2012 September 30 Sunday
Student Loan Debt: The New Serfdom
Americans can't escape student loan debt thru bankruptcy. A rapidly rising percentage of households carry the burden of student loan debt.
About one out of five (19%) of the nation’s households owed student debt in 2010, more than double the share two decades earlier and a significant rise from the 15% that owed such debt in 2007, just prior to the onset of the Great Recession, according to a Pew Research Center analysis of newly available government data.
The Pew Research analysis also finds that a record 40% of all households headed by someone younger than age 35 owe such debt, by far the highest share among any age group.
The burden of student debt has increased even more because incomes declined during and after the Great Recession. The burden will only grow heavier in the next recession. The Republican Party is missing out on a great campaign issue where they could promote far cheaper ways to get an education and valuable training.
The poor can't afford debt payments of course. They've got too little money for basics, let alone for debt. This educational system that lures people into education that will not boost their earning potential is cruel.
It also finds that, whether computed as a share of household income or assets, the relative burden of student loan debt is greatest for households in the bottom fifth of the income spectrum, even though members of such households are less likely than those in other groups to attend college in the first place.
Since 2007 the incidence of student debt has increased in nearly every demographic and economic category, as has the size of that debt.
"The Undiscovered Jew", In the comments of a post by Half Sigma, has recently made the point that Republicans could achieve multiple goals by promoting alternatives to the current expensive liberal higher education system.
Scott Walker in Wisconsin, who is the most effective conservative in America because he's the only conservative making aggressive moves to cripple the liberal bureaucracy rather than simply knocking out Democrat polls, has a good idea.
His education reform plan would let anyone test out of classes in any subject to earn their degree faster. On the surface, this only appears to be an attempt to save undergraduates tuition debt by letting them skip classes they have already mastered.
However, his plan is actually a stealth attack on the liberal arts because liberal arts classes are the easiest classes to test out of because there's no math or science involved in the tests. However, because Walker doesn't overtly say he wants to defund the humanities, Walker is able to gain public support for his plan because ordinary voters like the fact Walker's flexible degree program will cut tuition costs.
This is the way to defund the liberal arts - by getting fewer students to take lib arts classes. This will defund the liberal arts because department funding is to a large extent based on how many students are taking x amount of credit hours in the department. The fewer students taking lib arts credit hours, the more starved of funding the liberal arts becomes.
While TUJ emphasizes the partisan advantage of basically defunding left-leaning propagandists I think efforts to cut higher education costs are essential in an environment of declining living standards and higher education costs that rise faster than inflation. People can't afford higher ed. Technology enables cheaper forms of lecture delivery. Online lectures and online books can slash costs. Online tests for practice drilling can help speed learning. Education delivered online is also hugely more convenient. Watch lectures or take tests any time and anywhere you have power and a broadband connection. If you can trouble yourself to download in advance then your only need will be power.
I want to weld Walker's flexible degree program with giving undergrads the option of skipping their gened requirements completely to focus only on their major, as is done in Britain and Australia.
I've made this point repeatedly in the past. The current status quo is unsustainable. Higher education costs too much. We need online lectures for most topics (and YouTube has them for a large assortment of topics). We need online tests that let you check your knowledge and to drill to enhancement your memory recall and mental skills. Then we need proctored tests where you can pay to just take tests.
Tim Worstall sees the current structure of universities as medieval.
I first saw this point over at Brad Delong’s. That the whole teaching structure of a university is based upon the medieval expense of books. No individual student could possibly hope to afford even one book directly, let alone the small library required to read all around a subject. Thus the form of tuition of the lecture, where the Master reads to the assembled from the text.
Higher education is next in line for massive restructuring. After that comes medicine. Everything that costs a lot and has soaring costs is in line to get restructured. When world oil production starts coming down off its current bumpy plateau the downward pressure on living standards will assure that both higher education and medicine lose their privileged status.
I would quibble at your last conclusion--medicine continues to deliver significant forward progress while there is no evidence that education has or will (especially if you believe in the signaling theory Bryan Caplan endorses or in the basics of IQ). Now whether the progress medicine delivers is worth the prices charged (research differs here) or whether the barriers to entry (after all, the pre-AMA world of physician entry was a fiasco and quality control at the price of higher cost has much cross-partisan support) are worth it are open questions but it is reasonable to believe people will be willing to pay a large premium as the field advances. Education is the true dinosaur here with its pure rentseeking...
Now whether the progress medicine delivers is worth the prices charged (research differs here) or whether the barriers to entry (after all, the pre-AMA world of physician entry was a fiasco and quality control at the price of higher cost has much cross-partisan support) are worth it are open questions
I think that the rise in medical costs is an effect less of barriers to entry than of massive cost-shifting, including, but not only, cost-shifting from government-mandated care (EMTALA and the like). Not to mention the cost of staff to handle the volumes of paperwork that such cost-shifting brings with it.
I put a certain fraction of my paycheck into an FSA and prefer to pay my own way for routine medical care. Earlier this year I visited an office specializing in eye medicine for a yearly checkup. At the business counter I explained that I wanted to pay the bill. I was not permitted to do so. (They didn't even understand the words at first.) They forced me to pay nothing but the copay while they billed my insurance company for an unspecified amount. That was their job, and the job of their counterparts at the insurance company. A few days ago I got a chest X-ray at a hospital; the staff person said she "[didn't] have the list of cash prices on hand" so I couldn't pay for that either. I have no doubt that the hospital was using my bill, whatever it was, to cover unpaid costs elsewhere.
Education is the true dinosaur here with its pure rentseeking...
Agreed. But the country needs R&D, and a lot of that has devolved back to the universities from the private sector. I don't want to see it orphaned.
In 2011 health care was 17.9% of GDP and is projected to hit 19.6% of GDP in 2021 with further rises beyond that point. That's huge. It depresses living standards. The bigger medicine becomes the bigger the target it becomes for restructuring and innovation to cut costs. We've got two choices:
A) automate health care.
B) cut back on health care spending growth by cutting back on the total amount of care delivered per sick person.
I expect B will happen. We can not afford the current rate of spending growth. But I prefer A. If we automate we can cut spending growth without lowering quality of care. Automation can actually raise quality of care by delivering best quality to more people.
Another reason to cut costs: When growth of replacement organs, creation of stem cells, and other more advanced treatments become possible we are going to need even more cash to deliver those treatments. So we need to automate the delivery of the less effective treatments in order to free up money for the more effective treatments that are coming. Most medical treatments have poor efficacy since few solve the underlying causes which are mostly rooted in aging.
Federal tuition subsidies have backfired. Instead of making college more affordable for all, they have resulted in tuition going through the roof making it affordable only for those qualifying for federal aid or the very rich. Others must borrow large sums of money to attend college. The federal government and the schools are equally guilty in promoting the idea that (a) a college education will automatically lead to a higher salary, and therefore (b) the federal government must subsidize education. The result has been (a) more power for the federal government in terms of who it allows to have the aid and hence attend college at the expense of others, and (b) higher salaries for college professors and administrators. They do this even though college administrators and professors know that most high school graduates are unprepared for college. Indeed, the first year (or two) of college has essentially been transformed to remedial high school.
I had the opportunity to take some classes at an "upper echelon" college a few years ago. Most students had trouble with simple math (fractions), grammar and what used to pass for basic knowledge of historical facts. what was most startling was that there were more class sections devoted to "basic math" and algebra than to calculus. When I was in college, the lowest math offered was calculus. Today, even though it's supposed to be a state requirement that to graduate one must pass algebra II, kids are forced to retake algebra I in college because they lack competency.
I have mixed feeling regarding online courses. I have used that option and while I'm sure it is a great option for many and that for some material it may be great, for many courses, I derive great benefit from the back and forth dialogue with professors and other students that currently is somewhat lacking in the online setting. On the other hand, in many universities, the almost universal far left bias of the professors makes this a dubious benefit. However, I do think that having this option makes the education market more competitive.
Now, as far as the costs of medicine are concerned, this should come as no surprise given the federal subsidies (both direct and indirect) that have resulted in a system where most medical services are paid with shat people feel is other people's money. If consumers paid directly for the care - and Medicare/Medicaid and employer paid healthcare had never been introduced - medical care would be exponentially cheaper. Further, in regards to your comments about most medical treatments having poor efficacy, if people had to pay directly for these treatments, the ineffective treatments would rapidly disappear. In a free market, people purchasing services chose between Service A and Service B based on various factors, one being price and they are more careful with choosing because they may not be able to afford the second choice. When someone else is paying for the service, cost becomes irrelevant and people are willing to try something that may seem "less invasive" or "less painful" etc even though it may not work because costs don't encourage them to make a single choice. This is particularly true when there is a condition for which no truly effective treatment exist. For example, how many of us (if we were 85 years old) would be willing to pay $250,000 for a cancer treatment if we were told that at best it would only extend our prognosis from 6 months survival to 7 months survival? Probably few if the money came from our pocket and hence we wouldn't be able to pass the money on to our kids. But if we assume other people (the government) is paying, the downside is limited - even though, in reality, our kids will be forced to pay.
What really depresses living standards are real estate prices and their associated transfer payments to the FIRE (finance, insurance, real estate) sector and gov't.
Close to 35% of US family budgets go to housing (some figures suggest as high as 40% of average US family budgets go to mortgage or rent).
The major elements in US family budgets are housing (with prices bid up on credit), debt service, and health insurance – and wage withholding for financializing Social Security and Medicare. Industrial firms also have been financialized, using debt leverage to increase their return on equity. The effect is for interest to increase as a proportion of cash flow (EBITDA: earnings before interest, taxes, depreciation and amortization). Corporate raiders pay their high-interest bondholders, while financial managers also are using this EBITDA for stock buy-backs to increase share prices (and hence the value of their stock options).
Shifting taxes off property onto employment and sales spurs the financialization of family and business budgets as tax cuts on property are capitalized into higher bank loans. Payments to government agencies for taxes and pre-saving for Social Security and Medicare absorb another 30% of family budgets.
1. Housing (ownership or rental costs) 32 – 40%
2. Debt service (non-mortgage) 15%
3. FICA withholding for Social Security and Medicare 15%
4. Taxes (income, sales and excise or VAT) 15%
These transfer payments to the FIRE sector and government agencies have transformed international cost structures, absorbing roughly 75% of US family budgets. This helps explain the deteriorating US industrial trade balance as the economy has become financialized.
This represents a massive parasitic load on the US economy that is diminishing and killing off its host.
Housing costs are significantly less in many other countries. They are notably less than half of US housing costs in the BRIC countries, which is why they are industrializing rapidly:
FICA taxes haven't gone up for many years. Health insurance certainly has. It is worth noting that debt is usually taken on voluntarily. Meaning: people could just not borrow money to buy things.
BRIC countries: Brazil and Russia are advancing due to rich natural resources. China is industrializing because hundreds of millions of smart people were allowed to escape communism. Housing costs are not a major factor in BRIC economic growth.
The US government went on a spending bender without raising taxes. Federal tax rates were higher in the late 1990s.
The US government's biggest role in lowering living standards came thru its loose immigration policy. Other factors lowering living standards are outside of the control of US government policy. Depleting natural resources and greater Asian demand for natural resources are driving up costs and lowering living standards.
Speaking as someone who wants a smaller government and who would like to slash the welfare state: Our biggest problems are factors other than the money that flows thru the welfare state.
Housing costs do matter. Labor has to be housed. Higher housing costs result in higher labor costs. This can be exploited by rent-seekers engaging in labor arbitrage, as it has been.
Empirical research has shown that roughly 75% of US family budgets is being absorbed by transfer payments to the FIRE sector and government. Households haven't been spending more on consumption and luxuries. This 75% includes education costs, which is part of the transfer payments to the FIRE sector via non-mortgage debt service. Much of the remaining 25% is absorbed by high medical costs. And then there is little to nothing left. This huge overhead is a massive parasitic load on US households that diminishes living standards.
Interesting argument on how higher FIRE payments reduce the standard-of-living in the US. To summarize your comments in this post, you're arguing that the mortgage-interest deduction on Form 1040 indirectly causes people to take on a higher mortgage, thereby increasing the FIRE payments? Ultimately people afford what they can relatively afford for a monthly mortgage payment based on after-tax disposable income. Nonetheless, it is fascinating why the US has such a higher proportion of income being channeled towards real estate.
I think people are spending to get away from lower classes. Buy an expensive home in a neighborhood where all homes are expensive and then all your neighbors won't be dysfunctional and your kids can go to a school where the kids aren't all stupid and unruly.