Who says there's no inflation?

Courtesy of The Economist comes this fantastic chart, which shows the runaway growth in costs of college tuition and related expenses over the last 40 years.

The Economist remarks further that cost increases at public schools have actually outpaced those at private schools, nearing a 15-fold increase over 40 years. Recall from this infographic (mentioned in this previous post) that 1978, the base year for this chart, was the year in which the federal government began placing restrictions on the dischargeability of student loan debt. Further restrictions were passed in 1990 and 1998 (in which year Congress completely eliminated the ability to discharge student loan debt in bankruptcy proceedings), both of which represent inflection points in the top line of the graph. These inflection points lend credence to Jess Bachman's thesis that the government's treatment of student loan debt is in fact to blame for increased costs at our nation's universities.

But I think there is more to this chart than simply a student loan story. Over the past 20 years or so, government-produced "core" inflation data has been modest at best, showing only slight inflation in consumer prices (hence the "Consumer prices" line tracking with the "Average hourly wage" line on the chart above).

But the sectors in which prices have risen the most steadily--education and health care (health care is unfortunately not included in the Economist's chart)--are those in which the United States is unable to outsource production or directly purchase goods from abroad. In other words, they are the service sectors.

Those industries which are the most US-centric (and least impacted by foreign trade) have in fact experienced runaway inflation, significantly outpacing wage growth and destroying the US wage-earner's purchasing power. The fact that "core" inflation has remained subdued, then, seems to be a function of lower labor costs abroad, and American firms' ability to take advantage of those lower costs.

I think this is a troubling trend for multiple reasons. If the US economy continues to struggle, or at least does not meet the pace of economic growth in traditionally low-cost labor areas (such as China and India), what will happen as wage rates among the nations equilibrate? If our (foreign) input costs on consumer goods increase, what will we then lean on to keep down our domestic rate of inflation? Will it be a decrease in our own wage rate? Will we see 1970s-style inflation, or worse, hyperinflation? None of these options seem particularly palatable.


In the near-term, widespread concerns about possible deflation are valid, but the Fed's insistence on flooding the market with money via historically low interest rates could prove an incredibly dangerous response. It would not take much of a change in the global economy for the "Consumer prices" line on the above chart to start behaving like the "College tuition & fees" line. That is an outcome that almost nobody in our country can afford.


[The Economist]

Is student loan debt the root of all evil?

Today I was tipped off to this fantastic infographic by Jess Bachman (who's got some terrific stuff on a variety of topics here) about the shady dealings behind federally guaranteed student loans. I highly recommend you take a look through the graphic, but here are some of the key takeaways (emphasis mine):

In 1998, Congress completely eliminated the ability to discharge student loan debt in bankruptcy. The same rules apply to debt from criminal acts (you murder someone and are sued) and debt from fraud. Loans for education are the only type of loan that has this Federal 'no-escape' clause.

The harshest collection methods are reserved for student loans. Miss a few payments and you can be subject to:

- Wage garnishment without a court order

- Suspension of state professional licenses

- Garnishment of social security/disability income

- Withholding IRS tax refunds

Note that these provisions apply not only to government-provided loans, but also to loans taken out from private lenders. The graphic goes into further detail about how this scheme benefits governments (and, by extension, the schools themselves who receive government funds through direct subsidies or preferable tax treatment), but that's not my real point of contention.

I'm more worried about the impact that this forced debt slavery has on the choices that are made by our nation's best and brightest upon graduation. I know firsthand from both my undergraduate days and my MBA days the extraordinary pressure that the mountain of (non-dischargeable) student loan debt places on graduates, and the implications worry me.

I graduated Harvard with a moderate loan debt compared to many of my friends and classmates (the equivalent of about one year's tuition, including room and board), but I still felt the dread that a wall of impending loan payments creates. Multiple hundreds of dollars per month (much of it interest) represents a big chunk of any entry-level salary, automatically eliminating several career options.

This dynamic is even more pronounced at the graduate school level. I was lucky enough to have savings from my post-undergrad career (as well as significant scholarship money), and thus escaped my MBA days debt-free. But many of my classmates were not so lucky, and left town with $100k+ in debt (not to mention 2 years' lost salary) for their efforts.

There, even more so than in my undergrad days, I saw countless talented (and highly educated) people abandoning their dreams of entrepreneurship or non-traditional career paths (media & entertainment, sustainable business, etc.) in favor of more highly-paid jobs in consulting and, of course, investment banking. A full 55% of my graduating MBA class went into banking, consulting, or financial services, all of which are by their nature non-productive businesses (yes, I've heard counter-arguments as to their productivity, and no, I don't buy them).

I've been arguing for years with anyone who wants to listen (okay, mostly my wife, who happens to be a recruiter at colleges for a major national bank) that FAR too many of our best and brightest are going into these industries, rather than more productive businesses like manufacturing and technology. 55% is an insane number, especially at a school that bills its MBA program as having a "general management" focus. When you have too many highly intelligent people in too small a space, fighting for too few profits, corners are bound to be cut, and shady behavior is likely to follow. It's not that well-educated people are immoral by their nature, it's just that they have far too much to lose. A hungry animal--even a smart one--will often resort to any means necessary to get himself a meal.

Furthermore, when great profits are to be had in these industries (by legitimate means or otherwise), the incentive to work for a regulatory body like the SEC wanes. No rational college or MBA graduate would take his sack of loan debt up to Washington or New York and go to work putting his former classmates out of work or in jail--at least, not one without a seriously admirable gift for big-picture altruism.

I don't think it's too far a stretch, then, to say that the infrastructure surrounding student loan debt is at least in part to blame for the financial bubble that developed over the past 20 years, and its subsequent burst and crisis. Saddle too many intelligent people with unforgivable debt, channel them into high-paying jobs that they don't necessarily want, and undesirable outcomes are almost inevitable.

It may sound hypocritical and disingenuous for me to preach from my perch atop the ivory tower, but I really do believe that too many people are going to college, blindly taking on huge debt for the promise of future piles of cash. If young students realized (which even I didn't until now) that their debt was non-dischargeable, and that their career options would thus be limited (perhaps permanently), I firmly believe that fewer students would take those loans, and more would turn to careers of entrepreneurship and creative enterprises. This spirit of entrepreneurship is what made America's economy great to begin with, and it is a necessary development if we are ever to return to our previous position of economic power.