America, We have a Problem: the Effect of the Average Cost of Public Higher Education on the % of total wealth held by the top 1%

“You cannot be a good house in a rapidly deteriorating neighborhood.” — Mohamed El-Erian

“We have an obligation and a responsibility to be investing in our students and our schools. We must make sure that people who have the grades, the desire and the will, but not the money, can still get the best education possible.” — Barack Obama

Read the full paper here:

http://bit.ly/edu-wealth

Abstract

The rising cost of higher education and the growing gap between the wealthiest Americans and everyone else are critical societal issues. The purpose of this paper is to explore these issues in depth and attempt to determine using linear regression whether the rise in the cost of higher education has had a statistically significant impact on the amount of total wealth held by the top 1%. In order to better gauge the effect, I will look at the wealth gap 3, 6 and 9 years after the observed average cost of tuition, room and board at 4 year public universities. While this fails to include private schools in America, many of these schools are significantly more expensive and specialized than public universities, which educate a larger percentage of students and theoretically should be affordable by qualified students from all socioeconomic statuses. This issue is worthy of rigorous analysis because a large wealth gap signifies an unbalanced society. Education has the potential to act as an equalizer allowing for a greater number of people to learn the skills necessary to receive higher wages, be competitive in the workplace and create wealth. The findings of this paper specifically aim to highlight the need to address unaffordable higher education and a severely unequal society. Additionally, this paper will invite the reader to consider the stark macroeconomic consequences should the current situation persist.

Outline

1. Introduction
2. Exploring the problems in higher education
3. Bureaucracy = Rising Cost
4. Exploring Wealth Inequality
5. Why is the wealth gap growing?
6. Education and Wealth Inequality
7. My Analysis
8. Conclusion

Introduction

• Go to college: individuals with a bachelor’s degree earn $22,600 more a year than those with just a high school diploma
• College prepares people for the real world and gives students more time to be net consumers so that they may provide more value (both economic and societal) to the world through the skills they learn
• “Inequality in America today is twice as bad as in ancient Rome, worse than it was in in czarist Russia, Gilded Age America, modern Egypt, Tunisia or Yemen, many banana republics in Latin America, and worse than experienced by slaves in 1774 colonial America.”

Let’s be clear

• Paul Graham, cofounder of startup accelerator Y Combinator and holder of a Harvard PhD: “the most common mistake people make about economic inequality is to treat it as a single phenomenon. The most naive version of which is the one based on the pie fallacy: that the rich get rich by taking money from the poor.”
• The wealth gap is not growing because wealthy people are taking wealth from poorer people.
• In fact, they are creating more wealth. How?

Exploring the problems in higher education

• College degrees are not equal: A random degree from Stanford University is expected to return 14.2% each year for 20 years while a degree from Fayetteville State University will return a negative 10.6% over the same time frame
• An engineering graduate from the University of California, Berkeley can expect to be nearly $1.1m better off after 20 years than someone who never went to college while an arts graduate from Murray State University in Kentucky can expect to make $147,000 less over 20 years than a high school graduate, after paying for his education
• 50 percent of college graduates are graduating under-employed or unemployed
• The cost of higher education is exploding: The average cost of tuition and fees at a private, four-year university in 2015 was $31,231 — up sharply from $1,832 in 1971–1972. At public, four-year schools, tuition and fees cost about $9,139 this year up from $500 in 1971.

Bureaucracy = Rising Cost

• According to the Department of Education data, administrative positions at colleges and universities grew by 60 percent between 1993 and 2009, which Bloomberg reported was 10 times the rate of growth of tenured faculty positions.
• University of Minnesota pays over $1B in compensation a year
• The University of Maryland at College Park employs six vice presidents, six associate vice presidents, five assistant vice presidents, six assistants to the president, and six assistants to the vice presidents
• “one-third of all colleges and universities in the United States face financial statements significantly weaker than before the recession and are on an unsustainable fiscal path. Another quarter find themselves at serious risk of joining them.” — Jeff Denneen, head of the higher education practice at Bain & Company

Exploring wealth inequality: Why wealth?

• Wealth is an enabler and provider of economic freedom. Thus, wealth provides a much stronger indication of economic affluence than income.
• “in a representative democracy, the distribution of power is often related to the distribution of wealth.”
• in 2013, the top 1% held 39% of the total wealth in the United States.
• To make it in the top 1% in 2010, one’s mean household income needed to be $1,318,200, mean household net worth needed to be $16,439,400 and mean non home wealth needed to be $15,171,600
• Concentration at the top: the 16,000 families making up the richest 0.01%, with an average net worth of $371m, now control 11.2% of total wealth

Why is the wealth gap growing?

• Consumer debt?
• Technological change and globalization
• “On a value weighted basis, businesses with a technology component grew from 7.1 percent in 1982 to 25.5 percent in 2011, over one-quarter of the total wealth in the 2011 Forbes 400.” — Steven Kaplan and Joshua Rauh
• “A great programmer, on a roll, could create a million dollars worth of wealth in a couple weeks.” — Paul Graham
• “short termism” or the idea that most American companies are out to create a quick buck rather than lasting, widespread economic value, focus on quarterly earnings
• Founded 12 years ago, Facebook is currently the world’s 6th largest company with a market cap of about $325B.

Other ideas

• Joseph Stiglitz, Nobel prize-winning economist from Columbia University, claims “the Fed’s aggressive monetary policies may have further boosted U.S. inequality.”
• Matthew Rognlie of the Massachusetts Institute of Technology thinks that the increase in the value of housing is driving the increase in wealth inequality.

Where do the top 1% make their money?

• 36 percent of the top 1%’s income comes from capital gains
• the top 1% is creating more new value than ever before and consequently capturing that value in the form of net worth.
• Current Forbes 400: finance and tech

Education and wealth inequality

• “the wealthiest 20% of American families are over-represented (in colleges and universities) by more than double their percentage of the population: an immense margin of 21% while every other income group is under-represented.
• “you cannot be a good house in a rapidly deteriorating neighborhood.”76 — Mohamed El-Erian, chief executive of Pimco
• “too much inequality can harm the efficient operation of the economy.” — Lawrence Katz

My Analysis

To begin, I regressed the % of wealth held by the top 1% at 3 year lag on price of tuition. Then, I regressed % of wealth held by the top 1% at 6 year lag on price of tuition. Finally, I regressed % of wealth held by the top 1% at 9 year lag on price.

Since there were gaps in my data, I was unable to correct for autocorrelation in the price of higher education which should be expected to rise at least as fast as the CPI. The Durbin-Watson Statistic is a well-known test for autocorrelation in linear regression models, but it is not considered valid for models with lagged dependent variables.

Analysis — 3 year

Our t stat is greater than 1.96 so we can know that tutionCost does influence the % of wealth held by the top 1%. In fact, our R-squared shows that tutuionCost explains 24% of the variance in the % of the wealth held by the top 1%.

Analysis — 6 year

For the six year model, we can observe that for each additional $1,000 added to tuition cost, the % of wealth held by the top 1% increases by .00761 points. Additionally, our R squared increased by 19% while our P–value decreased making the results from this model more compelling than the first.

Analysis — 9 year

We see another increase in our t-stat as well as a significant decrease of 56% in the P value and increase in R-squared of 27%. For the 9 year model, we can observe that for each additional $1,000 added to tuition cost, the % of wealth held by the top 1% increases by .00899 points. The accuracy of these regressions could be strengthened but they do indicate a relationship between the % of wealth held by the top 1% and the price of public higher education. While you might argue that the price of education will continue to rise at around the pace of the CPI, if current trends continue we could have real trouble on our hands.

Conclusion

• “We have an obligation and a responsibility to be investing in our students and our schools. We must make sure that people who have the grades, the desire and the will, but not the money, can still get the best education possible.”
• Tax structures can be changed in a year or two. Fixing an education system takes a lifetime.
• Skills obtained through education are the means by which wealth is created.

Read the full paper here:

http://bit.ly/edu-wealth