Finding a New Macroeconomics: (12) Inequality and the Crisis in Higher Education

The crisis that is about to break out involves student debt and how we finance higher education. Like the housing crisis that preceded it, this crisis is intimately connected to America’s soaring inequality, and how, as Americans on the bottom rungs of the ladder strive to climb up, they are inevitably pulled down. * * * 

To be competitive in the 21st century is to have a highly educated labor force, one with college and advanced degrees. Instead, we are foreclosing on our future as a nation.

Student debt also is a drag on the slow recovery that began in 2009. By dampening consumption, it hinders economic growth. It is also holding back recovery in real estate, the sector where the Great Recession started.* * * 

As has been repeatedly observed, all of the economic gains since the Great Recession have gone to the top 1 percent. – Joseph Stigler [1]

Higher education is fundamental to our civilization and society. Young Americans seeking meaningful careers, adequate incomes, and acceptable living standards require further education after graduation from high school, but growing inequality has badly jeopardized their prospects, and therefore America’s future. A detailed look at this problem is called for, because our understanding of it is closely related to our perspective on the economics of inequality. The decline of education in America provides an enlightening context for evaluating conflicting perspectives on inequality.

Joseph Stiglitz is one of the few economists who associate increasing inequality with declining income growth, and the only economist so far as I am aware to even mention inequality in connection with the student debt issue. Hence, Stiglitz is the only economist I am aware of identifying the negative effect of student debt on growth and recovery.  His perspective on the impacts of inequality is far more advanced and comprehensive than that of most other economists.  However, because it discusses the continuing growth of inequality only in connection with the education sector, the quoted article leaves the matter somewhat ambiguous: (1) Is recovery in the real estate sector being held back solely by growing educational debt, or is the continuing concentration of wealth and income a broader underlying cause of both problems? (2) What basis is there for claiming there is a “slow recovery” – indeed any prospect for long-term recovery at all – when “all economic gains since the Great Recession [began] have gone to the top 1 percent” and the causes of inequality growth remain uncorrected?

This post will help answer those questions, but keep in mind that the growth of income and wealth inequality is a continuing, systemic problem. Hundreds of billions of dollars are sequestered by the top 1% each year, much of it coming from the increasing national debt and much of it coming from the declining middle class and bottom 99%. Any appearance of “recovery” and increased real growth, such as the report in today’s New York Times,United States’ 2nd-Quarter Growth Is Revised Up to 2.5%, from 1.7%,”  [2] must be qualified with the understanding that this is not “normal” growth, in any way lasting, because any short-term growth is continuously undermined by the growing concentration of income and wealth at the top that got us here.  With that caveat, let’s take a close look at economic inequality in the context of the education crisis in America.

Right-wing Denial

Right-wing ideologues deny that income inequality growth has any effect on education at all, at any level; whatever income inequality does exist, they claim, has no economic significance. Take, for example, the well-known formulation presented by the CATO Institute:

[W]hat inequality does exist is not the result of the Bush tax cuts or a failure to spend more on social-welfare programs, but on the transformation of the American economy from a focus on manufacturing to information and technology. This change puts a greater premium on education. As a result, the incomes of high-school dropouts or those with just high-school degrees have stagnated while incomes for many college graduates and those with graduate-level educations have increased significantly. The unfortunate fact is that despite massive increases in education spending, large segments of our society remain unprepared for a 21st-century economy. [3]

This line of argument is wrong in just about every respect. First, it has the facts wrong: People with graduate-level educations do have higher average incomes, but in this declining economy, incomes of people with post-graduate degrees have not “increased significantly.” Median real incomes have dropped by about ten percent since 2007, especially, indeed mostly, for individuals with bachelor’s degrees or higher, as shown in this chart from the 2012 Economic Report of the President: [4] 

2012 erp p 187

Moreover, a growing number of college graduates, especially women, have earnings at or near the poverty level. [5]

The CATO Institute’s claim that inequality is not a serious problem presumes that there is no overall decline for people on the underside of the growing income gap, which today, as we have learned, includes more than the entire bottom 99% of income earners. The following graph by Zero Hedge shows that since the Crash, real incomes of high school and college graduates have both declined, and at about the same rate: [6]

education differences declining income 20120928_coll5

Tanner repeats commonly propagated right-wing misperceptions. He argues, for example, that:

If one person gets a bigger portion of the pie, others of necessity get smaller pieces, and the role of government is to divide up the slices of that pie. In reality, though, the size of the pie is infinite. But to make it grow, we need people who are ambitious, skilled risk-takers.

No, the size of the pie is not infinite. It depends on the money supply, indeed the active money supply. Tanner merely begs the question of inequality’s real impacts, asserting further that: “After all, if we doubled everyone’s income tomorrow, we would eliminate an enormous amount of economic hardship. Yet, inequality would actually increase.” If we doubled everyone’s income and wealth tomorrow, however, we would only be doubling the money supply – doubling all prices while halving the value of the dollar: Inequality and real incomes would remain unchanged.

Although this obfuscation was presented quite recently, in January 2012, some of its misperceptions had already been officially endorsed. In December 2010, Federal Reserve Chairman Ben Bernanke argued in a 60 Minutes interview that “rising inequality” is “a very bad development . . . creating two societies,” and leading to an unequal society “which doesn’t have the cohesion that we’d like to see.” He said:

[I]t’s based very much, I think, on educational differences. The unemployment rate we’ve been talking about. If you’re a college graduate, unemployment is 5 percent. If you’re a high school graduate, it’s 10 percent or more. It’s a very big difference. Congress could help economic growth by making the tax code more efficient. [7]

Bernanke attributed income inequality to “educational differences,” then identified higher unemployment as its only consequence. This is doubly misleading, for (1) it discounts other causes, beyond education levels, of higher levels of unemployment, and (2) it characterizes the inequality problem as simply one of social “cohesion.”

 Neoclassical Misperceptions

Similarly, in February 2012, the brief discussion of inequality in The Economic Report of the President focused on a concern for the adverse effect it has on “inter-generational mobility.” [8] That is certainly an important effect, which worsens as income and education levels decline. However, this report reflects a “neoclassical” perspective that overlooks other permanent, quantifiable effects of inequality. Consider, for example, this passage from the 2012 ERP:

The confluence of rising inequality and low economic mobility over the past three decades poses a real threat to the future of the United States as a land of opportunity. Social and economic mobility across generations are at risk of declining unless concerted efforts are devoted to providing more opportunities for those born into lower-income households.

Long-Term Unemployment

The upheaval in the labor market brought on by the recession that started in late 2007 is primarily a cyclical phenomenon. A major challenge, especially given the long-term changes in the labor market that were underway even before the recession, is how to prevent these cyclical dislocations from having permanent effects on workers’ prospects. [9]

This juxtaposition of issues reveals an important inconsistency: In two consecutive paragraphs the 2012 ERP asserts that rising inequality poses a real, permanent threat to economic opportunity and income mobility, but then suggests that the “recession” is only temporary. But presuming unemployment to only be a temporary problem undermines the basis for the claimed long-term threat to economic opportunity. The assumption fails to recognize that the rising inequality continuously undermines full employment and growth, preventing recovery of lost opportunity and mobility.  

Like the right-wing ideology, the neoclassical synthesis overlooks the connection between income and wealth redistribution and growth: The ideologues on the right contend that there is no inequality problem beyond educational differences, which merely lead to higher unemployment among individuals with lower levels of education. The 2012 ERP, however, connects rising inequality and low mobility to lower “opportunity,” of which education is a factor, but it perceives unemployment to be a “cyclical” problem that will eventually correct itself.

These viewpoints in combination are fatally reinforcing. Combine them and the inequality problem seems to cancel itself out.  Together, they suggest that (a) the only problem with inequality is unequal unemployment, and (b) unemployment is only a short-term problem. But, again, what these perspectives both overlook is inequality’s salient effect – reduced growth. 

In his 2012 book, Paul Krugman roundly criticized the CATO Institute’s perspective on the income inequality problem, arguing that while education admittedly affects earnings potential:

To focus solely on education-based wage differentials … is to miss not just part of the story but most of it. For the really big gains have gone not to college-educated workers in general but to a handful of the very well-off.* * * High school teachers generally have both college and postgraduate degrees; they have not, to put it mildly, seen the kinds of income gains that hedge fund managers have experienced. * * * [In 2011] twenty-five fund managers made three times as much money as the eighty thousand New York City schoolteachers. [10]

The Crisis in Higher Education

The CATO Institute’s “focus solely on education-based wage differentials” does not merely miss most of the inequality story, it turns the story on its head: Educational differences aren’t leading to greater inequality; rather, income and wealth redistribution is causing a serious decline in educational opportunity for the entire “bottom 99%,” just as it is undermining the affordability of all other life necessities including housing, healthcare, and food.  

The cost of obtaining college and post-graduate degrees has been rising faster than the overall rate of inflation for many years. The National Center for Education Statistics (NCES) reports a 234% increase in real (in 2009-10 dollars) tuition, room and board rates, for all U.S. colleges and universities since 1980. [11] The cost escalation has worsened over the last five years. As this was written in August of 2013, AP reported a College Board survey showing that over the past five years tuition at public four-year colleges increased 27% adjusted for inflation, while the real cost of tuition at private four-year schools increased 13% and real tuition and fees at community (two-year) schools rose 24%. [12]

But even while college education was rapidly becoming more expensive in the decade before the Crash of 2008, college enrollment was increasing. Census data from the 2012 Statistical Abstract [13] reveals that the percentage of high school graduates enrolling in college grew from 64% in 2003 to 69% in 2008. [14] This has not been a demand response to rising economic opportunity and incomes; it has been a response necessitated by the reduced opportunity and prosperity of the steadily declining middle class. 

Collin Binkley and Abby Smith, reporting for the The Columbus Dispatch in July of 2013, interviewed former and current students and summed up the situation this way:

The rising cost of college — coupled with a tight job market — has left many graduates with low job prospects and high debt. Although escalating costs have caused many students to question the value of their college education … students have little choice but to pay the price. 

[A] Cincinnati native who every year spends the equivalent of a new Toyota Prius on her education at Miami University in Oxford, agreed, saying, “It is so competitive with jobs. If it’s just a high-school degree, you can’t really move up too high or get a job in the first place.” [15]

The Student Debt Crisis

Because students cannot earn nearly as much and parents cannot contribute as much as they could in the 1960s and 1970s, students are borrowing more, and student debt has been rising astronomically. Mother Jones reported in June of 2013: “The amount of total student loan debt has soared in the past decade, shooting up from $240 billion at the start of 2003 to nearly $1 trillion today.” [16] This is an average increase of $75 billion per year; however, new student debt has been growing exponentially, exceeding $100 billion per year for the first time in 2011, when total student debt reached the $1 trillion mark. [17] The following chart [18] traces student debt, auto debt, and credit card debt, as a percent of income, over the decade 2003-2012:

20120928_coll3_0

Since the Crash of 2008 two of the biggest components of consumer debt have declined as a percent of total income (GDP), while student debt has continued its long-term growth since 2004. Because total income includes top 1% income, and the charted debt levels are almost entirely bottom 99% phenomena, it would be more relevant to isolate the bottom 99% in these computations: Such a chart would show that bottom 99% auto and credit card debt have not actually declined, as a percent of bottom 99% income, and bottom 99% student debt has increased even more (to more than 10% of bottom 99% income). Meanwhile, the bottom 99% economy and consumer demand continue to shrink along with the rising impact of education costs on household savings and budgets – and that means fewer jobs and lower incomes.

The student debt crisis rivals that of the mortgage debt bubble that resulted in the Crash of 2008. The Consumer Protection Financial Bureau (CFPB) reported in March 2012 that “[the private student loan] market went through the same boom and bust cycle we saw play out in markets for mortgages and other credit products.” [19] The Occupy Student Debt Campaign complained that much of the new student debt has been securitized by Wall Street banks and sold for profit, as was done with mortgage debt before the Crash of 2008, [20] implying that another speculative “bubble” could burst with rising defaults, leading to another “too big to fail” bank bailout and more massive wealth transfers from the bottom 99% to the top 1%.

Although it is true that student loans have been securitized as Sally Mae’s “student loan asset-backed securities (SLABS),” analysts such as Chadwick Matlin of Reuters argue that the concerns about the student loan market are overblown because “the vast” majority of student loans are backed by the government, and the SLABS market is not overextended. [21] These days to argue that student debt is “backed by the government” may seem like arguing that student debt is backed by the bottom 99%, hardly more than cold comfort; but as Matlin notes the SLABS market has cooled considerably since proceeds peaked at over $70 billion in 2007; proceeds fell to about $25 billion in 2012. That does not necessarily mean that another bubble can’t or won’t develop and burst with rising defaults. Regardless of whether SLABS investors end up profiting from their speculation, one thing is certain: There is no up-side for the bottom 99% in the SLABS market.   

The following graph, provided by Tyler Durden of Zero Hedge, [22] shows the spike in defaults on student loans since 2011:

Student Loan Delinquencies

This chart shows the percentage of loans in 90+ day delinquency from 2003 through Q3 of 2012.  A separate chart, showing the amount of newly delinquent 30+ day student loan balances over the same period, shows an increase from $17 billion after the Crash to over $21 billion at Q1 2012, rising to over $33 billion over the next two quarters. 

The CFPB released a comprehensive report on repayment status for federal student loan programs as of June of 2013. Total student debt (including accrued interest) at that time approached $1.2 trillion and federal student debt approached $1 trillion ($998.7 billion). [23] Loans in the “Federal Direct Loan” program ($569.2 billion) were: 42% in repayment, and 28% in grace, deferment or forbearance, and 5% in default. Loans in the Federal Family Educational Loan (FFEL) Programs were 60% in repayment, 23% in grace, deferment, or forbearance and 14% in default.

Significantly, the nation’s student body is reaching the end of its ability to pay for higher education without substantial borrowing and substantial deferral of repayment, at a much greater cost in interest expense. That is why it was so significant that Congress allowed the 3.4% interest rate on student loans to double to 6.8% as scheduled on July 1 of 2013. Matt Taibbi, reporting on the passage on July 31, 2013 of a plan to peg interest rates to Treasury rates, “ensuring the rate for undergrads would only rise to 3.86% for the coming year,” opined that “this was just the thinnest of temporary solutions – Congressional Budget Office projections predicted interest rates on undergraduate loans under the new plan would still rise as high as 7.25% within five years, while graduate loans could reach an even more ridiculous 8.8%.” [24]

The Impact of Redistribution

The full economic effects of the student debt crisis will remain hidden until full account is taken of the continuing decline caused by income and wealth redistribution. There are three major considerations: (1) Because interest payments are wealth transfers from the students (bottom 99%) to the banks (top 1%), higher interest on student loans increases economic decline and inequality; (2) The reduction in the federal budget deficit estimated by CBO is unrealistic, because it depends on overly optimistic projected federal “savings” from collecting higher interest on student loans, and; (3) The entire problem of growing student costs and debt cannot be properly understood without considering the impacts of income and wealth redistribution.

               Direct Inequality Effects

The most obvious direct effect is the widening of income and wealth gaps. As illustrated in this chart published by Mother Jones, [25] the burden of student debt falls most heavily on the poorest, most unemployed people in America who typically have the greatest need to borrow money:

debt by wealthIt is surprising that 58% of student debt is in the bottom 25%, but the percentage of students coming from the bottom quartile was 22% in the 1999-2000 school year. [26] Thus, 58% of the current $1.2 trillion outstanding balance, or $696 billion, is owed by the bottom quartile. With interest rates rising, defaults can only keep rising significantly, which may be one reason President Obama is making student debt his top issue for the fall legislative term. But, clearly, the implications for income and wealth redistribution, and growth, are enormous.

               The Impact on the Federal Deficit

A declining economy means declining federal tax revenue and, all else equal, a worsening budget deficit.  Here is CBO’s June 2013 projection of the impact of federal student debt on the budget deficit:

CBO projects that the total cost to the federal government of student loans disbursed between 2013 and 2023 will be negative; that is, the student loan program will produce savings that reduce the deficit. * * * The estimated savings are $37 billion in 2013 but will diminish over time to fall below $10 billion per year from 2018 through 2023. (That $37 billion in savings for loans originated in 2013 excludes savings of $15 billion that CBO expects to be recorded in the budget this year as a result of the Administration’s reassessment of the cost of student loans made in previous years.) [27]

These numbers are soft, however, even without taking how income and wealth redistribution causes declining growth into account.  CBO explained further that:

FCRA accounting [used for the base projection] does not consider some costs borne by the government. In particular, it omits the risk taxpayers face because federal receipts from interest and principal payments on student loans tend to be low when economic and financial conditions are poor and resources therefore are more valuable. Fair-value accounting methods account for such risk and, as a result, the program’s savings are less (or its costs are greater) under fair-value accounting than they are under FCRA’s rules. On a fair-value basis, CBO projects that the student loan program will yield $6 billion in savings in 2013 and will have a cost of $95 billion for the 2013–2023 period as a whole, compared with projected savings of $37 billion this year and $184 billion for the entire period on a FCRA basis.

In other words, CBO concedes that, when the record of declining payments and escalating defaults on student debt is taken into account, the government will lose an estimated $184 billion rather than save $95 billion on student loans over the next decade.

But how reliable, even, is that projection? CBO does not do redistribution-based forecasting, so it does not take into account the economic contraction and associated decline in federal revenues caused by the continuing growth of income and wealth inequality. It becomes crucial to ask: How was CBO’s FCRA-based forecast determined? How did its forecast extrapolate from the sharp increase in defaults in 2012? Given the failure of the CBO’s mainstream forecasting models to account for the continuous redistribution of income and wealth into the top 1%, it seems highly likely that CBO’s assumptions about federal student loan defaults, and the $95 billion government loss projected over ten years, are considerably understated.

               The Process of Growing Student Costs and Debt

The failure to account for the impact of income and wealth redistribution has consistently led to confusion about the extent of this crisis and why it is happening. Analysts and educators have been unable to understand why college costs keep rising faster than the rate of inflation.  Nearly all analyses have, subjectively, placed the blame on excessive college and university spending: The President of Rochester Institute of Technology (RIT), Bill Destler, for example, has argued that a big reason for escalating costs might be the cost of “competition among colleges and universities for national eminence and high rankings.” [28] Binkley and Smith, for The Columbus Dispatch, offered a similar explanation:   

According to experts, there are multiple upward pressures on tuition costs, ranging from state-of-the-art computerized classrooms that Lyons could not have imagined in the 1970s, rising salaries for professors and administrators, more sophisticated health and counseling programs for students, and an “arms race” among schools for the best dormitories, gymnasiums and dining halls. 

Those increased costs come at a time when states are cutting money for public universities, which transfer the costs of higher education to parents and students. [29]

Matt Tiabbi has similarly subscribed to this seductive line of reasoning. He argues that rising interest costs don’t matter much, because the underlying cause of the crisis is the exploitative nature of the university system, “the colleges and universities, and the contractors who build their extravagant athletic complexes, hotel-like dormatories and . . . other campus embellishments.” To Tiabbi, the federal student-loan program is “essentially a massive and ongoing government subsidy,” with the government, projected to profit from the interest on student loans, the secondary beneficiary. “The answer lies,” Tiabbi insists, “in a sociopathic marriage of private-sector greed and government force that will make you shake your head in wonder at the way modern America sucks blood out of its young.”  [30]

Apparently also blaming profligate college spending, President Obama in August of 2013 proposed a plan to base federal financial aid to students based partly on ratings of colleges on factors including “tuition, graduation rates, debt and earnings of graduates, and the percentage of lower-income students who attend.” [31] The President’s plan is designed to incent aid for the students from the poorest families whose burdens are the most significant.

But these excessive spending and “arms race” scenarios have a problem: Many schools – especially the publicly funded schools whose tuitions have risen the most – have been forced to cut offerings, programs, faculty and salaries in response to dwindling funds. The State University of New York (SUNY) system, for example, has been tightening its belt – cutting back on administrative costs, course offerings and academic services – in the face of funding cuts that have forced significant tuition increases. [32] SUNY students are progressively getting less value at considerably higher cost.

So we need to ask: Why would any school in such a situation consciously risk further weakening its financial soundness by participating in such a competition and hoping to be compensated for it through higher tuition payments? Wouldn’t they already be doing everything they could to trim their budgets? Nor can we assume that everything colleges and universities spend money on is more expensive for them than elsewhere: There is no evidence that administrative, construction or maintenance costs are inflating faster at colleges and universities than equivalent costs elsewhere, that the costs they incur for materials and supplies are inflating faster for them, or that compensation for faculty and administrators is rising more rapidly (or falling less rapidly) than equivalent pay elsewhere. Finally, in this bottom 99% depression, it seems unlikely that many institutions, if any, would be greatly expanding their offerings today and building bigger and more expensive programs.

We need a wider perspective, and a more comprehensive explanation. The following table traces total college and university enrollment, total (nominal) college and university expenditures, and average and total student payments for selected years from 1980-81 to 2011-12:  

College Expenses and Student Payments

(1)

School Year

(2)

En-roll-ment ($M)

(3)

Nom.  Exp. ($B)

(4)

Real Exp. ($B)

(5)

(4) / (2)     ($)

(6)

TFR&B /  student ($)

(7)

Real TFR&B/ student ($)

(8)

Total TFR&B (2) x (6) ($B)

(9)

TFR&B/exp. (8) /(3)

1980-81 12.1

64.05

160.26

13,248

3,101

8,147

37.51

.586

1999-00 14.8

236.78

303.14

20,413

10,430

14,020

154.88

.654

2001-02 15.9

280.72

341.43

21,436

11,380

14,533

181.26

.646

2005-06 17.5

353.58

385.10

22,022

14,634

16,735

255.91

.723

2007-08 18.2

408.49

418.20

22,918

16,231

17,447

296.19

.725

2010-11 21.0

460.00 (est.)

451.00 (est.)

21,460

18,497

19,039

388.74

.845

2011-12 21.0

n.a.

n.a.

n.a.

19,339

19,339

406.01

n.a.

2010-11 /1980-81

1.74

7.18

5.96

10.37

[Columns: (1) School year, and the factor of increase between 1980-81 and 2011-12; (2) Fall enrollment in all post-secondary, degree awarding institutions, including both private and public 2-year and 4-year institutions;  (3) Total nominal expenditures of all colleges and universities ($billions); (4) Total expenditures in 2009-10 dollars ($billions); (5) Real expenditures per student (col. 4/col. 2); (6) Average nominal student payments for tuition, fees, room and board (TFR&B) ($); (7) Average TFR&B in 2011-12 dollars ($); (8) Total nominal TFR&B (col. 2 x col. 6)($ billions); (9) Ratio of total TFR&B to total expenditures (col. 8/col. 3).  All data are from NCES, Digest of Education Statistics.  [33]

These are the important observations:

(1) Column #5 shows expenditures per student for all colleges and universities in constant dollars. Although there was expansion between 1980 and 2000, after 2000 real spending (including construction) per student has remained relatively constant. The data do not support the theory that in the 21st century there has been a spending competition, reckless or otherwise, for higher education as a whole;

(2) Multiplying total enrollment (column #2) by average tuition, fees, room and board per student (column #6) provides figures in each of these years for the TFR&B of all colleges and universities (column #8). TFR&B increased by a factor of 10.36x from 1980-81 to 2010-11, a greater increase than the increase in college expenditures (7.18x). The ubiquitous increase in tuition and fees has not been driven by the rising college expenditures. Some other factor has caused increased TFR&B;

(3) Column #9 shows that the percentage of total expenditures at all colleges and universities paid by TFR&B has gradually increased from 56.8% in 1980-81 to 84.5% in 2010-11. This is very significant: The percentage of college and University current costs paid from other sources dropped from 41.4% in 1980-81 to 15.5% in 2010-11.

There is only one explanation consistent with all of these facts: The steady growth of income and wealth inequality over the past three decades gradually constricted the other sources of funds: Falling tax revenues at all levels (federal, state, and local) meant lower higher education budgets, and falling contributions and declining endowments had the same (although lesser) impact on private institutions. Schools had no choice but to collect a higher proportion of costs directly from the students. Meanwhile, as bottom 99% incomes fell and inequality grew, especially after the Crash of 2008, students were forced to substantially increase their borrowing to meet the drastically rising costs of higher education.

One would expect this kind of rapidly magnifying problem in a depression, but commenters are wedded to the illusion that the U.S. economy is not in a depression, and is instead recovering from the Great Recession. Beyond that, virtually no commentator (other than Robert Reich and Joseph Stiglitz) has hinted at understanding how the declining growth caused by redistribution has steadily harmed higher education since 1980.

The data available to us confirms that inequality growth has been relentless and systemic, not just the consequence of occasional financial crises, and that in current circumstances it is irreversible. The data also reveals the amazing scale of the inequality problem: Education is not the only sector thusly affected – the same thing is happening in housing, healthcare, energy, and all other sectors from which excess profits are exacted. Thus, the $1 trillion level of student debt not only illuminates a problem for higher education, but also reveals the finite, limited potential of the declining bottom 99% economy.

Although this perspective has been rare for several generations of economists, it was once commonly understood. As John Stuart Mill wrote 150 years ago:

Since the human race has no means of enjoyable existence, or of existence at all, but what it derives from its own labour and abstinence, there would be no ground for complaint against society if everyone who was willing to undergo a fair share of this labour and abstinence could attain a fair share of the fruits. But is this the fact? Is it not the reverse of the fact? The reward, instead of being proportioned to the labour and abstinence of the individual, is almost in an inverse ratio to it: those who receive the least, labour and abstain the most. * * * The very idea of distributive justice, or of any proportionality between success and merit, or between success and exertion, is in the present state of society so manifestly chimerical as to be relegated to the regions of romance. [34]

In other words, people who have owned the means of production have nearly always controlled the distribution of its rewards, and to their benefit.

The distribution to the bottom 99% has become sufficiently inadequate today to allow affordable higher education or to keep the active economy out of depression. Mill had none of the data available today, but he and the classical economists saw the relationships clearly enough from their direct observations. Today’s economy is vastly different, with many more people, much higher productivity, its global scope, and data processing and communications technology that permits the nearly instantaneous movement of huge sums of information and money. These are developments that neither Smith nor Mill could have imagined. But their intuitive insights into concerning the impact of redistribution were sound. It is a shame that this wisdom has been all but forgotten.  

JMH – 8/28/13 (ed. 8/30/13, 9/22/13)

_____

[1] “Student Debt and the Crushing of the American Dream,” by Joseph Stiglitz, The New York Times, May 12, 2013 (here).

[2] “United States 2nd-Quarter Growth is Revised Up to 2.5%, from 1.7%,” by Catherine Rampell, The New York Times, August 29, 2013 (here).

[3] “The Income Inequality Myth,” by Michael D. Tanner, CATO Institute, Commentary, National Review (online), January 10, 2012 (here).

[4] The Economic Report of the President (February 2012) (here), p. 187.

[5]  Sources: Data for median annual earnings of full-time, full-year wage and salary workers ages 25–34, by educational attainment and sex: Selected years, 1980–2009 [in constant 2009 dollars] from Fast Facts, Institute of Education Sciences (IES), National Center for Education Statistics (here); Data for the poverty threshold [updated for CPI], from the U.S. Dept. of Commerce, Bureau of the Census (here); Median incomes for male and female college graduates are net of the costs of college education, based on present value computations from a study by Skidmore economist Sandy Baum, U.S. News and World Report, October 30, 2008 (here )

[6] “The Student Loan Bubble in 19 Simple Charts,” by Tyler Durden, Zero Hedge, September 28, 2012, (here).

[7] “In Interview, Bernanke Backs Tax Code Shift,” by Sewell Chan, New York Times, December 5, 2010 (here).

[8] The Economic Report of the President (February 2012) (here), pp. 178-181.

[9] The Economic Report of the President (February 2012) (here), p. 181.

[10] Paul Krugman, End This Depression Now!, W.W. Norton & Company, NY (2012), p. 75-76.

[11] Table, “Tuition costs of colleges and universities,” undergraduate tuition costs for selected years (1980-2011), National Center for Education Statistics (NCES) (here). Source: U.S. Department of Education, National Center for Education Statistics (2012), Digest of Education Statistics, 2011 (NCES 2012-001, Ch 3).

[12] “Tuition isn’t the only bill college students see,” by Philip Elliott, AP, Yahoo! News, August 13, 2013 (here): See also “The Rising Cost of Higher Education: What Now?,” by Rebecca Nathanson, Rolling Stone, July 29 (here).

[13] “Education: Higher Education: Institutions and Enrollment,” The 2012 Statistical Abstract, U.S. Census Bureau (here).

[14] “College Enrollment of Recent High School Completers,” Table 276 (here).

[15] “Families forced to cope with the rising cost of college,” by Collin Binkley and Abby Smith, The Columbus Dispatch, July 21, 2013 (here).

[16] “The Student Loan Debt Crisis in 9 Charts,” by Maggie Severns, Mother Jones, June 5, 2013 (here).

[17] “Student loans outstanding will exceed $1 trillion this year,” by Dennis Cauchon, USA Today, October 25, 2011 (here).

[18] “The Student Loan Bubble in 19 Simple Charts,” by Tyler Durden, Zero Hedge, September 28, 2012, (here).

[19] “Too Big to Fail: Student debt hits a trillion,” by Rohit Chopra, Consumer Financial Protection Bureau (CFPB), March 21, 2012 (here).

[20] “1T Day: As U.S. Student Debt Hits $1 Trillion, Occupy Protests Planned for Campuses Nationwide,” Democracy Now, April 25, 2012 (here).

[21] “Student loan bubble babble,”by Chadwick Matlin, Reuters, March 7, 2013 (here),  citing “Student-Loan Securities Stay Hot,” by Ruth Simon, Rachel Louise Ensign, and Al Yoon, The Wall Street Journal, March 3,  2013 (here).

[22] “The Scariest Chart of the Quarter: Student Debt Bubble Officially Pops As 90+ Day Delinquency Rate Goes Parabolic,” by Tyler Durden, Zero Hedge, 11/27/2012 (here).

[23] “A closer look at the trillion,” Rohit Chopra, CFPB, August 5, 2013 (here).

[24] “Ripping Off Young America: The College Loan Scandal,” by Matt Taibbi, Rolling Stone, August 16, 2013 (here); See also, “Obama Signs Student Loan Deal, Says More College Affordablity Efforts Needed,” by Josh Lederman and Philip Elliott, The Huffington Post, August 9, 2013 (here); and “Student Loan ‘Deal’ Ensures That College Costs Will Continue to Rise,” by Brittany Corona, The Foundry, August 19, 2013 (here).

[25] “The Student Loan Debt Crisis in 9 Charts,” by Maggie Severns, Mother Jones, June 5, 2013 (here).

[26] “A Mystery Behind the Rise of Student Debt,” by Jordan Weissmann, Atlantic, July 17, 2013 (here).

[27] “Options to Change Interest Rates and Other Terms on Student Loans,” Congressional Budget Office (CBO), June 2013 (here), p. 1.

[28] “Competition and the Rising Cost of Higher Education, by Bill Destler, The Blog, Huff Post College, September 10, 2012 (here).

[29] “Families forced to cope with the rising cost of college,” by Collin Binkley and Abby Smith, The Columbus Dispatch, July 21, 2013 (here).

[30] “Ripping Off Young America: The College Loan Scandal,” by Matt Taibbi, Rolling Stone, August 16, 2013 (here).

[31] “Obama’s Plan Aims to Lower Cost of College,” by Tamar Lewin, The New York Times, August 22, 2013 (here).

[32] “SUNY Scrambles to Save Money,” by Patrick Klinck, Community Web, August 4, 2011 (here).

[33] Sources:Total fall enrollment in degree-granting institutions,” National Center for Education Statistics (NCES), Digest of Education Statistics (DEG):2012, Table 221  (here); “Expenditures of educational institutions, by level and control of institution: Selected years, 1899-1900 through 2010-11,” DEG:2011, Table 29 (here); “Average undergraduate tuition and fees and room and board rates charged for full-time students in degree-granting institutions, by level and control of institution: 1969-70 through 2011-12,” DEG:2012, Table 381 (here); See also “School Expenditures by Type of Control and Level of Instruction in Constant (2000-2001) Dollars: 1960 to 2001,” U.S. Census Bureau, Statistical Abstract of the United States: 2002, Section 4: Education (here), Table No. 199.

[34] Chapters on Socialism, by John Stuart Mill, first published posthumously in 1879, Oxford University Press, NY (1998), pp. 382-3.

This entry was posted in - FEATURED POSTS -, - MOST RECENT POSTS -, Economics, Wealth and Income Inequality. Bookmark the permalink.

One Response to Finding a New Macroeconomics: (12) Inequality and the Crisis in Higher Education

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