The Cost of Higher Ed:  “How in the Hell Did This Happen?”

PracticalDad note:  The pace of writing over the past number of months slowed significantly, even to a crawl, but the conversations with the kids have continued regardless.  Late this past summer, prior to his own departure to freshman year of college, I was talking with Middle about college costs and he looked at me and asked “how in the hell did this happen?”  It’s a great question deserving of an answer, but like so many others, not one that has an easy answer.  What follows is a series of articles looking at the interconnected factors that have contributed to the disproportionately high cost of college.

Higher Education is a hot, steaming mess.  If you look at the number of colleges and programs offered, you might not think so, but in terms of actually obtaining that college degree, it really is a hot, steaming mess.  When you actually review the data, you find that the cost of tuition has risen more than 1100% since 1978 and what’s even more food for thought is that the linked article was published four years ago, in 2012.  Comparatively, the median American family income has risen only 269% in nominal dollars – a not-quite three fold increase over that same 1978 – 2012 timespan.  Factor in the disproportionate rise in the cost of healthcare by 601% over the same period and acknowledge the fact that more of the burden of these same costs are now borne by the American family than in 1978 and you begin to understand why it’s become such a hot-button issue. 

But costs don’t rise in such a fashion because they just levitate like so many feathers carried in the wind.  There are reasons for this and the reasons are multi-fold and interconnected, one playing out upon another over the course of decades, unnoticed by the mass of people because they’re engrossed in the very short-term necessities of either raising a family and living a life, or just binging on Netflix.  From this perspective, there are five factors that have contributed to our present situation:

         First, the effects of globalization and the shift to a “knowledge-based” economy.  It used to be that entry into the fabled American middle class was predicated upon a sustainable, living wage job that could be had with just a high-school degree.  That it was in a factory was acceptable since the employee could raise a family in a standard that was undreamed of during the Great Depression years, and it didn’t require additional education unless the employee wanted it.  But starting in the 1980s, companies and Wall Street began touting globalization, a principle whereby American corporations maximized their their profit for shareholders by shifting the lower-rung manufacturing overseas and retaining the higher-end positions here.  In this model, Americans would design and engineer the goods that the world needed while the little brown and yellow people elsewhere would have to contend with the workplace drudgery and pollution that came with manufacturing.  That you didn’t need to provide a sustainable living wage and could get a ‘tween-ager to manufacture a high-end pair of sneakers for pennies?  For the win, baby!

         Second, there was a purposeful effort by companies in the late 20th century to alter their job requirements so that the baseline for hiring in a wide variety of positions was now a college degree instead of a high school diploma.  That these same positions were now already successfully filled by capable high school graduates was irrelevant, a degree replaced the diploma as the baseline.  There’s certainly an argument for some of that being the result of a desire to move beyond what was perceived to be a failing public education system incapable of turning out satisfactory candidates.  But I can speak from experience that there were other factors as well.  The predominant reason was that as businesses made this move to a degree the hiring baseline, it created a ripple effect as their competitors felt compelled to do so in order to maintain the semblance of competitiveness, particularly in the eyes of their customers. 

          Third, the effects of shifts in the funding paradigm for higher education.  Where a significant support previously was provided by the government, the burden of educating young people has shifted first to the family and within the last decade, to the student.  I don’t believe that people truly understand the impact of the state and federal governments in the middle of the Twentieth Century upon higher education.  On the one side of the house, the Servicemen’s Readjustment Act of 1944 – aka The GI Bill – made significant educational funding available to millions of servicemen who returned home from the Second World War and literally provided higher education for an entire generation of young adults.  On the other side of the house, state governments boosted spending for their state institutions through the next several decades until the amount spent per student climaxed and then began to decline in the 1980s.  The ebbing has occurred in that while there are still educational benefits for veterans, we now have a volunteer military and the numbers of available recipients is far less than in the decade immediately following the end of World War Two.  Likewise, purposeful budgetary funding per student by most, if not all, state legislatures has declined in the three decades since the Reagan Administration. 

          Fourth, the shift to self funding by first the family and then the student was greased by years of low interest rates and the easy availability of credit.  What’s occurred with the funding of higher education is a microcosm of what’s occurred within public society as well.  As the Congress and Executive began two decades of vicious sniping and attack, it has devolved into a farcical situation in which there is no longer an agreed upon budget but instead a lengthy trail of continuing spending authorizations and debt limit increases.  Because decisions can’t be made and the debt continues to rise, the Federal Reserve has – and I hate to say it, but it’s true – stepped into the breach to delay a day of reckoning by maintaining artificially low interest rates.  So the financial role of government in higher education has shifted from fiscal policy laid out in conscious budgetary decisions to monetary policy as shown by the low cost of borrowing money.  Here’s the difference between fiscal and monetary policy:  fiscal policy is made by consensus, which is often messy and combative as issues are threshed through.  Monetary policy however, simply acts to delay any decisions because there is no perceived cost to borrowing and hence, no need to actually make a decision; can’t make a decision because it’s too unpleasant to hash through?  Don’t worry, we can hold off because it won’t cost much.  On the micro-level of the student and family, the story line for years was that borrowing to finance your education was wise because it was investing in yourself and would pay off in the long-run. 

          Fifth, all of the preceding factors braided together neatly to create an entitlement sense amongst higher education that it simply now had a captive market.  And based upon the ways in which some of the institutions have spent their money, their perception has seemed to be that the market was in the French Quarter as college presidents and administrators strolled down the Rue amidst a shower of cash screaming out laissez les bon temps rouler!  There was no perceived need to keep the spending down – apart from paying for pesky things like permanent faculty – since the money flowed and the steady flow of students continued.  Money was spent on increasing administration, extraneous and honestly unnecessary programs of study and physical plant and student options that are high-end accessories as many of the institutions competed with one another.  And yes, when your brochures are showing photos of climbing walls and Mongolian Grills as student dining options, then that would arguably qualify as high-end. 

So that’s the short version.  Like much else in America, we’ve gotten use to having plenty of options and choices without remembering that these options come with a price tag.  As my father used to comment from time to time:  champagne taste, beer budget.  Over the next several weeks, I’ll expand upon these factors individually because honestly, there’s some fascinating stuff out there.

PracticalDad Price Index – January 2016:  Welcome to the Jungle

The pricing for the 47 item PracticalDad Price Index marketbasket is complete and after looking at the results, the one phrase that crossed my mind is welcome to the jungle.  The changes that I’m seeing from one month to the next are symptomatic of what’s occurring in the larger economy in multiple ways.

In terms of pure numbers, the 47 item January 2016 PracticalDad Price Index declined from December’s 104.92 to January’s 104.54 (November 2010 = 100) while the 37 Food-Only Subindex dropped more than a full basis point from December’s 106.39 to January’s 105.25 (November 2010 = 100).  Please note that for the Food-Only Subindex, the cumulative decline from the December 2014 apex of 115.13 is now greater than 65%; it took more than four years of quantitative easing and loose monetary policy to bring that subindex for the 37 item foodstuff item marketbasket up by more than 15%.  With the cease of QE and persistent economic pressure upon the family, it’s only taken 13 months to undo it.

So how is this akin to a jungle?  You have to understand why the three store average dropped as much as it did in one month – unbelievably (to me, at least), the cost of a pound of 80% lean ground beef actually dropped by an average of 5.4%.  If you’re going to store or watching the news, you’d be in company with me at this drop.  But what was surprising – and informative – was the cause for the decline. All of the surveyed stores sold their 80% lean beef in store wrapped packages but last week, two of the three – each a part of a chain – were selling their 80% in a large, pill-shaped package called a chub instead of the usual packaging.  I’d seen the chubs before, but they had always been for the lower margin/higher fat 73% lean and because they were not part of the survey, I’d simply ignored them.  When the numbers were tabulated and the indices found, I decided to go back to the two stores to examine the beef further.  Each of the chubs, now sold in the two chains, were produced by a firm called JBS LLC, USA; this is the American subsidiary of a Brazilian multinational meat packing firm founded in Brazil in 1953.  As I perused further, I saw that JBS had done a serious job of growth via acquisition of firms both in the US and elsewhere.  They have diversified first across types of protein so that they now produce poultry as well as beef and they’ve diversified vertically by the purchase of massive feedlot operations used to fatten cattle prior to slaughter; in 2008, they purchased Five Rivers Cattle Feeding to make them the largest cattle feeder in the world.  They further extended their control by the 2010 purchase of the McElhaney Feedlot in Arizona, which increased their cattle feeding capacity by more than 130,000 head at one time.  So the producer of the chub is a massive presence in the beef production industry.

What scares the central banks about deflation is that during the Great Depression, money became so scarce that many companies lost control of their ability to set and maintain prices, resulting in their ultimate bankruptcies.  Competition amongst producers simply came down to which could survive long enough, a truly dog eat dog scenario.  This is eerily reminiscent as money continues to flow out of the middle class and budgeted food dollars are replaced only partially by government food stamp programs, placing greater pressure on the grocers and by extension, the producers.  As the preceding information about JBS SA shows, this is a firm that’s built for survival via sheer economies of scale.  What’s also notable about this change in the offering of 80% lean is that the chub is now the package offering for a higher grade of ground beef.  If you accept the proposition that the lower and fattier grades of beef are the province of those with less money, then a shift in packaging to the chub by a mass producer is an indication that the extent of the family budget woes are creeping throughout the middle class.  Obviously, executives at the grocery chains are noticing drops in sales and are aware of why and rolling out a lower priced alternative is the logical response.  However, this is not the kind of indicator that you want to see. 

The jungle metaphor also refers back to one of the great impact novels of the early 20th century, Upton Sinclair’s The Jungle.  Sinclair’s book was a work that exposed the conditions of the meat-packing industry of that period and by extension, the conditions that prevailed overall when businesses were able to operate without any form of oversight to enforce the most basic sanitary conditions.  It helped to establish the mindset that there was a legitimate role for government in the regulation of heretofore laissez faire competition.  One of the later upshots of this was the establishment of the Food and Drug Administration to oversee the safety of what goes on the table.  This isn’t to necessarily say that the packing conditions are horrible and the product tainted, but when businesses get to the size that meat production is akin to factory conditions, then it does make me wonder.

And now to the results of the Indices for the past six months.

 

PracticalDad Price Index: January, 2016
Month Total Index Food-Only Index Spread
1/16 104.54 105.25 .71
12/15 104.92 106.39 1.47
11/15 104.79 105.97 1.18
10/15 106.17 107.07 .90
9/15 105.21 107.12 1.91
8/15 104.96 106.97 2.01