Thursday Highlights

Thor’s day?

  1. Somebody gets it.
  2. Somebody else doesn’t.
  3. A Lutheran crosses the Bosphorus.
  4. Good news vis a vis the NSA.
  5. Demographics may drive our near future.
  6. Well, that’s a simple trick.
  7. So, who knew? The African slave trade of the 18th century was just recapitulating geology.
  8. Two? Two different ways?! Imagination failure is clearly present. There are probably 20 different ways, easy.
  9. That’s just silly.
  10. Miffed? Miffed at whom? Obama miffed at self apparently. What a maroon.
  11. Not getting the whole first shall be last thing.
  12. Jesus remarked that the poor will always be with us … fools will be too I guess.
  13. Yah, in the late 1950’s my dad worked his way though college with they money from his summer job.
  14. So, Mr Clinton is to blame in a large measure. Bet you didn’t know that.
  15. The ludicrous position the left has put itself with respect to the first amendment highlighted here.

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24 comments

  1. Boonton says:

    Few interesting notes:

    1. In constant dollar terms, your dad’s min. wage job paid $21.72 an hour.

    2. Still if the min wage were tripled, it would still take nearly 20 hours to pay a single credit hour off. Still higher but it does illustrate the fact that your dad’s min. wage is not your kids’ min. wage and if the secret to killing off inequality, poverty, joblessness etc. was getting rid of the min. wage it’s clear we’ve been trying that for decades now and it’s failed.

    3. You have classic cost disease here. A quick search says in the 70’s you’d expect to pay $850 for a 25″ Sylvania TV. At the min wage back then that would take a whopping 293 hours. Today let’s say $200 which would be about 28 hours. Which is one reason why if you worked in a TV factory in 1970 you probably had a good living. Today scooping ice-cream won’t pay for college but it will pay to fill your room up with gadgets.

  2. Mark says:

    Boonton,
    I suspect it wasn’t a min. wage job. He worked for a road crew which was mostly union. Unions rarely contract for min wage. When the union guy showed up the foreman had my dad wander off for a bit. They traveled around the state for the job during the summer.

    I’m curious why in you analysis, of cost disease and min wage that you don’t take into account that the cost of education has far exceed the rise in the price of, well, everything over the last 65 years.

  3. Boonton says:

    As for ‘student loans’ causing this, BS squared. Think about this, conservatives who blame student loans are also the same group who hawk vouchers as a replacement for public school. What’s the difference between a student loan and a voucher? A loan you have to pay back, a voucher is essentially free money for you.

    Colleges are all in competition with each other. Even if it’s easy for everyone to get a student loan of any amount, that doesn’t chang ethe fact that they have to pay them back. School A which wants to charge $100K per year is at a disadvantage with School B, which offers the same stuff but only charges $50K per year. Why wouldn’t school B get more customers than A? And if loans make people so insensitive to prices that they can’t tell the difference between paying back $50K*4 versus $100K*4 what does that say for the idea of vouchers?!

    Loans didn’t make college expensive anymore than auto loans made cars expensive. Loans follow expensive items. When cars started getting pricey, it made sense to finance them. When radios’s were pricey they were often financed too…no one does that now for the most part.

    And the fact is that the income differential between a college degree and just a HS one has grown. You’re talking over a $1M in more lifetime income or more. If I told you some vacation home could be expected to generate $1M in aggregate rent over the next 30 years you’d consider it a bargain to be able to borrow $200K to buy it.

  4. Mark says:

    Boonton,
    Tuition in 1955 at U of Wisconsin (google it) was $50 for a semester. I suspect most of his summer money went to room and board. Which is why he was in a Chem frat sleeping on a porch (in Madison in the winter) and they cooked for themselves.

  5. Mark says:

    Boonton,
    ??? Where’d that come from

  6. Mark says:

    Boonton,
    Apparently (according to our economist Boonton) contrary to popular notions, low interest loans don’t help sell cars. It seems the car industry hasn’t realized that.

  7. Boonton says:

    If you made car loans illegal tomorrow the auto industry would collapse. But a new car isn’t going to cost less than $1000 ever.

  8. Boonton says:

    Apparently (according to our economist Boonton) contrary to popular notions, low interest loans don’t help sell cars.

    I’m selling lint. Would you like to buy a pound of it from me for $500,000? Don’t have the cash? Suppose I told you I have a bank that will give you a 30 year loan at 0% interest. Do you want to buy it now?

  9. Mark says:

    Boonton,
    I’m still not sure where the whole student loan thing came from? Not me.

    Let’s see, tuition went from $50 to $5000 per semester (I don’t know what his room/board fees were … but that summer covered them … now room/board is $5k per semester). What else over the last 60 years has increased in cost by two orders of magnitude (as noted by the article, wages have not and inflation has not). Room/board probably has gone up by an order of magnitude. For comparison Min wage then $.75 now it’s an order of magnitude greater. So while the room/board has kept pace with the wage increases … tuition has far exceeded it.

    I’m selling lint.

    Not relevant. Cars and education isn’t a thing people want to get rid of.

    If you made car loans illegal tomorrow the auto industry would collapse. But a new car isn’t going to cost less than $1000 ever.

    Btw, the cost of a (new) car in 1955 was about $1500. I didn’t suggest making loans illegal. My question was why you think lo-cost loans don’t (no money now!!! no money down!!!) sell cars. They do. So, two ways to sell cars. Lower prices or make (cheap) money available. Why making loans available or cheaper helps cars sell at higher prices but does not do the same for college is what you haven’t explained (and won’t because it’s wrong).

  10. Mark says:

    Boonton,
    Interestingly enough with all the kerfuffle of the housing bubble and increases in prices, they’ve only gone up an order of magnitude (tracking with cars) and not two (or a factor of 2-3 like milk).

    So … what else has increased in price for the same product like education.

  11. Boonton says:

    The student loan issue came from the blog you cited which asserted a cause of increased tuition was student loans, supposedly since it’s easier to take out lots of student loans today that makes it easier for colleges to simply hike prices thru the roof. Presumably this explained your assertion that Clinton was responsible since he did champion making it easier to get student loans.

    So while the room/board has kept pace with the wage increases … tuition has far exceeded it.

    True, and yet televisions have fallen relative to wage increases. This is the ‘cost disease’ and it happens when you have one sector that grows in productivity faster than another sector. For the same amount of input, we can make lots of TV’s relative to 1970 yet a barber can’t cut any more heads of hair than he could compared to 1970. So relatively speaking haircuts feel more and more expensive while gadgets feel less and less so. While colleges do have some automated aspects, they are more like barbers in that they are labor intensive and slow in productivity growth. Hence they become more and more expensive as time goes on.

    Not relevant. Cars and education isn’t a thing people want to get rid of.

    A car lot certainly wants to get rid of its inventory of cars. My point is just because you can get a loan doesn’t mean you’re immune to the price, whether you’re talking about a house, car or eduction.

  12. Mark says:

    Boonton,
    My Clinton remark was on another link/event/post. That was noting that it was a Clinton era decision to disarm all personnel on armed services bases. Seems dumb to me. Security and MPs on bases (at the very least) should be armed.

    My point is just because you can get a loan doesn’t mean you’re immune to the price

    You do like the straw man. Immune? Please. Nobody’s claiming that. You can move inventory both by lowering prices or making loans more available/cheaper. Which is to say if you make a loan cheaper you can charge more to get same sale. So … why is this true for cars but not for college ?

  13. Boonton says:

    Your link for Clinton is wrong then, looks like you repeated the college cost link….and since Clinton did work to make student loans more sensible it’s plausible to see why one might try to build such a case against him on college costs.

    As for loans, I think the story’s a bit more complex. Econ 101 will depict demand as being made up by price so you can draw a 2-d demand curve (more demanded at low price, less at high one). More exactly demand is made up of multiple variables. The most important would probably be:
    – price
    – price of substitutes + means greater demand
    – price of compliments + means less demand
    – income (past present and future) + means more demand

    Loans increase demand by essentially increasing income. Without loans you can only use income from the present and past to buy something, with loans you can transfer future income into the present. The ability to tap loans, then, would increase demand which could increase prices. But beyond that lower interest rates on loans just lower the price of the ‘income time transfer’. In other words, it’s not very plausible to think a few points less interest would merit paying a much larger price unless supply was highly inelastic (which it isn’t, while there’s only one Harvard it’s not like it’s all that hard for colleges to expand).

    An asset is a bit different in that it’s expected to generate income so that will cause demand creation. If the asset generated no income, loans wouldn’t create demand except for the ability to time shift future income into present demand.

    College costs more because more expected future income meand more demand. Loans are just a transmission mechanism. If you raised the interest rate it wouldn’t have much impact because rising income differentials mean rising value of the college degree today. If it’s going to raise your future income by 100% rather than 25%, a 6% student loan rate versus 2% is annoying but ultimately not very relevant.

  14. buddyglass says:

    I’m late to the discussion, but its worth noting that the kids who have to work to pay for college are the ones most likely to not have to pay “sticker price”.

  15. Mark says:

    Mr Howard,
    Where the discussion went was pointing out (from my family history, i.e., my father) that college costs were $50 per semester for in state students in Wisconsin in 1955 and that my father paid for his tuition+board by working in the summer. From that point it was pointed out that college costs have risen two orders of magnitude (or more) in the meantime. Mr Boonton is arguing something of a straw man by trying to make the claim that college loans are not the sole cause of the increase. I am trying to argue that they are a contributing factor, one of many causes. I’m not even claiming they are a primary cause.

    Boonton,
    Let’s try to bring some sense back into the discussion. The introduction of loans for colleges as the standard accepted method for financing student education meant in part that colleges got the free reign to escalate costs. The colleges are under two major influences they think that their product very much increases the earning potential of a graduate and subsequently they are justified in charging more. At the same time there are growing demographic pressures and have always been competition between schools to attract good students. This competition drives them to improve the attractiveness of their product. The “attractiveness” can be increased in meaningful ways, getting better teachers/professors and in not-so-meaningful ways, through new buildings, new fitness centers/spas, better food, better dorms. The food at the somewhat average mainstream campuses I’ve toured as my kids are looking for schools are excellent. The food at the top flight University I attended when I was an undergraduate in the early 80s was just one small step better than what we got at the summer Boy Scout camp, it was edible but horrible. You can bet that today, UofChicago undergraduates aren’t paying 50+k per year and eating swill. Alongside the rapid increase in the sticker price, there has been of course accompanying waste, whether that has been an important or just a small fraction in the cost explosion is a question I don’t have an answer for.

    The absence of an understanding that “loans will be required” allowed and forced colleges into this non-essential “attractiveness” war, which has driven costs up. But your story that “loans” are irrelevant is not right. Your initial premise is wrong. Just because “future value” if high does not warrant an commensurate increase in the sticker price. To make an analogy, if you were born with a birth defect, which if not corrected would leave with a lifespan of minutes. The cost of the operation should not figure in the “potential future earnings” this makes available to you if done. This is your cost justification and it isn’t warranted.

  16. buddyglass says:

    Gotcha. I was only commenting on the graph at that site, which presumably used “sticker price” and not actual cost to the student. At many schools, much of the increase in tuition has gone directly to need based financial aid. Schools essentially tax students with wealthy parents (by creating a cost structure where they’re the only ones who actually pay full price) and then use the extra tuition to subsidize kids with low-to-middle income parents.

    About 15% of households earn more than mine, nationally, and it would cost me only marginally more to send my son to Harvard than it would to send him to the large, decently-good public flagship in my state. That’s because, at the public school, I’d pay at-or-near full price; at Harvard my son’s bill would be deeply discounted.

    But yes, even after accounting for financial aid the inflation-adjusted cost of college has risen. I wonder to what extent it’s been caused by the “education inflation” phenomenon where a bachelor’s degree is the new high school diploma. That is to say, the cost of *not* going to college is comparatively greater today than it was in your grandfather’s day. Consequently, colleges are able to get people to pay more for a degree.

  17. Boonton says:

    The introduction of loans for colleges as the standard accepted method for financing student education meant in part that colleges got the free reign to escalate costs.

    No they didn’t. Loans do nothing beyond allowing you shift future income into the present moment. To the degree they do anything, they are functionally ike you getting a big raise. If you got a big raise tomorrow would you pay $50 for a cup of coffee at Starbucks? Probably not. You may be willing to spend $2.50 where’as before you tried to keep it under $2 but Starbucks doesn’t have ‘free reign’ to escalate costs.

    The colleges are under two major influences they think that their product very much increases the earning potential of a graduate and subsequently they are justified in charging more.

    What they think is irrelevant. They aren’t taking on the loans nor are they offering the loans. Return to my ‘offer’ to let you borrow money to buy my overpriced lint. Why do you decline even if the interest rate is 0%? Because you don’t want to buy lint, you have no use for it. Even if you knew you’d soon get a lot of huge raises, you’d still have no interest in a loan to buy lint.

    But college is an asset (like a house, a business, even stock). Assets are things that create future income. That creates a dynamic where because the asset increases your income, you’re willing to pay a higher price for it.

    Consider, totally low cost and seemless loan systems wouldn’t be enough to let you even consider borrowing to buy a $50 cup of Starbucks coffee. But suppose you had reason to believe in a year the coffee bean would go extinct and frozen cups of coffee from the pre-extinction era would sell for hundreds…even thousands of dollars just as pre-embargo Cuban cigars sell for big bucks in the US. You very well may buy a Venti for $50 today and put it on your credit card.

    It’s not the loan itself that causes that to happen, it’s the ‘future you’ who you project to have income of thousands of dollars extra that allows you to be willing to pay the higher price today. If all in the sudden perception changes, they announce the great extinction was a hoax and all is well the price would crash down immediately even if there were plenty of loans available.

    Bit too out there in that story above? Just change ‘cup of coffee brought with credit card’ to ‘house brought with mortgage’ and you have a real life story, not a sci-fi one.

    My position is that college cost is driven by the expected income gains of college, almost everything else is trivial.

    The “attractiveness” can be increased in meaningful ways, getting better teachers/professors and in not-so-meaningful ways, through new buildings, new fitness centers/spas, better food, better dorms

    Could be a part of it, one way to view that is simply a type of advertising expense. Most colleges aren’t running TV ads which fund thousands of people watching ‘Judge Judy’ for free all in the hopes of getting one or two new students. Instead they give all the students great food in the hopes it wows a few students and parents enough doing the HS tour thing to make the difference.

    Another factor is that this stuff is really cheap. It’s easy to piggy back a new fitness center into a building….esp. if you’re building it from the ground up and have to build a new classroom building anyway.

  18. Boonton says:

    Working with this toolkit, let’s ask what elements for hte increased demand in college might be?

    1. Income effect – if you have more income you’re willing to buy more stuff and pay more for it.

    2. Quality – if something is higher quality, you’re willing to spend more for it.

    3. Asset effect – if something can either make you money in the future or be sold for a premium, that will impact what you’re willing to pay for it today.

    Quality has certainly increased. As Marc pointed out, food and campus amenities have probably gotten better so that alone would merit paying more. But consider, what if you had a college with a crappy campus but a private apartment building next door that had a nice fitness center and a jazzy food court on it’s base floor? Why not spend less on the college and use the savings to get most of your amenities there? One possibility is that the college can provide those fancy amenities at a lower cost than the private market. That may be the case if the amenities are a type of advertising. Or if the college has cost advantages that don’t exist outside the college (many colleges hold large tracs of prime real estate, even absent that even having to walk a single block to the campus proper is a downside.

    Income effect – If you think you’re going to be richer tomorrow, you’re willing to spend more today. But by itself this isn’t sufficient since you’d spend more on *everything* today.

    Asset effect – This is the killer, IMO. What would make you feel ok about spending $50 on a cup of coffee? To get you to do that based on quality would require an amazing improvement in coffee. In terms of income….well if I just won the lottery and was expecting the first million check at the end of the week I might spend $50 on a cup today. But if I thought for some reason I could flip that coffee either as income or as a capital gain, then I could very quickly spend a lot, lot more than a ‘normal’ price for it.

    In fact you see that all the time. You hear about some rush to buy some popular toy at Christmas time, people spend multiple times it’s retail price and then they flip it for much more (some of my friends were doing this back in the 90’s with Furbies…dropping $60-$80 for a $30 toy so they could sell it to parents for $150).

    The ability to borrow money has mimimal impact here. First, people could and did borrow for college before formal student loans. All student loans do is make the transaction costs a bit less expensive. So it’s not even like borrowing was impossible in the pre-loan world.

    The asset effect, in contrast, has the force to swing prices dramatically.

  19. Mark says:

    Boonton,

    As Marc pointed out, food and campus amenities have probably gotten better so that alone would merit paying more.

    No. I pointed out that those were non-essential frills which drive the cost up but which don’t actually improve the product. It’s like saying your coffee at Starbucks should cost ten times more because they have fancy furniture and expensive china. Which helps your drive through customer not one whit.

    What would make you feel ok about spending $50 on a cup of coffee? To get you to do that based on quality would require an amazing improvement in coffee. […and …] Quality has certainly increased.

    A good point made against the justification of raising the price of education by two orders of magnitude (which should btw be a $500 cup of coffee I think). The quality of education has arguably not improved at all. Woops.

  20. Mark says:

    Boonton,
    You’re also missing my point on loans. If the government decided to make available unsecured loans at killer interest rates (hard now that interest rates have been forced by the government to toxic-ally low levels) so that everybody could afford Starbucks. Imagine that their “everyone should get Starbucks” selling point works. People avail themselves of these coffee loans. Will that drive the price of Starbucks up or down?

    The point is that coffee used to be a thing which loans were not required to obtain. The expectation that (a) loans are required and (b) are available cheaply without collateral makes the higher price more accpetable and manageable. Why you don’t think this allows a price to rise is something you’re not explaining.

  21. Mark says:

    Boonton,

    Another factor is that this stuff is really cheap. It’s easy to piggy back a new fitness center into a building….esp. if you’re building it from the ground up and have to build a new classroom building anyway.

    Actually a state of the art fitness center like the one newly built at ISU which we saw during our tour cost several million dollars easily. So, no. It’s not cheap. And no, there are no classrooms in the building.

  22. Boonton says:

    It’s like saying your coffee at Starbucks should cost ten times more because they have fancy furniture and expensive china. Which helps your drive through customer not one whit.

    This would go to the question of whether price discrimination was possible. Would they charge less for the drive through customers than the sit down ones? If they did what would stop sit down customers from ordering with their cars and then brining their coffees into the sofas? In the world of college, this would be the student who rejects room and board to live off campus.

    If the government decided to make available unsecured loans at killer interest rates (hard now that interest rates have been forced by the government to toxic-ally low levels) so that everybody could afford Starbucks. Imagine that their “everyone should get Starbucks” selling point works. People avail themselves of these coffee loans. Will that drive the price of Starbucks up or down?

    If Starbucks cost $500 why would you avail yourself to such a loan? Even at 0% you’re still paying $500 for a cup of coffee. Your not going to take the loan unless that cup is really worth $500. If the loan has any rate above $0% it would have to be worth more than $500.

    Actually a state of the art fitness center like the one newly built at ISU which we saw during our tour cost several million dollars easily. So, no

    According to wikipedia they have 20K students and 140 buildings on 1,000 acreas. Let’s say the building cost $5M. That’s $250 per student. Not exactly breaking the tuition budget is it? Even more, that’s assuming you’re paying for the building in a single year’s student body. In reality a building gets amortized over 20-30 years of its useful life. At that point the cost per student per semester starts to disappear.

    The quality of education has arguably not improved at all. Woops.

    You want to be a doctor, I give you a time machine that let’s you go to any time from the present moment to the past. What year would you set it to go to medical school? 1970?

    You want to be a literature major. Again all literature available in 1970 is available today plus literature written between 1970-present. Even if you feel education techniques have gotten worse, the steady increase in knowledge over time gives education a big advantage in time periods.

  23. Mark says:

    Boonton,

    You want to be a literature major. Again all literature available in 1970 is available today plus literature written between 1970-present. Even if you feel education techniques have gotten worse, the steady increase in knowledge over time gives education a big advantage in time periods.

    The pedagogic techniques have not changed significantly to justify a 2 order of magnitude cost increase. The education you based on advances in the field (Literature might have devolved … but, be that as it may) …

    I’m still missing your justification for the cost increase.

  24. Boonton says:

    This goes back to the ‘economics of superstars’. Back in the day Charles Dickens was probably the world’s biggest writer. Today it may be JK Rowling. Dickens got rich, but nowhere near as much as Rowling.

    The world is paying a higher ‘price’ for it’s most popular writer today than it did a century ago….probably several orders of magnitude greater. What ‘justifies’ that increase? Is Rowling orders of magnitude better than Dickens? Hard to say but I think the answer is both are good, not perfect but good. some might say she’s a bit better, others might be biased towards the ‘historical’ aspect of Dickens and say he’s better but roughly speaking they are around the same zone of ‘quality’.

    The quality of your literature degree is probably slightly better. Even if you think post-1970 literature is worse than pre-1970, all the pre-1970 books are still around to read. In terms of quality it would be very, very, hard for 2014 literature degree to NOT at least equal the 1970 one. I grant you a 2014 literature PHd is not ‘orders of magnitude’ better read than a 1970 one.

    But recall the asset angle to all this. What you can do with a 2014 literature degree is make a lot more money than you could with the 1970 one. And there the ‘orders of magnitude’ get justified.