It’s not a failure of monetary policy, but fiscal policy.
Over at The Quantum Pontiff, ScienceBlogling Dave Bacon asks if college tuition is a bubble:
But what I find interesting, and what I’ve never been able to figure out, is the larger trend (ignore the last two years, please). Why are tuition prices increasing at such a fast rate for four year colleges? For example, see slide 5 of this presentation where one sees that over the last three decades, the inflation adjusted price of college has more than tripled at public four year universities and gone up nearly as much a private four year universities….
My own theory is that we are in the middle of a leverage driven bubble. Okay, yeah, its a stretch, but its fun to look at the numbers.
I think Dave is right that the continuation of the ludicrous increases in college tuition is due to funny money–just as the final stages of the ridiculous run up in housing prices was due to ‘ninja loans’*. To explain what I mean, let’s first think about what putting two kids through private college entails (and remember that rising private college tuitions allow public institutions to raise tuitions and still seem like a bargain).
If a family with two kids born two years apart sends both children to private colleges, that family will spend ~$400,000 over a six year period. This is in a country where the annual median income is ~$50,000. So when you hear well-endowed universities congratulating themselves that sixty percent of their students receive financial aid, keep in mind what that really means: forty percent of families could afford to pay what is essentially a second mortgage cash on the barrel head.
Now consider this figure from Les Leopold’s The Looting of America (and derived from U.S. Census data):
What is driving the incredible rate of increase of college tuition is that there are enough families that can pay those tuitions with cash. Sure, they would rather pay less (less is always better than more), but they can pay more. That drives prices up. The start of the boom in tuition was the explosion in income inequality.
So how does increasing leverage factor in? Well, if that leverage weren’t available, universities would have a revolt on their hands: families in the ‘second tenth’ would have a hard time paying the bills–never mind the other eighty percent. Yes, flooding the educational market with funny money kept the boom going. But this is what happens when rising income inequality meets an inelastic good.
The way we lower tuitions is two fold:
1) Increase funding to quality public schools so they can lower their tuitions. At some point, they will drive private prices down, or at least retard their growth.
2) Reduce income inequality so there is a smaller pool of people who can spend so much on tuition.
And if this sounds anything like a rehash of Keynes vs. Bernanke-Friedman, well….
*No Income, No Job, Approved.