Skip to content

Posts by Steven Pressman, Visiting Research Fellow

Best of 2015: Is College Worth the Expense?

university campus bicyclesThis week, as we recharge for the new year, we highlight a few of our best-read blogs of 2015. This piece, by our visiting research fellow, Steven Pressman, originally ran in August.

The cost of attending a four-year college in the United States has increased sharply of late, from around $3,500 in the early 1980’s to around $24,000 for this upcoming academic year.

Since 1980, nothing has increased in price more than college. Not health care. Not gasoline. Not housing.

If college costs had increased with inflation since the early 1980’s, tuition this year would be a little more than $9,000 per year. What accounts for Read more

A Reason to Celebrate Social Security’s Birthday

FDREighty years ago this week — on August 14, 1935 —  President Franklin D. Roosevelt signed the Social Security Act. It created a national old-age retirement program in the United States for the first time. It was an investment that continues to pay dividends even today.

At the time, 30 (of the then 48) US states had developed their own old-age retirement programs. These plans experienced a number of problems. Unlike the Federal government, states must balance their budget annually. In hard economic times, such as the Great Depression, tax revenues fall; states then feel pressure to cut retirement benefits in order to keep their budget balanced. Another problem was that firms can move production facilities to states with lower taxes. This, too, pressures states with generous retirement programs to reduce taxes and benefit levels.

A national program solved these problems.

Over the past 80 years, critics have complained that Social Security is an unfunded entitlement that will bankrupt the country; however, this is not the correct way to view Social Security. It is more appropriate to view it as an insurance program. It protects Americans from financial disaster during a long retirement. Benefits are guaranteed for life and are increased each year to keep up with inflation. Social Security also provides financial support to surviving spouses of deceased workers and to their children until they reach 18 (19 if still in high school).

There are also some macroeconomic benefits from the program. By enabling people to retire, rather than having to work until they die, jobs open up for younger workers. Both retirees and workers receive money to spend and help grow the economy.

Despite all this, undoubtedly the major achievement of Social Security is that it has enabled millions of Americans to retire without becoming poor. For this reason it is the most popular of all government programs.

Yes, there are problems that still need to be addressed. The program is projected to run small deficits in the future due to the retirement of the Baby Boom generation, as well as slow population growth. And the program does need to be modernized to deal with life in the 21st Century, to reflect lots of self-employed individuals and working women.

But given all the good it has done, we should all wish Social Security a happy 80th birthday and many happy returns.

Is College Worth the Expense?

college campusThe cost of attending a four-year college in the United States has increased sharply of late, from around $3,500 in the early 1980’s to around $24,000 for this upcoming academic year.

Since 1980, nothing has increased in price more than college. Not health care. Not gasoline. Not housing.

If college costs had increased with inflation since the early 1980’s, tuition this year would be a little more than $9,000 per year. What accounts for the extra $15,000 in annual expenses?

As I explain in my recent videos ,two main factors are primarily responsible for sharply rising college costs.

First, there are more administrators at colleges today than several decades ago. In addition, administrator salaries have soared during the past several decades. It is not uncommon now for college presidents to make more than $1,000,000 per year.

A second key factor pushing up college costs is that government aid to higher education has declined at both the federal and state levels. Given the costs of educating students, universities have increased tuition in order to make up for lost government money.

Read more

Economy Grows on a Shaky Foundation of Debt

Money 2Median household income has remained stagnant over the past quarter century, when controlled for inflation. With rising needs like cell phones, computers and cable TV, many U.S. households have had to go into debt to maintain a middle-class standard of living.

This has provided a boost to the overall economy, because consumer spending makes up nearly 70 percent of total spending. As consumer spending goes, so goes the U.S. economy.

But there is a problem with this solution. High debt levels are not sustainable over the long haul. At some point, interest payments on debt become a burden on households, and require that households deleverage, paying down some of their debt. When this occurs, economies usually enter a recession.

Since the start of the Great Recession, U.S. households have sought to deleverage. However, this effort has been mostly unsuccessful. Americans have found it too difficult to shed their debt because of falling incomes.

Debt payments, adjusted for inflation, and debt payments relative to income have fallen since 2007. However, this decline was mainly due to lower interest rates stemming from an aggressive monetary policy, and government programs like the Home Affordable Modification Program, which helps homeowners struggling to pay their mortgages.

Read more

Greek Financial Crisis: What Would Aristotle Do?

GreeceA common put-down of economists is that they know the price of everything but the value of nothing. This pithy comment encapsulates two very different views of money, and can be helpful in understanding how to resolve the Greek financial crisis.

Adam Smith, regarded as the father of economics, took a moral view of money. For Smith, money was about being able to have a decent standard of living, or being able to “appear in public without shame.” He supported government regulation of lending rates because he feared that lenders would take unfair advantage of the destitute. Following the Smithian view of money, we developed bankruptcy laws that let people (and business firms) escape from crushing debt, and survive without this debt hanging over them.

The philosopher Jeremy Bentham adopted a more economic perspective. He thought that Smith’s moral view of money was inconsistent with his laissez-faire economics, where people determined what was best for them, and markets determined what was best for the economy overall. Bentham pointed out that usury laws limited individual freedom and had bad economic consequences: Lenders would not lend at low rates, and so we had less investment and spending. The economic view of money states that bankruptcy laws encourage reckless behavior and speculation, since if something goes wrong there is a simple out.

Understanding these two views of money is crucial for understanding the Greek tragedy whose last act will take place this week in Brussels (unless everyone agrees to kick the can down the road for another few weeks).

Read more