7% of private sector employee compensation in September 2013.

Holding compensation constant, their wages/salaries will not decrease to the extent that they would have had not their employers eaten a portion of the premium increases. I expect that employers will respond to higher premiums in a variety of ways, some taking more time than others; e.g., some will hold compensation constant and lower other benefits and/or the wage/salary component, some will be able to raise the prices of their prices of their products and services, some will expect more work out of their employees, some will not be able to hire additional employees, and there will be a continued substitution of labor for capital as the cost of labor rises relative to the cost of capital.

A pedantic point -- wealth is a stock, income is a flow.

A relative price increase for any product or service (hamburger, milk, health insurance, etc.) that we consume has a real income effect. To the extent that we can substitute other products/services (e.g., chicken, pork, fish, tofu, etc., for hamburger), we are able to mitigate that effect. The possibilities for mitigating a higher price for health insurance are limited, to say the least.

Most of the discussion about "inequality" is in reference to income, not wealth.

We can use a portion of our incomes for consumption this year and defer consumption to future years by investing the remaining portion. Some folks have very high incomes over their working lives but have little to show for it at the end. Spending their incomes on "wine, women, and song" may give them good memories, but little else. (Well, maybe cirrhosis of the liver and a social disease) . Some folks with modest incomes defer consumption and obtain substantial wealth by investing wisely.

As far as paying wages no more than value added, that is sensible. The wage market will have a lot to do with driving that decision. A business owner may decide to seek more value through adding talent or experience, but they still need to compete with the labor market in terms of how much it will cost to get that.

I agree completely, and in a competitive market, employees will end up where they add the most value and therefore maximize their own incomes.

In the wage market, it's true that the lower income levels of wage earners are more exposed to global competition than CEO's and University Presidents, and that will suppress those wages here in the US. But, in theory at least, shouldn't we see a leveraging down of wages at all levels?

If reasonably capable people are forced to accept wages lower than their skills would merit, why doesn't that effect go all the way up the chain of income levels? Supply and demand should reflect the fact that their are extra people floating around the labor pool with skills and experience. How does primarily only the upper level of wage earners escape this effect?

From a lay person's economic science point of view, it seems you are attempting to selectively apply the principles.

Dave, I discuss international trade and globalization with trepidation. You are always civil, some TBN members are not.

With international trade and globalization, there are winners and losers in each country according to each country's comparative advantage. Comparative advantage can and does change over time. The US is at a comparative disadvantage when it comes to some portions of the textile industry. The US losers are the affected textile companies and their employees, the winners are consumers -- we can buy t-shirts for $5 at Wal-Mart. To the extent that the employees have skills that are transferable, they can seek employment in other industries. They suffer if their skills are not transferable -- they will have to accept lower wages/salaries or retrain. I don't know the extent to which textile CEO's have skills that are specific to that industry.

For the products and services that the US has a comparative advantage, the winners are the companies and their employees who produce the products and services. The losers are the US consumers of those products and services. In 2011, the two leading US export sectors were industrial supplies and capital goods. (What America Sells To The World : Planet Money : NPR) These sectors are capital-intensive and require a highly-skilled workforce. That workforce is paid accordingly. .

It comes down both to the supply and demand for skills. I may be the most-skilled textile loom operator in the US, but if there is no demand for loom operators, I cannot expect to be rewarded for that skill unless it is transferable to other occupations/industries. I may be the best textile manager in the US, but if there is no demand for textile managers, I cannot expect to be rewarded for that skill unless it is transferable to other industries. (I need to do some reading on the transfer of executive skills across firms and industries. I do recall "outsiders" being brought in as CEOs: as I recall, some have succeeded, others have failed.)

I agree shareholders should demand better corporate governance. There have been shareholder attempts at this but my recollection is they haven't had much success. One problem they face is large blocks of shares are held and voted by institutional investors; pension funds, investment houses, etc. Those share votes are controlled by yet another cadre of board members who aren't likely to run around fouling their own nest. I would bet that the outcome of practically any vote is predetermined before the annual shareholder's meeting is held.

I agree that attempts to oust corporate boards are rarely successful. However, boards have fired incompetent/under-performing executives and boards have been ousted. Under- performing companies have been taken over by other companies (public and private) in either friendly or hostile fashion.

I disagree with your take on institutional investors, pension funds, etc. Those folks are in the business of picking stocks, bonds, etc. for the benefit of their clients. Occasionally, they do participate in attempts to oust boards, but I think they avoid under-performing companies by steering clear of their stock.

Steve

I didn't take as much time as I should have in proofing my post. Please excuse my errors.

 

[dave1949]

Don't forgot the $20.00 per week that mom and dad are going to put in a 529 from the time a child is born until they turn 18.
$1000 per year for 18 years at 8% interest = over $40,000.

Don't forget the price of concert tickets either. :laughing:

A return of 8% may be too generous. A college savings fund is like a retirement fund, it needs to be largely intact when you need it to be. You don't have 5-10 years to wait out a tough market. Avoiding market volatility usually reduces the returns somewhat.

Compared to withdrawing some portion of a 529 when the market is bottomed out such as in 2008, it may be cheaper to borrow money in the long run rather than locking in a loss. You could always hope that the value of the 529 would increase in one or two years allowing early repayment of the loan. I don't know if that plays within the rules for a 529.

I do feel for you guys who are preparing to send kids to college. Is it worth it, and can it be afforded, are not easy questions and the answer is different for each child.

 

[smstonypoint]

An alternative I haven't seen mentioned yet is military service. Courtesy of the GI Bill and my working wife, I was able to complete my undergraduate education without going into debt.

I understand that the GI Bill has changed since my service (1965-1969) , but I believe that both current servicemen/women and veterans receive financial assistance in continuing their educations.

There are also ROTC scholarships that pay for tuition with allowances for texts and subsistence.

This isn't for everyone, but this is one means of obtaining an education without incurring ruinous debt.

Steve

 

[dave1949]

I believe you are referring to his blog entry rather than his longer piece in the Journal of Economic Perspectives (JEP). His blog entry discusses other economists' research that examines the "economic health" of the middle class. See his JEP article for his broader perspective.

In my opinion, the major point of his blog entry is relevant to the discussion of "income inequality." "(H)as the middle class experienced stagnant real income (a mere 3.2 percent increase) or significant gains (a 36.7 percent increase)? It depends on which measure of income you look at."



Employee compensation includes wages/salaries and employer-paid benefits (leave, retirement, insurance, FICA, etc.) According to http://www.bls.gov/news.release/pdf/ecec.pdf, those benefits amounted to 29.7% of private sector employee compensation in September 2013.

Holding compensation constant, their wages/salaries will not decrease to the extent that they would have had not their employers eaten a portion of the premium increases. I expect that employers will respond to higher premiums in a variety of ways, some taking more time than others; e.g., some will some will hold compensation constant and lower other benefits and/or the wage/salary component, some will be able to raise the prices of their prices of their products and services, some will not be able to hire additional employees, and there will be a continued substitution of labor for capital as the cost of labor rises relative to the cost of capital.

A pedantic point -- wealth is a stock, income is a flow.

A relative price increase for any product or service (hamburger, milk, health insurance, etc.) that we consume has a real income effect. To the extent that we can substitute other products/services (e.g., chicken, pork, fish, tofu, etc., for hamburger), we are able to mitigate that effect. The possibilities for mitigating a higher price for health insurance are limited, to say the least.

Most of the discussion about "inequality" is in reference to income, not wealth.

We can use a portion of our incomes for consumption this year and defer consumption to future years by investing the remaining portion. Some folks have very high incomes over their working lives but have little to show for it at the end. Spending their incomes on "wine, women, and song" may give them good memories, but little else. (Well, maybe cirrhosis of the liver and a social disease) . Some folks with modest incomes defer consumption and obtain substantial wealth by investing wisely.




I agree completely, and in a competitive market, employees will end up where they add the most value and therefore maximize their own incomes.



Dave, I discuss international trade and globalization with trepidation. You are always civil, some TBN members are not.

With international trade and globalization, there are winners and losers in each country according to each country's comparative advantage. Comparative advantage can and does change over time. The US is at a comparative disadvantage when it comes to some portions of the textile industry. The US losers are the affected textile companies and their employees, the winners are consumers -- we can buy t-shirts for $5 at Wal-Mart. To the extent that the employees have skills that are transferable, they can seek employment in other industries. They suffer if their skills are not transferable -- they will have to accept lower wages/salaries or retrain. I don't know the extent to which textile CEO's have skills that are specific to that industry.

For the products and services that the US has a comparative advantage, the winners are the companies and their employees who produce the products and services. The losers are the US consumers of those products and services. In 2011, the two leading US export sectors were industrial supplies and capital goods. (What America Sells To The World : Planet Money : NPR) These sectors are capital-intensive and require a highly-skilled workforce. That workforce is paid accordingly. .

It comes down both to the supply and demand for skills. I may be the most-skilled textile loom operator in the US, but if there is no demand for loom operators, I cannot expect to be rewarded for that skill unless it is transferable to other occupations/industries. I may be the best textile manager in the US, but if there is no demand for textile managers, I cannot expect to be rewarded for that skill unless it is transferable to other industries. (I need to do some reading on the transfer of executive skills across firms and industries. I do recall "outsiders" being brought in as CEOs: as I recall, some have succeeded, others have failed.)



I agree that attempts to oust corporate boards are rarely successful. However, boards have fired incompetent/under-performing executives and boards have been ousted. Under- performing companies have been taken over by other companies (public and private) in either friendly or hostile fashion.

I disagree with your take on institutional investors, pension funds, etc. Those folks are in the business of picking stocks, bonds, etc. for the benefit of their clients. Occasionally, they do participate in attempts to oust boards, but I think they avoid under-performing companies by steering clear of their stock.

Steve

I didn't take as much time as I should have in proofing my post. Please excuse my errors.

Ah, I found the Mankiw piece you originally referenced, thank you. I found it very rational.

One quibble I have with his dissection of the arguments of the Left regarding income redistribution, is perhaps he ignores the chicken-egg aspect of that. Transfers increase as a result of need, not just policy. Policy does reflect need. There are programs that define transfer eligibility parameters and as more people fall within those parameters, the Peter to Paul payments will naturally increase.

I don't have an issue with that. No matter how it is viewed in economic theory, the reality is that there are people seeking help to meet their basic needs. If by some national or global change in rewards for productivity mechanism (aside from rent-seeking), a small cohort of people end up with most of the resources, where else can we go to seek balance? It seems most economists agree we cannot fiscally or morally afford large-scale poverty. How poor is poor, how much help is deserved, and how productive the help is, are certainly contentious issues.

Setting the unemployed aside, working American families are getting simultaneously slammed on multiple fronts: the cost of higher education, the cost of health care, and the wage cost of globalization. Self-initiative can help on those issues to a degree, but the root problems cannot be fixed by working families. I have a sense that many are just bouncing around like the ball in a pinball machine, ricocheting from one obstacle to another while someone else is working the flippers.

I tend to see more rent-seeking and principal-agent behavior at work than you do.

 

[smstonypoint]

One quibble I have with his dissection of the arguments of the Left regarding income redistribution, is perhaps he ignores the chicken-egg aspect of that. Transfers increase as a result of need, not just policy. Policy does reflect need. There are programs that define transfer eligibility parameters and as more people fall within those parameters, the Peter to Paul payments will naturally increase.

I don't have an issue with that. No matter how it is viewed in economic theory, the reality is that there are people seeking help to meet their basic needs.

A problem with some of these policies is that they provide disincentives for people to leave the welfare/poverty programs.

If by some national or global change in rewards for productivity mechanism (aside from rent-seeking), a small cohort of people end up with most of the resources, where else can we go to seek balance?

Let's rule out ill-gotten gains through rent-seeking and cronyism. By doing so, we have to ask how those folks generated their incomes and wealth. They have apparently provided goods and services that customers chose to buy. I don't have a problem with that. These folks don't leave their money under a mattress. They employ people in their own companies, they invest in other companies, they consume, etc.

Speaking of cronyism and rent-seeking, I like this quote from Don Boudreaux (Cafe Hayek)

"I agree that government enforces many policies that bestow undeserved riches on politically favored groups. But I disagree that (1) these cronyist policies were for decades the dominant force in our economy, and (2) the problem with these policies is whatever increases in income inequality these policies might produce.

If cronyism had truly been the dominant force in our economy for decades, we would have stagnated long ago. The economic booms of the 1980s and 1990s would not have happened. Ordinary Americans today would have no smartphones, no GPS navigation, no digital photography, no e-books, no Amazon.com, no big-box retailers, no access to miracle drugs such as statins and PDE5 inhibitors. This list can be extended much further.

Yet even if I here underestimate the extent of cronyism, the problem with cronyism isn't that it makes incomes less equal. The problem is that it stifles economic growth and, worse, violates the property and contract rights of ordinary people in order that government can transfer unearned treasure to politically powerful special interests. Any resulting rise in income inequality is merely a symptom of cronyism's evils. Efforts aimed directly at making incomes more equal, therefore, miss the mark. Such efforts not only penalize non-cronies, but by attacking merely a symptom of cronyism, these efforts divert attention from and leave intact the destructive cronyist policies themselves.

Were I a crony, that's a situation that I'd find to be most convenient."

Setting the unemployed aside, working American families are getting simultaneously slammed on multiple fronts: the cost of higher education, the cost of health care, and the wage cost of globalization. Self-initiative can help on those issues to a degree, but the root problems cannot be fixed by working families. I have a sense that many are just bouncing around like the ball in a pinball machine, ricocheting from one obstacle to another while someone else is working the flippers.

I tend to see more rent-seeking and principal-agent behavior at work than you do.

I think the solution consists of policies that promote economic growth rather than hindering it.

Trust me, I see rent-seeking and the principal-agent problem at work.

Steve