COMMENT: Health Care, Tuition & Housing: Have You Become A Bubble Pawn?

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About a year ago I watched the 2015 movie The Big Short starring Christian Bale, Steve Carell, and Ryan Gosling. It’s a movie about the days leading up to the housing crash of 2008. It’s about the burst of the housing bubble. It’s about how the housing bubble got set up in the first place. I’ve watched this movie probably half a dozen times, each time trying hard to understand what happened. With my limited business background (which includes a one-semester stint in an MBA program), I still could not figure it all out. Why? Because economic bubbles by their very nature are about divorcing assessments of value and risk from anything approaching reality. As Big Short points out, sub prime mortgages were bought and sold, and packaged, and repackaged, and combined with lots of other stuff until a point where very few, even seasoned investors and government regulators, could assess value or risk. Mortgage backed investment instruments left Earth’s gravitational pull. But, yes, everything did eventually come crashing down. Average people lost homes or went bankrupt or found themselves in houses that were upside down (owing more on the house than it’s worth), or with retirement accounts drained. It’s a horrific story, and people even today (2018) are still digging out. If you know what you are doing (as the Christian Bale character did) you can make a lot of money as the bubble expands. But you could lose everything once the bubble bursts.

I just finished reading Elisabeth Rosenthal’s 2017 book entitled An American Sickness—How Healthcare Became Big Business and How You Can Take It Back. It tells a shocking tale of how our American healthcare system has gone terribly wrong. It’s a story about yet another bubble economy where a single dose of a medication can cost $100 one day and over $600 the next (as happened with the epipen debacle). Healthcare has left Earth’s gravitational pull. In some cases, the cost of health insurance has gone up as much as 40% from 2017 to 2018. As Rosenthal points out, this is pure speculation; there’s no grounding in reality. Healthcare now acts more like a commodities market not unlike wheat, coffee, oranges, and sugar. This is simple insanity. And as Rosenthal points out with example after example, there are things that happen within the American healthcare system (runaway drug prices are but one example) that do not happen in any other industrialized nation. Economically speaking, all of the US now resides in Las Vegas. It’s gambling pure and simple. And real people’s lives are at stake. The same holds true with student tuition debt.

Students are leaving graduate school with tuition debt approaching a quarter of a million dollars. We’ve all heard that student debt has eclipsed credit card debt and stands at about $1.3 trillion dollars (as of December, 2017). Please, roll that figure around in your head for a while. Or how about a loss of $7 trillion in housing value and another $11 trillion in stock market value after the housing crash. These are staggering numbers. Why is it that we continue to allow these bubbles to take hold and grow, to use a Las Vegas model of economics? When did Milton Friedman start playing the slots? John Mayall & the Bluesbreakers have a great song called Ain’t No Brakeman. The refrain says “ain’t no brakeman on this train.” Bubbles have no brakeman. It’s simply a wild and often very dangerous ride. No one is at the controls. There are no controls. What if I told you that you play a very important role in the life of a bubble. Allow me to explain.

Recently we received a grant report that was rather revealing. This report points out that the social services sector is going through a major tectonic shift. According to this report, the government, both state and federal, is moving away from contracting with social services organizations as a way of providing services. Social services organizations, as a part of ACA (the affordable care act), are being forced to move toward a medical model so that they can qualify for reimbursement from insurance companies, Medicaid and Medicare chief among them. In other words, social services organizations, now forced to be medical service providers, will only receive funding if they get you in the door. The same is true of student tuition.

It used to be that the government (again, both state and federal) made block grants to colleges and universities so that they could provide education at affordable levels. As I blogged about before, in 2013 I received a newsletter from my alma matter the University of Texas at Dallas. This newsletter contained an article by the then president of UTD, Dr. David E. Daniel. Dr. Daniel talks about the rising cost of tuition. He reveals that in the early 1980s (when I was at UTD) for every dollar of tuition, the state and federal government kicked in about forty cents. Today (in 2013) that amount is down to about four cents. Dr. Daniel goes on to wonder if “public education” is still an appropriate term given that there is so little public support. Good question.

So, how do colleges and universities get their funding? Yup, through you. Like with health care, departments of financial aid have to get you in the door. And they will engage in all manner of shady practices (like secretly converting student grants to loans, or engaging in scholarship displacement [1]) to do it. Getting you in the door was also true during the height of the sub prime mortgage lending frenzy. If you had a pulse (and there were probably ways around this criteria), you had a loan.

The bottom line is that our government is playing a central role in creating a very predatory economic environment that caters to a balloon mentality. You are being turned into a bubble pawn. They are “pawning risk” onto you. And there has been very little push back that I can see. My sense is that the Occupy movement was attempting to address this bubble mentality. However, their efforts failed to move the needle. So, we are left with being bubble pawns in an environment that becomes riskier all the time. It only takes one medical procedure (or very expensive, life-sustaining drug) that an insurance company decides they will not cover to bring about financial ruin. From an attachment perspective, exposing people to ever greater levels of risk only serves to undermine attachment security. There’s no brakeman on this train. The question becomes how to get off without getting hurt. Not sure I have the answer to that one.

Postscript: As I was polishing this post, I spied an article by Jon Talton entitled Americans’ Savings Falls Again — Here’s Why that Matters. Talton observes that “the United States tends to add to its debt because of tax cuts and cleaning up the mess of speculative bubbles, most notably from the Great Recession.” Talton reminds us that the US’s trade deficit and national debt are also examples of bubbles. He goes on to point out that falling savings rates, now at “a near-record low of 2.4 percent of disposable income in December [2017]” (quoting Talton) do not bode well for the trade deficit bubble. As Talton states: “Nations with positive savings rates tend to run trade surpluses. Nations with negative savings rates don’t. It’s not a morality play but a simple fact of economics.” So, it would appear that one simple way to get out from underneath the lather of economic bubbles is to simply start saving more. Another way would be to begin speaking out against bubble economies and Las Vegas-style economics.


[1] – We looked at starting a scholarship program at our Foundation but decided against it for one reason: scholarship displacement. Departments of financial aid prefer to place the tuition money that students bring in into a tuition slush fund. In this way, they can slather tuition money around willy nilly (e.g., to attract a star football player). In essence, departments of financial aid do not buy into a model that rewards merit. Their model is almost entirely “needs based.” And this includes the need to bring in students who can pay. The same holds for medical services. Clinics and hospitals are candid about their need to bring high quality health insurance policies through their doors. So, if an enterprising student goes out and secures a scholarship from a private foundation based on merit, that scholarship award may end up displacing out of the student’s financial aid package an amount equal to or, in some cases, larger than the grant award. A foundation has no way of knowing what actually happens to their scholarship award once it hits a department of financial aid, thus undermining the foundation’s fiduciary responsibility to track scholarship grants to individuals. Financial aid packages are a moving target and can change almost daily. Again, it’s a commodities market not unlike wheat, coffee, oranges, and sugar. Once we learned that by making a scholarship award to a student based on merit, we could adversely affect that student’s overall financial aid picture, we decided against our scholarship program. It’s a huge game and departments of financial aid are out to game the system, just like medical providers, and, up until recently, mortgage lenders (although I’m sure there are still shenanigans here too). We live in a huge game where players are encouraged to game the system. Hard work has been replaced with hard gaming.