Monday, January 30, 2012

Obama Plans To Slow Rising Tuition

See Obama Details Plan to Curb Tuition By LAURA MECKLER and STEPHANIE BANCHERO of The Wall Street Journal.

Part of the problem is "...concern about the rising costs of college tuition, which have increased by an average of 136% over the past 20 years, adjusted for inflation."

Here are some key excerpts:

"[Obama] wants to withdraw federal campus-based aid from colleges and universities that increase tuition too rapidly or fail to provide a "good value" for the money."

"William Powers Jr., president of the University of Texas at Austin, said he supports using a threat of funding as a lever to get specific outcomes, but said there could be nasty debates about how those outcomes are measured. "This could be fabulously successful, or not, depending on the details and implementation.""

"Mr. Obama would change that by rewriting the formula so that schools that keep tuition down and that provide "good value" would be rewarded with more money. The White House did not say what would constitute "good value," but said the new formula would include measures such as graduation rates and debt repayment.""

This might put pressure on teachers to pass students so they can graduate and keep their school's graduation rate high enough.
"Some critics warned that federal efforts to control tuition costs amount to price controls, while others pointed out that the $2.7 billion the plan affects is tiny compared to total spending in colleges and universities."

There is always a danger that a price ceiling (the type of price control mentioned) can cause shortages, as I mentioned in class last week. A lower price enforced by the government raises the quantity demanded while lowering the quantity supplied.

Now it may be more complicated than what a simple supply and demand graph would show. Higher education might be what is called "monopolistic competition," where firms have some pricing power. That does not mean, though, that price controls will work. The government would have to somehow know the right level of tuition for every school.

With competition intense, schools bid for superstar faculty which raises tuition. Also, they have been competing with amenities like better dorms and facilities. Colleges also offer scholarships to the best students, meaning others pay more. See chapter 18 of the book The Economics of Public Issues, 16e.

But some of the higher tuition has been covered by financial aid. See a post from March, 2010 called As college costs rise, sticker shock eased by student aid. From 2004-09, the net price that students pay, once financial aid is taken into account, actually fell.

Friday, January 27, 2012

U.S. GDP grows 2.8% to its fastest pace in 1-1/2 years, but slower than expected

Click here to read the article from the New York Daily News.

"Economists, however, had been betting on a slightly faster fourth-quarter pace of 3%."

That might not seem like a big deal, just .2% less than expected. In my macro courses we read a chapter in the book The Economics of Macroissues. The chapter discussed how nations with common law systems, where property rights are better protected than in nations with civil law systems, have higher growth rates. I pointed out to my classes that even a small difference in growth rates ends up causing a very big difference in per capita incomes due to the annual compounding effect.

The table below shows how much per capita income would be at various rates after 100 and 200 years. Assume we start with a per capita income of $1,000. If we grow 2.0% per year, after 100 years it will be $7,245. At 2.1% per year, it would be $7,791 or about $700 more. That is how much that little .1% matters. The difference over 200 years is about $11,000. After 100 years at 2.5% per year, per capita income would be $11,814. That is $4,000 more than the 2.0% rate. Small differences in growth rates add up to big differences over time.

Using the latest GDP figures for another example, if we grow 3.0% a year for the next 30 years, and if per capita GDP now is, say, $50,000, it would reach $121,363. But if it only grows 2.8% for 30 years, per capita GDP would be $114,488. That is $6,874 less than if we grow 3.0%

Per Capita Income After 100 and 200 Years At Various Annual Growth Rates (Starting With $1,000)

Wednesday, January 25, 2012

What We Give Up for Health Care

Interesting article by Ezekiel J. Emanuel in Sunday's NY Times. Click here to read it. He is a doctor. One of his brothers is mayor of Chicago Rahm Emanuel who is also former White House Chief of Staff under Obama.

One of the first lessons every semester is that there is no such thing as a free lunch or that everything has an opportunity cost. Here are some excerpts:
"The more we spend on health care, the less we can spend on other things we value."

"Over the past 30 years, health care inflation has been a major reason average wages have remained stagnant. For employers, the cost of labor is total compensation — wages plus benefits. As the cost of benefits rises, wages tend not to rise, or to rise much more slowly. According to the Bureau of Labor Statistics, as health care costs skyrocketed between 2000 and 2009, workers’ total compensation increased by 1.3 percent per year, but workers’ hourly wages alone increased by just 0.7 percent per year, significantly below the rate of inflation.

During those 30 years, the only sustained period when real hourly earnings increased was 1990 through 1998 — which coincided almost exactly with a period of unusually low increases in health care costs."

"Last year, Medicaid spending was estimated to account for nearly a quarter of total state spending — the largest portion of their budgets — and it’s getting only more expensive."

"And so states have turned to cutting funding for public education — the next biggest item in their budgets."

"as health care costs rise, so too do the number of uninsured Americans. According to an analysis I did a few years ago, for every 10 percent increase in the average cost of family health insurance premiums, the ranks of the uninsured (excluding seniors covered by Medicare) increased by 0.55 percent. When premiums doubled between 2000 and 2009, the percentage of Americans who were covered by employer-sponsored health insurance dropped to 61 percent from 69 percent."

"We cannot have it all."

"...we could speed up the implementation of payment reform, stop Medicare payments for tests and treatments that provide no benefit and endorse competitive bidding for medical goods and services."