Tuitions, Willingness to Pay, and Government Action

I had quite a bit of trouble in writing this post. To understand some of the problems I need to provide some definitions:

real means using constant dollars, taking inflation out of the picture
median means half are above and half are below
average or mean is determined by adding everything up and dividing by the number that you’ve summed
mode means the most frequently occurring number in whatever you’re counting
normal distribution means the median, mean, and mode are all the same
willingness to pay is a measure of demand

The problem that I had is that the figures I’m seeking are not readily available. What I was seeking was a graph of median college tuitions from 1970 to 2020 in real dollars. I’m going to need to use some anecdotal data.

This morning John Stossel’s op-ed in the New York Post, “Why college has become a total ripoff”, caught my eye. Naturally, he blames the high cost of a college education on the federal government:

It’s August. Many young people head off to college.

This year, fortunately, fewer will go.

I say “fortunately” because college is now an overpriced scam.

Overpriced because normal incentives to be frugal and make smart judgments about who should go to college were thrown out when the federal government took over granting student loans.

Why?

Because our government basically vomits money at everyone who applies.

If private lenders gave out the loans, they’d look at whether they were likely to be paid back.

I think that while government has played a role it’s not the only factor at work and I want to explain why. The TL;DR version is that college tuition has been rising very rapidly for a very long time, longer than the present round of student loans and (attempted) debt forgiveness.

I happen to know some of the following because I’m inquisitive and I talk to people. In 1960 the annual tuition at my elite alma mater was $600. By 1970 it had tripled to $1,800. It continued to triple roughly every 10 years: $5,400 (1980), $16,200 (1990), $48,600 (2000). Now it’s $62,391. Said another way over 60 years it increased more than a hundredfold.

Now let’s look at that in real terms:

Obviously, that’s a lot faster than inflation but inflation has played a role. It’s also clearly not just government action at work. If it had been, we’d see less regularity in the inexorable rise in inflation.

Now let’s look at real median family incomes over the same period:

Those are in 2021 dollars. Said another way in 2021 dollars the median family income was around $45,000 while today it’s around $89,000 dollars. Not quite doubled.

So, let’s recap. Inflation has rendered your dollar roughly equal to a dime in 1960. Median family incomes have roughly doubled. College tuitions have increased a hundredfold. Note that if median incomes had kept pace with inflation the median household income would be $450,000 today.

Here’s my interpretation of what’s happened. College tuitions have been increasing very rapidly for a very long time. That is driven by inflation and increased willingness to pay. Willingness to pay has increased become people have more money than they used to, because there’s a widespread and somewhat mistaken believe that the only way to get a good job is with a college education, as well as because the federal government has been throwing money at tertiary education. Basically, I think that John Stossel has the causality reversed. The government is throwing money at tertiary education because of voter demand and the increasing gap between college tuitions and median income.

I think that several things should happen. First, more strings should be attached to college loans. They should be restricted to majors that are likely to provide ROI. Second, we should deemphasize tertiary education in public discourse. It’s a lot less important than has been made out by opinionmakers. We need to reduce the role that the financial sector plays in the economy, referred to as “financialization”. And, finally, more policy should be directed at increasing median income. We can’t do that by increasing the number of workers in the country who can only get minimum (or sub-minimum) wage jobs. We need to produce more of what we consume.

I’m open to other suggestions. Increasing median income has been neglected for far too long.