Monday, January 25, 2016

College tuition and health care costs are unsustainable

Each of my four children has a 529 plan qualified education account into which my wife and I have invested a fixed monthly amount since the month each was born. Despite the impact of the Great Recession (two of my children were born before the fall of 2008) and other market downturns, these investments have grown substantially. Still, with eight and a half years to go until my eldest graduates from high school, we are likely to fall well short of fully financing a four-year college education for any of them due to the skyrocketing costs of college tuition. This will be true whether they aspire to attend my pricey alma mater, Harvard, or practically any other college in the nation. Students need no longer attend graduate or professional school to emerge with large amounts of educational debt; the average debt load of the Class of 2015 was more than $35,000, not counting loans that 17% of parents took out on their children's behalf.

Why have increases in college tuition constantly outpaced rates of inflation? On the New York Times's The Upshot blog, N. Gregory Mankiw recently offered these three reasons:

1) "Baumol's cost disease" - despite minimal advances in college productivity that would warrant our paying more for it, "because society overall is now richer, today's Socrates expects a reasonably high standard of living, and that implies hefty tuition."

2) Rising inequality - "it takes educated people to produce the next generation of educated people," and paying skilled workers is increasingly expensive.

3) Price discrimination - as colleges have raised published prices for the relatively well-off, they have also offered more financial aid based on a family's resources.

Even accounting for the impact of financial aid and subsidies to public universities, tuition costs are rapidly rising out of reach for most families. As Kevin Carey explained in a 2012 article in The New Republic:

Imagine you’re in the business of selling apples that cost $1 on the open market. Then the government decides that more people should have the opportunity to buy apples and society would benefit from a net increase in apple consumption. So it decides to drop the price of apples to 60 cents. Sometimes it does this by giving you 40 cents for every apple you sell, on the condition that you start selling apples for 60 cents. Sometimes it gives people vouchers worth 40 cents that can only be used to purchase apples from approved vendors.

At first, the policy works splendidly. Apples are effectively less expensive so more people buy them and the nation is suffused with apple goodness. But then you, the apple vendor, look at the situation and say “Hey, the market price of an apple is still $1. Wouldn’t it be great if I could charge $1 for apples, but still get 40 cents from the government for every apple I sell?” Raising the price all the way from 60 cents back to $1 in a single year would be too obvious and jeopardize political support for the apple subsidy program. So you start raising prices by three, four, or five percent above inflation annually. When annoyed public officials begin asking why, you explain that apple production is an expensive, labor-intensive business, and that all of the extra money is being used to produce the very best apples money can buy. Since apple quality is substantially a matter of taste, this is a hard claim to refute.

Meanwhile, you use some of your new profits to sponsor crowd-pleasing sports events on weekends, building public goodwill. Other profits are used to hire professional lobbyists to plead for both more subsidies and more freedom to set prices. You also convince the government to allow you and other incumbent apple sellers to form a private organization with the authority to decide whether new sellers can become “approved apple vendors” for the purposes of receiving public subsidies. Unsurprisingly, few new sellers are approved.

But eventually things start to break down. As time passes and price increases accumulate, the public starts to notice that while the taxes they pay to support apple subsidies are staying the same, the price of subsidized apples is creeping closer to the market price. This seems unreasonable. Meanwhile, when the economy turns sour, available tax receipts for apple subsidization decline. Instead of raising taxes to make up the difference, public officials drop the per-apple subsidy to 30 cents. This is bad for you, because it means you either have to spend less money on the exotic orchid greenhouse you’ve built next to the apple orchard—the reason, truth be told, you got into the apple business in the first place—or raise prices even further. Luckily, since you’ve kept new vendors out of the market and prices are still below the market rate, you can get away with raising prices, and so you do.

This is essentially the story of public higher education over the last thirty years. Diplomas are, of course, not apples. But they are more like apples than colleges like to pretend.

This blog is about health care, and college costs are not the same as health care costs. But they are a lot more similar than first meets the eye. Both colleges and health care organizations employ armies of highly skilled workers. Like a college education, access to health care is a good thing (although earning a college diploma improves health more than the best health care money can buy), but measures of quality are hard to find and hotly disputed. Higher prices are often conflated with higher quality (a strong incentive to raise prices), and there is little transparency in how colleges and health institutions come up with price tags beyond what the market will bear. The federal government's response to these rising costs has been to make it easier for students to borrow money for tuition and to subsidize the purchase of health insurance for lower-income persons, but in neither case has it done much to restrain cost growth. Finally, the trajectories of college tuition and health care costs are both unsustainable. These are observations, not solutions - but hopefully solutions to one problem will apply to the other as well.