Inflation vs. Imagination

While it is only in the past few months that Fed chairman Ben Bernanke has focused on inflation as a threat to our economic well being, it has been obvious for several years that it has been having a detrimental effect on American families. The consumer price index, the most broadly referenced statistic on inflation, has looked benign for a long, long time but the CPI doesn’t take into account costs like healthcare and higher education – both of which have been skyrocketing for more than a decade.

Ask the wage earners you know what they are concerned about and you’ll likely hear about health care costs, saving for retirement (which has a large health care component), and putting the kids through college. These fundamentals have been getting more and more expensive – and increasingly out of reach for even middle-class families. Layer that with the recent inflation in food and energy costs (likely to last five to ten years according to the experts I speak with) and you can see the storm clouds darkening.

Ask those same wage earners if they would trade our system for the European model with higher taxes but universal health care, college tuition, and generous government pension programs and they’ll likely shriek and label you a Commie sympathizer. Better to keep the money for yourself so that your fate is in your own hands.

But of course most people don’t save enough to take care of any of these needs. College is increasingly funded through loans (that’s debt, kids) and the national savings rate is at just about zero.

“US consumers’ savings rates are among the lowest in the OECD. They always have
been, but the wedge has widened in recent years. Back in the early 1990s, US
consumers saved about 7% of their disposable income. By the latter 1990s that
was down to the 4% level, and in the new millennium the rate sank to 2%. This
dropped further – close to zero – as booming growth continued. Americans spent
nearly all that they earned in the 2005-07 period.”

There are debates about how the savings rate is calculated but, in any event, basic building blocks of economic mobility are becoming less and less attainable for more and more people. The amount of debt being carried by the average family increasing. Half of all personal bankruptcies are caused by unexpected medical expenses.

The underlying issue that I see is that it is increasingly difficult for one to live what I call a “rich poor” life. A rich poor life is what your old English and Math teachers likely lived. They didn’t earn a ton of money but they could afford a house, healthcare came from the job and the deductions weren’t overly burdensome, and retirement was covered through a traditional pension plan. They managed to live interesting lives – traveled, went to the symphony, ate out now and again -- and could do it rather frugally.

That is increasingly difficult to do. First, as mentioned above some of the basics for long-term economic stability are harder to attain. Second, with the expansion of easy credit it has been easy for everything to go upscale. That quaint out of the way inn is now likely a quaint out of the way inn and spa with rooms at $500 a night rather than $50; the little Italian joint is now a fancy trattoria where the pasta is $20 a plate. A cup of coffee has morphed into a $4 latte.

It was in this context that I read about Berea College in today’s New York Times. This college in Kentucky charges no tuition, requires that its students work on campus, and handles almost as many students as prestigious Amherst College. Best of all, those graduates enter the world with no student loans to pay back. Wouldn’t it be wonderful if all graduates were as fortunate.

Wouldn’t it be a grand goal to set for ourselves to have every graduate from an accredited college or university leave campus with no financial debt to the institution? Imagine if instead of starting one's working life able to save and invest rather than pay back?

Berea is interesting because they have dared to think differently about how – and why – they provide an education. It is a pretty bare bones place but that is how they make their model work. Imagine if we could spread that imagination both to other educational institutions and also to other facets of our lives.

Imagine if we, as a society, put $2,000 into an interest-bearing retirement account for each child born in the U.S. The principal could be automatically repaid when the child turns 18 but the accrued interest could be the beginning of a retirement fund. Eighteen years of compounded interest can be significant.

Imagine if we thought about optimizing outcomes rather than spending so much time trying to ratify processes through ideological filters that worry about public vs. private.

Imagine.