Nov 09 2006
The Real Cause of Bloating College Costs: Inflation
Average 4-year private college costs have broken the $30,000 threshold. That’s according to CNNMoney.com, where they note the obvious: total costs for public and private schools costs are growing well ahead of official inflation. So what else is new?
We’ll shelve how CPI is understating real inflation for now, and focus on what’s going on with College costs. So, what’s CNNMoney’s read on rising costs?
Why costs keep climbing
In the past few years, tight government budgets have kept been cutting off non-tuition revenue from colleges, forcing schools to ask for more from students’ checkbooks.
Nor have the costs of health benefits and utilities gone down. And schools are also grappling with higher faculty salaries, especially at private institutions where faculty receive higher pay.
Well, that’s all true, but let’s not forget an important factor — the real definition of inflation: an increase in the money supply. (We mistakenly now use the term to define the consequences of this — rising prices.) In the good old U.S. of A., that’s accomplished via the credit markets, where not one dollar in circulation exists except those that have been loaned into the economy via the banking system. For details on how that works, we encourage you to tune in to our G. Edward Griffin interview.
Now, when the “powers that be” decide to create an environment, legislatively or otherwise, where interest rates are very low AND where loanable funds for education are readily available to pretty much anyone with a pulse, often backed by the implied full faith and credit of the U.S. taxpayer, wellâ€� there you have a ticket to inflated / expanding money supply.
In context, I’ve talked over the years to many people who will do anything to pay for college. That primarily involves massive debts. Graduates often are saddled with tens of thousands of dollars of loans for decades post-graduation, a burden fortunately lowered by well-below-market interest rates, in the 2%-3% range in many cases. Parents will tap into home equity or credit cards to pay the tab, many times blowing a hole in any chance for a comfortable retirement - with some even saying they’ll do what they must even if it means declaring bankruptcy after graduation to clear the debts. Again, all that translates into college tuition being funded massively by expanding credit - e.g. expanding money supply — also known as inflation. (I can’t say that too often!)
Now, probably the most misunderstood fact about inflation is that it does not hit all goods and services similarly or simultaneously. It concentrates in those areas with the highest consumer demand, and it is usually masked most in those areas high on the technology curve. That’s why you can find home theatres cheaper than ever at the same time college costs break everyone’s pocket books… while gas prices double in three yearsâ€� while healthcare benefit costs shoot up.
Those readers looking for the real culprit for most skyrocketing costs in an economy, start with a close look for an inflationary banking system. It is our primary explanation: In the U.S., college costs go up as high as they do because people will suffer whatever debts it takes to put their kids through college, and the money supply expands to accommodate. But most importantly, don’t think of it as college costs going up, think of it as your dollar loosing purchasing power relative to higher education — a framework of return measurement (real vs. nominal) that we believe astute investors will use going forward vs. the very arbitrary and neutered Core CPI.
All that said, those in higher education ought to take note with what’s gone on recently with the off-shoring of tutoring jobs. It’s only a matter of time before Americans wake up to the fact that an online education from abroad is worth more than the absurd skyrocketing costs of domestic based traditional education.
Definately currency inflation is a large part, but don’t forget the added ancillary baggage of all the extra stuff required by regulation or the costs of our litigation environment when it comes to rising prices, too.
Jackson — those issues apply to every business in the U.S. As such, the provide huge barriers to doing business — provide a huge leg up to competition from abroad. But they are not unique to college. Inflation affects credit related businesses / items most. As JE said, people will do anything to put their kids in school. Just like lots will do anything for healthcare to save their lives.
Tuna,
Actually, it affects high priority goods and services the most, which is then exacerbated by availability of cheap credit. Of course, if cheap credit were only made available to a specific targeted good or service you’d see the price go up. (kinda like housing mortgages have done to the housing bubble.) Of course, there’s the technology exemption to the rule — especially with a trade deficit like we have in the U.S. — where cheaply made high tech items flood the market, which more and more consumers chase by the day — reflected in the ever growing trade imbalance. Interestingly that $$ gets recycled by foreign nations back into our credit markets here in the U.S., enabling more and more inflation via fractional reserve requirements.
Back in my Liberal days, I used to think that it would be a Good Thing to see more government backed grants and cheap loans for education.
But, after learning more about the Austrian school of economics, it’s clear that this flood of money distorts the market, making people pay more and more for education regardless of the quality or marketability of the degree. If *your* parents can’t afford to send you to school, your neighbors will by either 1: going deep into debt or 2:getting massive government grants
The universities can raise prices with impunity regardless of quality, as there is always a huge pool of free/cheap money out there to buy their services.
Tuition prices have gone up at least 15-21% since I graduated (in only 2001)…so tell me: Are the current graduates 21% better educated? Or just 21% poorer?
-DaveP