How your iPad will conquer student debt

Aristotle teaching Alexander.

College costs are out of control. Students and families are reeling under burgeoning debt. Politicians, state and federal, are rushing to feed the beast they have created. That might work.

The statistics are appalling when taken in whole. Here are a few…

• Since 1990, the cost of attending college has risen at over four time the rate of inflation
• In the last 25 years, full-time university administrators have increased 75% while student enrollment has grown only a bit over 25%
• Median pay for public-college presidents is now over $400,000 with several being paid over $1,000,000
• Since 2001, the cost to attend public college will have doubled by 2016
• In 1991, one in ten families carried tuition debt while today it is one in five, with many owing over $100,000

It’s undeniable that attending college has become as much a financial burden to the typical American family as home ownership. But, the recent housing bust included, home ownership on whole is still a long term investment that pays off. The same cannot always be said of the “investment” in a college education. Nearly half of all college grads now work in jobs that don’t require a college degree. Was that a double latte macchiato?
  

There appears to be a confluence of several trends at work here.

1. Public funding of tuition support has enabled colleges to exorbitantly increase fees and tuition
2. Colleges have greatly increased the number of dean or director-level positions dealing with equality, diversity, and related non-academic functions
3. We have encouraged all students to attend college, some who might be better served by excellent vocational schools

While we might continue down the path of publicly funding these fiefdoms, there is little hope that strategy will yield affordable results. Fortunately, there is a light on the horizon.
   

Teaching is the act of imparting knowledge. But over 2,000 years, we are using techniques that are fundamentally unchanged since Aristotle’s students sat at his feet. The internet has blown up that model by allowing a skilled professor to now instruct thousands of students at one time. Computerized courseware administers quizzes and recommends supplemental studies individually tailored to each student. Academic courses can be undertaken in the solitary environs of a student’s home, or in small study groups, or remote classrooms. The only requirement is an internet connection.
  

Simply use your favorite search engine to look for “university courses online.” You will find that many leading universities are offering internet courses, a good number for credit. Private, donation-based organizations such as the Khan Academy provide in-depth training in a wide range of topics from mathematics to history to physics to finance. For-profit companies are beginning to see the opportunity. Coursera, Inc., has partnered with 33 top universities to offer academically rigorous courses to students all over the world. 
  

Bloated colleges feeding at the public trough will soon take note. Some of them will see the opportunity and will embrace this new paradigm. The rest will see their enrollments dwindle. That’s life.

Socialization and social comity

President William Howard Taft

The CDC has spoken and we are fat. The worst state, Mississippi, has an obesity rate of 35%. Massachusetts, the third best, has nothing to brag about with nearly one out of four citizens tipping the scales at “unhealthy.” This 2011 study was based on self-reporting and people tend to gild the lily. Another more rigorous report which involved weighing participants estimates that 36% of all Americans are overweight.  We are in the midst of a true epidemic.

Obesity is serious because it increases the incidence of diabetes, heart disease, cancer, and stroke among other ailments. Quality of life is worsened and mortality rate increased. Obesity results in significantly elevated health care costs.  And while it is easy to make rationalizations, obesity is a choice. What and how much we put in our mouths, whether and how frequently we exercise; these are personal choices.

We hear the term “socialization” tossed about frequently. By this, we don’t mean the process of making your puppy play well with others, but rather, the spreading of risks and costs across a large group of people.

It is a familiar concept.  One common example of socializing risk is automobile insurance.  Every driver (at least in Massachusetts) is required to carry automobile insurance.  In a given period, not everyone will have an accident, but everyone pays premiums.  The unlucky few who actually suffer a loss are compensated from the pool.

But this is not, in itself, socialization of risk.  If a 19-year-old from Roxbury paid a premium based on his actual risk of loss, it might be $10,000 per year.  Meanwhile, a 50-year-old woman in rural western Massachusetts might pay only $400.  But that’s not how we do it.  The state, in its wisdom, has deemed that we should all pay more so that the young scofflaw in Roxbury pays less.  This is true socialization of risk, the salient point being that it is actuarially unfair. (Unfair in that the woman from western Mass, along with most of us, pay more than we should while the young man pays far less than he should). This leveling of risk premium removes from the young man in Roxbury the incentive to drive exceedingly carefully.

In other words, socialization of risk distorts our decision making process and leads to more risky behavior (because risk, and hence cost to the individual, is subsidized).  It is always true that to get less of something, tax it; to get more, subsidize it. Subsidizing risky behavior is a sure fire way to get more.

Any form of national health care is another variety of risk socialization. Our increasingly socialized health care system does not charge premiums based on risk factors.  For instance, an inveterate rock climber does not pay higher health insurance premiums than you do, but she takes much greater risks.  Likewise, a motorcycle racer, skier, pilot, scuba diver, or lumberjack do not pay higher premiums than you do.  Health risks are subsidized.

It was different in an earlier era.

William Howard Taft, our 27th president, served from 1909-1913.  He was morbidly obese, suffered from high blood pressure, severe sleep apnea, and died of a heart attack. But at that time, each was responsible for his own behaviors and the resultant consequences. Taft ate richly and drank to excess, did not exercise, packed on the pounds, and suffered poor health as a result. But no one had to pay Taft’s physician except Taft.

In this day of increasingly socialized medicine, where poor personal choices engender no individual costs but burden the public fisc, it is difficult to observe such profligacy without comment, or at least smoldering resentment.  Socialization is making us downright rude.

But government, which is adept in creating such a mess, can further intervene. A recent article in The Telegraph (London) offered such a solution:

“Ridiculing someone as 'fat' or 'obese' could become a hate crime under an idea being floated by a group of MPs and a leading charity.”

This is a solution of sorts.

The price is right

Soviet farm women search empty shelves for overshoes.

How is it that we can find fresh tomatoes in Manhattan in January while Soviet farm women struggled to obtain adequate footwear and were often faced with empty shelves?

A seemingly simple question, but one which reveals the power of a market economy and the importance of prices.

When you decide to buy something, price is a very important factor in your decision.  You may decide to buy McIntosh apples at $1.29, or perhaps Red Delicious at $1.39.  But you might decide to substitute bananas for your fruit, or buy nothing at all.  Any of these actions sends a signal to suppliers whether to provide more or less of which variety of apple, or perhaps bananas instead. 

When you participate in these economic decisions as a consumer or supplier, you become part of an enormously powerful, highly parallel, economic computer.  This computer, orders of magnitude more capable than IBM’s Watson, allocates resources to meet demand at prices that consumers will pay.  Hundreds of millions of decisions are made every day: prices accepted or rejected by consumers, set by competitors, and read by suppliers.

What happens when this mechanism is bypassed or distorted?  There is abundant evidence that we suffer shortages, unwanted surpluses, or unaffordable prices when government, in its hubris, attempts to plan supply or control prices.

At one extreme is the Soviet Union; it was a managed economy with faceless bureaucrats determining investment, resource allocation, and production schedules.  Over the period 1928 to 1991, the Soviet citizenry’s experience was one of chronic shortages of food, fuel, and consumer goods.  A bureaucracy, even armed with automation, cannot begin to approach the immense power of our collective  economic computer.

Our government can, and does, fiddle with our market economy, with less than stellar results.  There are many examples.

·       Subsidies cause high prices.  During the conversion from analog to digital TV transmission, the government offered $40 coupons for converter boxes.  You never saw a converter box offered for less than $40 – it became the new zero (price floor).  There is strong evidence that government grants and loan programs have contributed mightily to the inexorable rise in college tuition.  Scholarly  studies show that government subsidies of ethanol have resulted in higher corn prices.  (Have you noticed what a box of corn flakes now costs?)

·       Price controls create shortages. When the government puts a cap on prices, shortages result.  During the gasoline crisis of 1973, price caps resulted in widespread shortages and massive lines of people waiting to get a few gallons of scarce gasoline.  In an attempt to control "gouging" during emergencies, government price caps only insure that shortages will occur.

·        In the absence of price information, competition disappears. Our current health care system is a perfect example of the lack of price information inhibiting wise consumer decisions and supplier price competition.  The result?  The cost of health care rose 7.32% in the 12 months ending in August 2010 (last period available), while the general rate of inflation during that same period was 1.1%.  So why did health care costs increase nearly 7 times the rate of inflation?  Because consumers have no idea what services cost, and additionally, have no skin in the game.  After all, the insurance company will pay.

What can you (citizen, consumer, voter) do with this knowledge?  First, be very skeptical of your legislators.  They may think that they are superior to our human, economic supercomputer, but they are not.  Be wary of schemes that “control prices”.  That can only be done with effective competition and full knowledge of pricing.  Look askance at subsidies; they will only result in higher prices.  Meet with skepticism any proposal that does not engage the pricing mechanism to determine supply, and competition to moderate prices.  

More and better information is always the answer, so that you, the wise consumer, in concert with millions of your fellows, solve the equation of how much of what to produce at a price that consumers will pay.  This is equally true of apples and hospital stays.