POINT OF VIEW: OP-ED page for keith murray ON BIZ

This page is devoted to invited manuscripts that might appeal to the followers of keith murray ON BIZ
on the treatment of interesting, long-form ideas about topics on a wider range than those pertaining strictly to the world of business.  Instead, here are some POVs that reflect a greater reality than the world of commerce narrowly operates in, but which likely affect the greater business environment, if only indirectly!

In this context, the issues that are considered might be about affairs in the world of commerce and management--or they might be on wide-ranging topics from science to politics that are new or under developed in any other context or medium--yet which impact people or the commerce they engage in as buyers and sellers of goods, services, or ideas, both currently or in the future.  

They can be original manuscripts, or re-printed [with attribution and/or copyright permission] for other sources--all for the benefit of viewers and followers of keith murray ON BIZ.  Authors [and their eMail addresses] are noted for each entry and comments-back-to-the-writer are encouraged.  

If you think you have an idea you'd like to get in front of a smart, thoughtful audience, submission are invited.  Send all manuscripts to Keith Murray:  kmurray@bryant.edu.  

Thursday
Sep242009

"Sweeping changes" in student loan bill really lock-in more of the same in financing a college degree

In the September 18 issue of the Wall Street Journal, it was reported that with the House approval of an education-financing bill recently, changes are underway to change the way student college loans are made, cutting-out private lenders and the federal government as the sole source of student loans. 

While it seems appealing to some to eliminate greedy private bankers—and the prospects of a proposed $87M in savings being re-directed to low-income students and minorities—the real issue is the failure of Congress to re-think the way financing of college degrees occur in the first place.

To begin with, the costs to students of a college degree today is a lot money.  Whether a public or private institution, college represents a major expenditure for most Americans.  Today, the annual expenditure for it represents an enormous before-tax proportion of household income, in the range of 30% to 70%--annually, depending on whether the institution is public or private!

Nonetheless, getting a college degree, however, represents--in strictly economic terms--a very good deal.  Over a working lifetime of 40 years, college grads will, on average, earn roughly $1M over that earned by high school degree holders.  When one considers the payout from a college degree in some specialized fields—business, engineering, technology—differences are even more dramatic.  Adjusted for these financial increases in day’s terms, the earning power of the average bachelors degree is about $400,000, while the net present costs is $150,000—a whopping quarter of a million dollars gain for having acquired a college diploma. 

Furthermore, a bachelors degree substantially hikes the odds for post-college gains of graduates, irrespective of whether the individual studies at an elite school or not:  A student’s chances of earning income in the top 20% of the population increase five-fold for low income family students, over three fold for students from middle-income backgrounds, and over two-fold for students from families making over $82,000. 

The problem with the current proposal in Congress is very simple—it continues the old and out-dated idea, namely that a high-cost-but-long-term benefit like college effectively must be paid-for with what amounts to short-term financing.  As a society, we don’t do this with the procurement of other, major, long-lived benefits--an obvious example being the purchase of one’s home.  Considering the span of an entire post-college career, asking students to finance with relatively short-term borrowing for what is a long-term benefit transaction is problematic for two reasons. 

First, it places a financial burden, however reasonable and prudent the decision may be to acquire a college degree in the first place, on young adults at the period of their early careers when they are least prepared—income-wise—to handle and repay a substantial loan.  Second, it makes much more sense to spread the costs of financing a worthy “investment” over the useful lifetime of the economic benefits incurred!  Final passage of the current House bill all but assures a prolonged continuation of the old system of unrealistically bunching the burden to students at a time when they are least able and prepared to repay a smart choice for themselves and society. 

A college degree is nothing more than a sound, economically savvy decision for the individual to make and society to encourage and facilitate.  What is missing in the U.S. college marketplace today are the financial mechanisms which make that investment transaction occur with relative ease and rationality.  What’s needed, instead of more traditional government or bank financing, is a better societal mechanism to pay for the reasonable cost of making a prudent investment in oneself by attending college. 

Too many families today are forced to refinance their homes, pay with credit cards, dip into precious retirement savings—all to make it possible for sons and daughters to take advantage of what is prima facie a very attractive value proposition.  Typically, these same families can, over a reasonably long period of time, finance cars, homes, vacation properties, boats--but not a college degree; yet, a college degree likely represents the single best investment to be made by long-term financing! 

Perfectly viable-but-different solutions have been around for a long time, yet pose a drastic change in the college financing model.  One is that after a successful, and largely self-funded, freshman year, college students could “borrow” government funds for all or a substantial proportion of the costs of any college they choose for the balance of their programs.  Upon graduating, each grad would be required to pay a small percent of their annual incomes [say, one or two-percent] for the remainder of their productive working lives via their IRS 1040 income tax returns every year on tax day.  In the long run the plan would pay-back the federal government for fronting the money and replenish the advance fund for students who follow; such an approach to college financing could cut-out cumbersome bureaucracy as well!  Recently, former Secretary of Commerce, Robert Reich has also proposed a plan of similar design and concept. 

The real issue with the current House-passed bill is that it really represents no change at all—and locks students into very poor ways to handle what otherwise is a prudent, sound choice.  Its passage represents a failure to create the appropriate mechanisms already erected and sustained for other types of high-cost, high-value purchases—indeed a way that would make the necessary means available to all who desire and merit the considerable benefits and value of a college degree to get exactly what they need and deserve.  

 

Sunday
Sep062009

A mid-Summers dream

by Michael A. Roberto & Brian Gaspardo
Published in The Washington Times
Monday, August 17, 2009 

 

Twenty years ago, as young and impressionable undergraduates, we enrolled in Harvard University Professor Lawrence H. Summers' public-sector economics course. Mr. Summers had a legendary reputation as a remarkable intellect unwilling to tolerate sloppy reasoning and mundane questions, so we approached his class with awe and fear.

We worked hard, enjoyed the intellectual challenge, and learned a great deal.

We now consider the policies championed by our former mentor from his new post as President Obama's chief economic adviser. We wonder: What would Professor Summers think of Economic Adviser Summers? A few key lessons from his course would seem to conflict with the policies he now promotes.

Lesson No. 1: Policies that broaden the tax base and lower marginal rates enhance economic efficiency. Professor Summers taught us that the dead weight loss (or economic inefficiency) from taxation increases with the square of the tax rate. Therefore, government should strive to broaden the tax base and lower marginal rates. The current administration -- apparently with the blessings of Economic Adviser Summers -- seeks to use the tax code to engage in social engineering, often resulting in proposals that narrow the tax base and raise marginal rates. Such policies may redistribute income, but will surely harm economic efficiency.

Lesson No. 2: Federal deficits ultimately drive up real interest rates and crowd out private investment.

Severe economic downturns, particularly liquidity traps, may justify increased federal spending. However, unprecedented government deficits come at a cost. As a professor, Mr. Summers taught us supply and demand - massive government borrowing demands will cause interest rates to rise. The administration promises to rein in these deficits in the years ahead, but experience tells us "temporary" government spending programs prove remarkably permanent. Higher interest rates and the crowding out of private investment ultimately will imperil long-term economic growth.

Lesson No. 3: Markets depend on stable and consistent laws and regulations. Professor Summers taught us that markets function best when government establishes a sound legal system and protects property rights. Put simply, government must create and enforce the rules of the game in a consistent manner. The recent treatment of bond holders at Chrysler LLC and General Motors Corp. appears to undermine the rule of law. While Economic Adviser Summers trumpets the jobs "saved" by the auto bailout, Professor Summers surely would have realized that trouncing on bondholders' legal rights will increase the cost of capital for all U.S. corporations and ultimately lead to fewer American jobs.

Lesson No. 4: Government has the potential, but not necessarily the ability, to correct for market failures. Markets are not perfect, and market failures harm economic efficiency. However, the costs of government failure often exceed the costs of market failure. The likelihood of government blunders surely rises when presidents, Treasury secretaries and economic advisers who have rarely worked in the private sector begin nationalizing complex industries like banking, health care and automobiles.

Lesson No. 5: Tax policy drives up the cost of health care. Current tax policy taxes wages, but not health care benefits. That discrepancy distorts people's behavior by making certain forms of compensation (benefits) more attractive than others (wages). This incentive leads employees to select policies with low deductibles and co-pays, which means they bear minimal cost when deciding to seek medical care. Therefore, tax policy pushes up demand, and thereby prices, for both health insurance and medical care.

The current proposals for health care reform make bold promises of cost reductions, yet they do little to address the basic incentives that drive up health care spending. Professor Summers taught us there is no free lunch.

We believe the American people can benefit from the wisdom and insight of Professor Summers. We worry though that political ideologies and agendas may be leading to policies today that would have been subject to a withering critique in that Harvard classroom 20 years ago.

Michael A. Roberto is the trustee professor of management at Bryant University in Rhode Island, and author of "Know What You Don't Know" (Wharton School Publishing, 2009). Brian L. Gaspardo is managing partner of O'Neill and Gaspardo LLC in Oak Brook Terrace, Ill.

Sunday
Sep062009

The high price of a college education: It's time to stop complaining and solve the real problem

By Keith Murray [kmurray@bryant.edu]
Originally submitted to the WALL STREET JOURNAL, September 1, 2009

 

Each year, as surely as the arrival of the dog days of summer, there also come complaints in the media about the excessive costs of getting a college education in today’s America.  The time to challenge the premise of those claims is long overdue and, instead, to set about solving the real problem. 

The objections heard most frequently are about how greedy colleges dare to annually hike tuition & fees faster than the cost of inflation or how terrible it is that graduates have to assume so much in the way of onerous, burdensome loans.  What is never asked is what would higher education in the U.S. be like if it didn’t stay ahead of the innovations associated with an ever expanding knowledge base, keep current in terms of instructional technology, or developing facilities to meet even higher enrollments associated with population growth?  A number of points are worth considering. 

1.  A college education today does cost a lot.  All the talk about what seems to be the high cost of going to college is perfectly reasonable—it is; whether a public or private institution, college represents a major expenditure for most Americans.  Today, the average annual expenditure for a public education is $15,000—that’s over $60,000 to get the full degree; for a private institution, that same cost to students is even steeper:  $37,000 a year, for a total of more than $148,000 for four years.  In terms of median annual family incomes in the U.S. today, these annual costs represent an enormous before-tax proportion of income, in the range of 25% to over 60%--annually!

2.  It also costs a great deal to be in the education business This is simply a reality of the times we live in.  To erect a dorm in a non-urban setting can easily cost a half a million dollars per suite to house just six students.  That professors get paid well is bothersome to some, but nothing more complicated than free-market forces is at play in establishing those scarce specialists’ salaries.  College administrators aren’t sanguine about high capital costs or operating expenses, but that’s the world their institutions must be a part of—and pay for, one way or another.   

3.  Most individuals are simply unfamiliar with the costs associated with education at any level It is not a surprise that for most people, the tax funded public K-12 education system likely obscures a good appreciation for how costly learning at even higher levels can be.   But the reality is that costs are far from trivial.  The top five states in the U.S. pay over an average of $16,000 per year for each student in their primary and secondary systems; in the Washington, D.C. public system, per pupil spending in 2007-08 was estimated to be $24,600.  These learning costs approach—and, in some cases, rival—tuition costs in higher education, and the price some college students are asked to cover.  However, for some, apparently, anything—or very much—over “free” is too much. 

4.  Getting a college degree, however, represents--in strictly economic terms--a very good dealOver a working lifetime of 40 years, high school grads will earn approximately $1.2M; over the same period the average college graduate will make an average of $2.1M, roughly a $1M more!  When one considers the payout from a college degree in a specialized field of study—business, engineering, technology—those differences are even substantially more dramatic.  Put another way, adjusting for these financial increases in day’s terms, the earning power of the average bachelors degree is about $400,000, while the net present costs is $150,000—a whopping quarter of a million dollars gain for having acquired a college diploma. 

Put another way, a bachelors degree substantially hikes the odds for post-college gains of graduates, irrespective of whether the individual studies at an elite school or not:  A student’s chances of earning income in the top 20% of the population increase five-fold for low income family students, over three fold for students from middle-income backgrounds, and over two-fold for students from families making over $82,000. 

5.  It is time to focus on how society makes access to the benefits of college available to all who are motivated and worthy What’s needed is a better societal mechanism to pay for the reasonable costs of making a prudent investment in oneself by attending college.  If college costs simply represent what it takes to become more valuable as an individual—and reap the economic benefits of that--then a college degree is nothing more than an sound investment.  What is missing in the U.S. college marketplace today is the societal—really financial—mechanisms which make that investment transaction occur

Too many families today are forced to refinance their homes, pay with credit cards, dip into precious retirement savings—all to make it possible for sons and daughters to take advantage of what is prima facie a very attractive value proposition.  Typically, these same families can, over a reasonably long period of time, finance cars, homes, vacation properties, boats--but not a college degree; yet, a college degree likely represents the single best investment to be made by long-term financing!  In effect, what’s lacking—in addition to more scholarships, grants, and other familiar cost reducers—is a simple, fair, open-to-all payment and financing system that makes feasible the purchase of a college degree financed over a reasonably long period of time. 

Interestingly, perfectly viable solutions have been around for a long time!  Going back to the 1970s, Boston University’s then president, John Silber proposed a Tuition Advance Fund; under his plan Congress would simply “front the money,” all to be paid back by the very recipients of the college degrees--and the economic benefits that accompany that accomplishment.  After a successful, and largely self-funded, freshman year, college students could “borrow” all or a substantial proportion of the costs of any college they choose for the balance of their programs.  Upon graduating, each grad would be required to pay a small percent of their annual incomes [say, one or two-percent] for the remainder of their productive working lives via their IRS 1040 income tax returns every year on tax day.  In the long run the plan would pay-back the federal government for fronting the money and replenish the advance fund for students who follow.  Recently, former Secretary of Commerce, Robert Reich has also proposed a plan of similar design and concept:  government funded college students as grads pay 10% of income from first ten years, post-graduation. 

In short, the acclaimed high cost of college today is not the central issue—those costs are, in large part, simply what they must inevitably be to render a scarce, valuable, professional service.  The real issue is the failure to create the appropriate mechanisms that have been erected and sustained for other types of high-cost, high-value purchases—a way that would make the necessary means available to all who desire and merit the considerable benefits and value of a college degree.