The Uncharity of College: The Big Business Nobody Understands

How Colleges Make More Money Than God By Giving It Away

Some people naively dismiss the insane increases in the Cost of Education over the last 50 years as merely Vanilla flavored Cost Disease. Don’t be fooled by the marshmallow swirl — this is Rocky Road, and the shit chocolatey-covered almond pieces are buried deep.

rocky_road.png

A very brief summary of what’s to come in this essay:

  • College degrees are more valuable than ever in post-industrial economies, so applicants to top-tier schools are up 240% over the last 25 years 

  • Meanwhile, available spots at top-tier colleges in America have increased just 2% over the last 25  years

  • Microeconomics 101: Fixed Supply + Increased Demand = Increased Price

  • That’s the obvious part

  • The non-obvious part is that this is intentional

  • Because the Charity-status ( 501(c)(3) ) of Colleges in America depends on more-than-half of their students being unable to afford the education (read: “receiving financial aid”)

    • Not in any legal code and statute you can find — but because the Ivy League was sued by the Department of Justice for price-fixing and beat the case by arguing that since more than half their students received “financial aid” — a lot of it — this was a charitable gift policy, not a pricing policy, thus tying together the charity-status of College and the percent of students receiving “financial aid” in a court of law…

    • …and Common Law puts tremendous weight on those court decisions, to say nothing of the political pressure that could rapidly be brought to bear on Institutions with endowments bigger than the budgets of 150 countries and most of the Fortune 500’s cash balances, yet which pay no taxes on their investments and charge middle-class Americans double-digit percentages of family Wealth for a degree whose cost is not tax deductible for the family paying $50,000+/year in tuition

    • All this is excused if people believe the true cost is even greater still, and merely attending college necessitates an act of immense generosity and charity on the part of that college…

  • That Charity-status protects the Investment Returns of College Endowments from Uncle Sam & the IRS

  • Investment Returns Compound over time, and there is no more powerful force on Earth — anyone not playing the game to maximize Compound-returns will lose to everyone who is

    • Investment Returns already generate more revenue than undergrad tuition income at: Princeton (911% more), Harvard (529% more), Yale (254% more), MIT (118% more), Stanford (115% more), Brown (29% more), Duke (13% more), Dartmouth (9% more), and U Chicago (6% more)

    • Undergrad tuition brings in just 10% - 20% of total revenue at the Ivy League / Top-10 schools not listed above. Undergrad Tuition is not more than a quarter of revenue at any of these schools.

  • Thus: if Colleges want to keep their Investment Returns tax-free, Tuition MUST remain unaffordable for at least 50% of undergrads

You think its your TUITION dollars that add $1 billion a year to this?

You think its your TUITION dollars that add $1 billion a year to this?

Ricardo’s Cost Disease

The traditional formulation of Baumol’s cost disease is quite simple: the cost of [SOMETHING] is not related to the direct cost of providing that [SOMETHING], but to the cost of the [MOST PRODUCTIVE OTHER THING] that could have been provided with the same resources instead.

They say there is nothing new under the sun, so naturally Baumol’s cost disease is a restatement for the modern era of a Law of economics developed by a Founding Father of the dismal science: David Ricardo.

The Law of Rent states that the rent of a land site is equal to the economic advantage obtained by using the site in its most productive use…

And Adam Smith himself wrote in The Wealth of Nations:

The rent of land, therefore, considered as the price paid for the use of the land, is naturally a monopoly price. It is not at all proportioned to what the landlord may have laid out upon the improvement of the land, or to what he can afford to take; but to what the farmer can afford to give.

In a Feudal Agrarian society, land is the major productive asset. So of course this conversation between Adam Smith and David Ricardo would be about Rent — what else would the average man spend his Wealth on?

But in 2018, we’ve got so many potential outlets for Capital — capital C — that Ricardo’s Law of Rent bleeds into every possible cost, from Infrastructure to Education to the Barbershop.

However.

Lay of the Land: Education is a More Complex Flavor of Cost Disease

Conventional wisdom says “a generation” is about 25 years, plus or minus 5.

3 months ago, the class of 2022 began their first semester at my alma mater: MIT. 

A Generation ago, the class of 1997 also began their first semester.

How has this small world of education changed in one Generation?

Total US College Enrollment Up 39% from 1993 to 2018

How many people actually applied each year? Unclear. We genuinely don’t seem to have that data — or at least Google didn’t dig it up for me yet.

Similarly, you can cut the green line off on my previous essay’s chart around 1993…

cost_of_tuition.png

…and see that the cost of this education has increased about 300% since 1993 (1,225% / 300% - 1) 

And to re-include just one more chart, you can see that 1993 marks a period that began a ~20% increase in real wages for male workers with Bachelor’s Degrees 

wages_by_education_level.png

So over this last Generation, a Bachelor’s Degree or higher has increased real wages by 20% - 40%, the total number of college-enrolled students has increased 39%, and the cost has increased by ~300%.

Adam Smith suggests that the cost of this education should rise according to what the middle-class can afford to give. 

I concur.

David Ricardo suggests that the cost of this education should mirror the maximum possible benefit from the education, regardless of what major was chosen and GPA achieved. 

I concur.

Baumol’s Cost Disease suggests that the cost of this education should rise with the productivity of the rest of our economy. 

I concur. And incidentally, the Cost of Tuition chart above is not-inflation-adjusted, so if we look at nominal-GDP between 1993 and 2018 we find it increased from $7,247B to $20,412B — or 182%. That is to say, perhaps as much as 2/3rds of the increase in the cost of education might be driven by an increase in overall productivity over the same time period — assuming that education is well-positioned to capture a large share of that surplus production.

Which it is.

But what of the remainder?

Mens et Manus and No More Bodies

I’m going to focus on MIT because I love the school and I was lucky enough to get in 10 years ago today. I focus here because I know it best, and I know it is the best. Which brings me to MIT’s Class of 1997, who began their undergraduate journey 25 years ago. Being the advanced institute that it is, MIT kindly uploaded the admittance stats for this class:

http://news.mit.edu/1993/class-0331

http://news.mit.edu/1993/class-0331

Yes, you read that right.

32% of applicants were accepted to MIT last Generation.

Total class size: 1,100.

Step forward a Generation, and look at today’s MIT Class of 2022:

Of those 1,464 admits, 1,122 of them ultimately decided to make MIT their home for the next 4 years (good choice!).

Thus, the Total Applicant Pool increased 239% over this 25 year period — from 6,410 to 21,706.

Meanwhile, Class Size increased 2% over that same time period, from 1,100 to 1,122 — just 22 extra bodies.

The Cost of Tuition increased 171% — excluding room & board and other expenses — from $19,000 to $51,520.

Education therefore exists at the intersection of increased productivity driving up overall costs — Vanilla Cost Disease — with massively increased competition in an ever-growing applicant pool for a fixed number of spots. My claim is that this is a feature, not a bug.

Due to the way signaling, ranking, social hierarchies, and prestige work in human society, opening a brand new University does not lower the value of MIT & the Ivy League schools. It actually increases their value. Not attending has the same signaling weight as attending, just in the other direction. 

In a world where 32% of applicants are accepted to MIT, perhaps the signaling value is moderately strong. In a world where 93.3% of applicants are rejected, the signaling value of being one of the lucky few goes up, not down. People tend to like people that other people like (lol) — but they tend to avoid people that other people have rejected. The impulse to avoid is stronger than the impulse to seek-out, because the downsides of social-association can be unbounded.

Why is increasing competition for a constant number of spots a feature (intended), not a bug (accidental)?

Question: As someone who has already applied, been accepted, attended, and graduated from a prestigious Institute, is my personal value-by-association-with-MIT increased or decreased by MIT becoming more selective? 

Trivially: my value increases as the value of an MIT-stamp-of-approval increases. 

Spoiler alert: this describes all alumni, staff, and current and future students. 

So how do you increase the prestige price value of a social signal?

Thanks to  McGill for this chart  — here’s  a link to  MIT’s Microeconomics class if anyone needs to brush up on the fundamentals. Don’t worry, taking this class online for free doesn’t lower the value of getting accepted by MIT — why is that? 6.7% btw

Thanks to McGill for this chart — here’s a link to MIT’s Microeconomics class if anyone needs to brush up on the fundamentals. Don’t worry, taking this class online for free doesn’t lower the value of getting accepted by MIT — why is that? 6.7% btw

This is where I add that my own Class — 2013 — only had to deal with a 10% Admit Rate at MIT, a “record low” at the time. But 25 years from now, when the admit rate is 2%, I’ll be very appreciative of the increased prestige that comes by association with such an elite institution.

Again — I’m only focusing in on MIT because I love the school and I was lucky enough to get in 10 years ago today. Don’t think Yale didn’t accept 20% of applicants in 1995, UChicago didn’t accept 77% of applicants in 1993, or that the Harvard Class of 1988 didn’t admit more kids than the Class of 2022 just did. Because all those things are true.

I leave as an exercise for the reader to explore how massively increased competition for strictly limited spots at the nations most prestigious institutions impacts cultural cohesion and the perception of the elite in the rest of the country — especially during a time in which the stamp-of-approval from said prestigious institutions becomes ever-more critical to career success and wage growth.

Pictured: College admissions for the Class of 2035

Pictured: College admissions for the Class of 2035

One More Thing: If you're not paying for the product, you are the product

There’s an extra layer to this strange ice cream cake of constant-supply education, I told you the almonds were buried deep: we didn’t get to Tuition yet.

If you actually followed that earlier “$19,000” link to a 1993 MIT article on their Tuition, and you read the President’s quote at the end, and you were wondering what he meant by: 

These two actions are consistent with our stand against the Justice Department's anti-trust suit, and are major driving forces in the development of an imbalance in our operating budget.

justice_department.png

You’ll be pleased to read that MIT prevailed in defending its practices from the Justice Department in December, 1993:

The case involved the widespread practice of pooling information about applicants for financial aid. The nation's brightest high school seniors often apply to several elite colleges. To prevent a bidding war, with colleges "buying" the best students with big aid packages, some institutions share information about their applicants, agreeing to limit their offers to the students' financial need.

I was under the impression that service-providers entering a “bidding war” to offer consumers lower prices was known as “Competition” in America. Thanks Uber & Lyft, btw. And I thought the opposite — NYTimes dubbed “cooperative practices” in that article — was known as “Price Fixing”?

And since when was the salesman of a service the right person to determine my financial “need”?

A Charitable Misunderstanding

In true Ivy League fashion, the eight Ivy League schools targeted by the Justice Department agreed to sign a “consent decree” barring such price fixing cooperation, while admitting no wrongdoing at all. Shoutout to the financial crisis of 2008 (ctrl-f for “wrongdoing” in that bad boy if you hate low blood pressure).

In true wronged-nerd fashion, MIT soldiered on and fought the Justice Department, once more teaching the world that if you start an argument with a nerd it will only end when somebody starts crying.

Pictured: Justice Dept., circa 1993

Pictured: Justice Dept., circa 1993

What’s great about this is that MIT marshaled the media (see: NYTimes above) and published their own view of the case while it was being litigated. Which means we can read their argument as they present it best:

In presenting its case, MIT made these key points:

i) MIT financial aid is a gift policy, not a pricing policy

ii) Tuition covers only half the cost of a student's education; all students receive a subsidy of more than $16,000 from MIT's endowment and income.

iii) Fifty-seven percent of students receive aid at MIT.

iv) The consent decree gave unequal treatment to non-athlete students by specifically excluding Ivy League athletes from the general ban on collaborative agreements.

Ignore that last point about athletes as it’s not important to MIT (shocking: Ivy League schools still wanted to be able to price fix cooperate in attracting star athletes), and focus on the first three points.

At first glance, this passes the sniff-test. MIT claims to be operating a charity — literally, that’s what they claim: “MIT said its need-based policy of distributing MIT scholarships is a policy of charitable gifts to students…” They say they can barely keep the lights on if they receive $51,520 in Tuition from students, they say they give all students a permanent 50% discount out of benevolence, and then they actually have to reach into their coffers and hand-out even more money to the 57% of students who otherwise would be unable to attend. 

Interesting note: the percentage of students who receive “financial aid” has not changed in the last 25 years. How perfect is that? The cost of MIT has gone up $32,520, but the number of kids in “financial need” has stayed the same! Pretty awesome that the 42% of families who don’t get any aid at all have all got at least $130,000 (4-years of tuition) in extra Wealth!

I said I wouldn’t include another chart from my first essay, but sometimes you just gotta do it.  Call me a hammer , if you must.

I said I wouldn’t include another chart from my first essay, but sometimes you just gotta do it. Call me a hammer, if you must.

Hmmmmmmm.

Back to the “charitable gifts to students”: Follow the actual trail of REAL dollars, and not the imaginary zeroes and monopoly money shifted around behind the scenes — when MIT gives you $40,000 of financial aid, they don’t take a full tuition from another student and give it to you, they don’t reach into a vault and give you physical dollars. They simply charge you less, a mere “discount” — the exchange is theoretical, monopoly money.

When you drop out after your first week to start the next Facebook…you don’t owe MIT $40,000!

The tax implications of this — you can’t fuck the IRS — are zero.

More Economics: Variable vs. Fixed Costs and a Slush Fund

You think of Tuition in terms of individual student amounts because that’s how you experience Tuition and that’s exactly how The Institute presents the bill to you. “This is what it costs us to educate you, individually! Yes, all $51,520 of it! Times two!” But the actual marginal cost of educating a given student at MIT is approximately zero (spoiler alert: you will not get much tender affection from your lecturers at MIT, and after the first week of class there’ll be many empty seats in your lecture hall).

Universities are DOMINATED by fixed costs, not variable costs. Lab operating costs, building construction, rents, research salaries, professor salaries, administration salaries, energy costs, etc. etc..

Which means the cost of operating The Institute for a given year is determined before any kids are admitted.

And this cost is funded by three things: The Endowment and Income.

“But that’s only two things!”

Right, that’s the magic. Read MIT’s second key point again. The Tuition you’re asked to pay ($51,520!!!) “only covers half of The Institute's costs” (yes, they still say the same thing today that they said 25 years ago), so the remaining fixed cost must be covered by The Endowment and “Income”. What’s included in “Income”? Tuitions from other students, of course!

Little pink slice in the  bottom right

Little pink slice in the bottom right

Duh, how else could a college get money? “Net of discount” just means “ignore all the fuzzy monopoly money and just look at what we actually got wired by the entire student body.”

Your Tuition doesn’t pay for your education — it goes into a shared pot that pays for the fixed costs of educating the whole student body, including you. 

To the extent that Tuitions received don’t cover all the costs, gifts from Benevolent Alumni / DARPA and Investment returns from the Endowment’s portfolio must necessarily fund the remaining balance.

Two Plus Two is Four, Minus One that's Three: Quick Maths Dodge the IRS

Flash back to the comment that has been clearly stated on all MIT admissions pages for the last 25 years (to remind the Justice Department that this is a Charitable institution):

The actual cost of an MIT education is about twice the annual tuition

And then look again at the pie-chart of Revenues above. If Tuitions received total $361.5M and that amounts to half the “actual cost” of an MIT education, then the full cost of educating undergraduates could be $723M.

But that must be understating the number hugely! MIT claims that the full cost is about double the list price of $51,520, or about $100,000, and since 58% of our undergraduates receive MIT Scholarships that average $45,542 per student” the Tuition Net of Discounts income of $361.5M must be much less than the actual amount MIT needs, because most of the kids get “financial aid”.

Thankfully, we can do napkin math. Since there are approx. 4,500 undergraduates at The Institute, MIT’s own words suggest that the actual Fixed Cost of providing MIT educations to all those kids must be $100,000 * 4,500 or…$450M.

Huh??? $450M is pretty close to the total income from Tuition in that pie-chart. How can MIT be subsidizing half the costs for every student, then giving 58% of them another huge discount in “financial aid” that averages $45,542, and yet still be collecting such a huge fraction of the needed amount??

This is like those goddamn word-problems they put on the Math section of the SAT…screw that. Have a spreadsheet instead:

Uncharitable observation: if all students paid exactly the same price — zero financial aid — and MIT collected the same $113M in total tuitions, the revenue from a new student would be $25,105 per student per year.  Rephrased: the Expected Value of a marginal student to MIT is $25,105…

Uncharitable observation: if all students paid exactly the same price — zero financial aid — and MIT collected the same $113M in total tuitions, the revenue from a new student would be $25,105 per student per year. Rephrased: the Expected Value of a marginal student to MIT is $25,105…

Answer: apparently they don’t — this doesn’t add up to the $361.5M in income listed as coming from Tuitions. Not even close.

The 1,890 students who pay the full sticker price of $51,520 a year contribute about $100M to MIT’s income statement. The 2,610 students who receive some form of aid, contribute another $16M. That’s $245M short of what MIT actually collected in Tuition in 2016.

Even if every undergraduate paid $51,520 a year, MIT would be $132M short. Graduate students, I suppose, must make up the difference? Are the MBA kids really subsidizing undergraduate educations? But then wouldn’t those Graduate students have a cost associated with their own education? Who is actually paying all this tuition?!

And, more importantly, who is subsidizing all those costs. MIT “needs” $450M to educate the undergraduates alone — according to MIT — and those guys are only contributing $113M…

Whatever the shortfall really is, it’s got to come out of the mythical Endowment, right? That’s what this is all about. That’s why this is a subsidy, “aid”, a charity.

The Case for Charity: A Charity Case

Is this Charity?

If tuition had not increased by $32,520 over the last 25 years, what percent of undergraduates would qualify for “financial aid”, by the standards of 2018? If 58% of undergrads qualify for “aid” when the price is $51,520, surely many fewer would qualify for aid if tuition were a mere $19,000 a year.

Would under 50% qualify for “aid”? Almost certainly.

Under 25%? Perhaps.

At that point, if only a minority of students are even receiving any aid at all — IS THIS STILL A CHARITY?

Units are in millions btw

Units are in millions btw

You know they don’t pay taxes on that, right?

You know that means it will compound faster than any other source of Wealth in the country, right?

Or do you still not understand compound growth?

The Justice Department lost their suit against MIT on the merits of MIT’s argument that they operated a Charity, as evidenced by the number of students receiving “aid” and the degree of that “aid”, which means there’s legal precedent that you count as a Charity and are subject to different laws as long as more than half your customers can’t afford your education product…

…and you think it’s a coincidence that exactly 58% of students qualify for “financial aid” every year for 25 years in a row?

It’s not “aid” when the price is calibrated to maintain unaffordability and necessitate 501(c)(3) Status.

The eagles of Justice have sharp eyes and sharper talons — best play it safe.

You Can’t Spell Irony Without The Alphabet Soup

There’s a delicious irony here, which is that donations to a college’s Endowment are tax-deductible up to 50% of your Income. This is because that endowment is hypothetically spent “Charitably” funding the education of students that otherwise just could not happen.

maximum_tax_advantaged_donation.png

They’ve got a point, by the way. Imagine what would happen if a clerical error deleted MIT’s endowment. No other source of Revenue even approaches the magnitude of the Investment gains from the Endowment (well, except the DARPA funding but that’s perhaps unique to MIT) — go back and check the pie-chart if you don’t believe me. If MIT’s endowment evaporated, it just wouldn’t be able to compete for talented professors or afford the latest research labs and facilities — because the cost of those scarce commodities is bid up by all the other colleges who’ve got their own big swinging 501(c)(3)-protected endowments to throw around.

The best way to compete for talented professors and the best facilities is to have the largest pile of money, and then earn tax-free investment returns on that money. I’m not knocking it, everyone else in America learned this at birth, in fact I think it’s in the Pledge of Allegiance — the best way to compete in Capitalism is to have the largest pile of Capital.

So donations to MIT must continue to be “tax advantaged”, and they’ll help you work out how to lower your tax bill by doing so with three different web pages.

Your own child’s Tuition, however — which as we see in the pie chart above ends up in the same shared pile as the donations — is only tax deductible up to $4,000 dollars. Unless you and your spouse jointly make more than $160,000 (i.e. unless you and your spouse both work and have degrees from a school in MIT’s tier), in which case you’ll spend $51,520 on tuition and say fucking thank you.

A Ditty for Your Pity:

Tuition for thee

501(c)(3)

For me

If you get college with no fee

You’re the reason investment returns are tax free

The product is you.

Thank the Revenue Act of 1954 for establishing a legal way to fuck the IRS btw — I said earlier: you can’t fuck the IRS. The emphasis was on you.

The Eight Levels of Giving Tzedakah

Making a donation to MIT appears to satisfy the second-highest level of giving possible, according to a 12th century Jewish sage:

2. Giving assistance in such a way that the giver and recipient are unknown to each other. Communal funds, administered by responsible people are also in this category.

There doesn’t seem to be a qualifier in his ancient text for giving in a way that offers the “greatest tax advantage” or “giving” money that you were never going to see anyway because Uncle Sam had it earmarked in his name — but hey, we make allowances in the modern day.

Since MIT is the one with the 501(c)(3) Charity Status, I wonder where its giving from the mythical Endowment ranks on the ancient scale?

It turns out that lately, colleges like to boast about the size of their endowment — look, I get it — which means we know roughly how big MIT’s is. In the past, however, they weren’t nearly as forthcoming with data about its size. I don’t think you need an advanced degree in Phallocentrism to understand why.

Thankfully, we can hold a magnifying glass to the past with the power of the internet and vague statements made to college newspapers…

In 1990, MIT’s operating budget was $1B dollars, and its Endowment was approximately the same amount: $1 billion.

In 2018, MIT’s operating budget was ~$3.5B dollars, and its Endowment was $16.4 billion

If this is a Charity, they have become remarkably inefficient with their assets over the last generation. 

At the bottom of the giving scale we have:

8. When donations are given grudgingly.

7. When one gives less than he should, but does so cheerfully.

Perhaps some received their “financial aid” cheerfully, but my interactions with MIT’s Financial Services arm were like pulling teeth — bloody, painful, leaving a wreck behind and a bad taste in the mouth, and best done under the influence of drugs. To be clear here lest this leaves too bitter of a taste in the mouth: from the individual family’s perspective, “aid” is not judged by the magnitude of the “discount” received, but by the percentage of the family’s existing assets the school decides we "need” going forward. While The Institute finds your family “not in need” of an extra $20,000 this year, you’ll find their Endowment increased by another billion dollars…

How much should MIT give though? Only God knows. Somehow they’ve been able to give, and give, and give, each and every year to students, subsidizing them all for 50%, and then giving 58% of them another 80%+ discount…and yet the Endowment has grown by $15.4 billion.

If this is a “charity”, I’d hate to see what they think a business looks like.

Big Business is Booming

A Generation ago, The Institute was able to fund its Fixed Costs with Tuitions, donations, grants, and an Endowment equal in size to its operating budget. 

Today, it needs Tuitions, donations, grants, and an Endowment 4.7x the size of the annual budget.

An Endowment that has grown 1,500% in 25 years.

While the class size has grown a mere 2% — don’t forget the first half of this essay.

A JPMorgan colleague once said to me: the power of compound growth means the best way to give to charity is to invest wisely.

Self-serving, of course, but all the best rationalizations are. But it turns out he had it the wrong way round: perhaps the best way to make money is actually to give money.

Not so much of it that you can’t compound what you’ve got, though: just enough to stay 501(c)(3).

Which means your product must remain unaffordable, to justify your benevolence.

Which means its cost must grow faster than the wealth of your customers.

The Justice Department’s eagles are out hunting mice, so you can’t conspire too openly to raise prices.

But limiting supply? Despite the Expected Value of an additional student being $25,000-per-year? That’s playing the game on easy mode, and comes with extra bonuses to institutional prestige to boot.

Tuition is meaningless income to MIT now — a drop in the bucket, just 3.2% of their income comes from undergraduate tuition — but so long as the Tuitions are unaffordable for 58% of undergraduates, the Investment returns on $16.4 billion dollars are tax free.

untaxed_investment_returns.gif

BONUS: this all serves to keep Alumni exceedingly happy with the ever-appreciating value of their degree, ensuring that everyone affiliated with The Institute is happy, donates more (did you even notice Charitable contributions were already a larger source of income than undergrad tuition?), and acts as good brand ambassadors.

EXTRA BONUS: the only people unhappy with this state of affairs are the ones who did not get into MIT, but might have if the admit-rate wasn’t 6.7%, so we can write them off as salty haters and nobody listens to their whining. Of course the plebs would want more places at MIT — but what do they think we’re going to do? Lower standards???

EXTRA EXTRA BONUS: Imagine for a moment the reaction in the admissions office at MIT and the rest of the Ivy League on reading the headline: HARVARD DOUBLES ENROLLMENT

Yield manage that one, rest of the fucking world. The fact that this doesn’t — and won’t — happen tells you much about the “competitive” state of the industry. You learn in the first week of Microeconomics that under a state of Perfect Competition, excess profits are competed away. Harvard got flack this year because their Investment Profits Endowment only grew 10%, to $40 billion dollars. It took Apple 3 years after the release of the iPhone to build up a cash balance the size of the one Harvard now has. Call it Imperfect Competition? Far-From-Perfect Competition? Perhaps Big Business will do after all.

EXTRA EXTRA EXTRA BONUS: Colleges who do not have $10+ Billion dollar endowments (most of them) still have to compete with the Ivy League-tier schools for Professors, Facilities, and more — they just don’t have the investment returns to help pay for it. What’s the only source of income they have left? Tuition.

So both the Big Dogs and the Small Dogs in the yard have an incentive to keep Tuitions unaffordable — the little guys are still relying on capturing all the surplus Wealth from America to keep the doors open (again, see: my first essay). If I were a Small Dog, though, I’d be very worried about the future.

You can’t compete with Compound Growth when you’re only collecting linear returns.

CRITICISM: “There is no statute in the body of tax law that specifies you must be offering aid to 50%+ of your students in order to qualify as a Charity, so a core point of this essay is in fact incorrect."

I’ve edited in an extra sub-bullet in my intro bullets clarifying the structure of my argument a bit. But while this criticism is definitely factually true, it perhaps suggests a different view of our legal framework in America (and its fluidity) from the view I have, where the letter of the law and the Tax-Sheltered status of these orgs is somewhat mutable and has already been subject to prior challenge by the DoJ. By bringing up the prior challenges by the DoJ — which was a case the DoJ lost based on Charity-arguments put forth by MIT — I hoped to highlight that the current status of the Institute as a “provider of Charity” was court-sanctioned based on those exact arguments.

I.e. Because MIT responded to the lawsuit by pointing to the number of students receiving “aid” and the degree of that “aid”, and because they won the case on those merits, Common Law precedent is created that bounds them and suggests that the case could perhaps be re-litigated were that “aid” no longer needed. Certainly the worry must exist.

I suggest this might be driving the magical 58% of students who receive “aid” every single year.

Instead of responding further to this critique in my own words, I hope it's okay to link to two other comments who I think addressed the issue in a better way that I did.

Link: https://news.ycombinator.com/item?id=18793049

Link: https://news.ycombinator.com/item?id=18794785

Since the discussion has moved on from the front-page of social media, I wanted to include these links for people who might end up here in the future without editing the post itself. Hopefully that's okay!

NOTES

  1. I said it twice already, but I’ll say it again to be sure: I love MIT, and feel both intense pride and gratitude about being able to attend (an odd mix of emotions). It’s the only college I ever applied to — I knew I wanted to go before I got there, and I’m much better off having gone than not. If you get in, you should go. This is not an indictment of MIT — it’s an explanation of a “Why?” that I think is somewhat hidden and not widely understood.

  2. I worked in the call center soliciting donations from Alumni as an undergrad — the people were great, the job was fantastic, the pay was excellent, the hours were flexible, the Alumni were wonderful and happy to speak to me, and it was just a good experience all round. If you need a job in college, I recommend it. Bonus for MIT kids today: you might get to see me on your training video!

  3. When MIT mandated freshmen live on campus, there was actually a decrease in admitted Class size. Much credit to Dean of Admissions Stu Schmill for increasing the class size back to prior levels

  4. Credit to Philip Greenspun for articulating some of this a whole generation ago. There truly is nothing new under the sun: https://philip.greenspun.com/school/tuition-free-mit.html

  5. Credit also to Tyler Cowen and others in the rationalist sphere who write online and first introduced me to the question: “why don’t universities add more spaces for undergrads?”

The Bermuda Triangle of Wealth

Three points motivated me to write this — forming a Bermuda Triangle in which the average American’s savings disappear without any apparent cause.

1. Considerations on Cost Disease — the observation that certain costs (Education, Medical Care, Housing) have increased many times faster than inflation, while wages in those same industries (and in all the other industries too) have remained mostly stagnant

cost_disease.png

2. Second, and on a more personal note, I’m fortunate enough to be a graduate of MIT who has worked in both finance and technology for 5 years since graduating. I’ve had fantastic employment opportunities. Nonetheless, any meaningful purchase in any of those categories above would wipe out all my liquid assets and savings and potentially require additional loans or financial assistance.

Education

For example, consider the cost of continuing my education with an MBA at the nearby Stanford (shoutout to my friends who are going / have gone already).

Note, this $120,000-for-10-months budget helpfully excludes the cost of the required “Experience Abroad” program, for which Stanford suggests reserving an additional $2,000 to $4,000 — practically chump change at this point.

Medical Care

I’m lucky in that I don’t anticipate any significant medical expenses in my future, but Google tells me that the most common reason for hospitalization in the US is childbirth. Thankfully, here in San Francisco, that would only set me back $15,000, unless of course we needed a C-section, in which case it’ll be a casual $30,000. More of an “undergraduate education” than an “MBA”-level sticker price, but certainly a meaningful percentage of my savings.

Housing

And of course, not that it needs to be said, but if I wanted to buy “Shelter” near my place of employment I’d be looking at a bank-breaking $1,358,600 purchase at the median, growing 8-10% per year:

cost_of_sf_housing.png

 

Since I can’t afford that, I’ll just settle for renting and saving my money!

Oh. Right. The Consumer Price Index for Rent in this town is up 30% since I moved here 4 years ago. Nice. In all transparency, my rent only went up 8% this year, which doesn’t sound quite so bad. Until I do the math on another 4 years of 8% rent increases (100 * 1.08^4 = 136%) — and realize that I need a 36% increase in income over that same period just to stay flat on nominal take-home savings.

Per my first point on Cost Disease, real median household income in the US has only just clawed its way back to what it was in 1999. Certainly it hasn’t grown 36% in the last 4 years. But maybe there’s some way I can get ahead of the median? Maybe there’s some way I can keep my income going up more than 36% every 4 years and actually build wealth too?

How much was that MBA, again?

3. Third and finally, official inflation rates in the United States continue to hover at or below their target of 2%

Which is pretty good news for the people at the Fed, and they should feel good about managing the money supply, which has increased pretty smoothly over the same time period.

Now, that seemed strange to me at first because I remember reading a bunch from 2008 to 2013 about Quantitative Easing and how the Fed was “going to print a ton of money.”

And it seems like it’s true, they did “print a ton of money”:

But unlike the prophecies of talking cartoon bears, all this money didn’t drive inflation through the roof and crash the stock market. It doesn’t seem to have really gone…anywhere. It just hit the banks’ deposit reserves and sat there (right-hand graph above). Two trillion dollars, perhaps slowly winding its way down now, in excess of what banks are required by regulations to hold onto.

From all appearances, on every metric, any way you can slice the macroeconomic data, this whole process seems to have been managed…if not perfectly, at least as well as any person could have reasonably accomplished.

Champagne all round for the people who work there, and I really do mean that. No sarcasm, no cynicism.

The Problem

There’s just this one problem I can’t get away from, and it doesn’t seem to be anyone’s fault but my own.

The problem is that the full cost of continuing my education wipes out almost 5 years of my earnings, and is increasing from year-to-year faster than those earnings. It’s not that it’s expensive (although it is), it’s that the expense captures the whole balance of my savings. But maybe that’s okay, these things are supposed to be investments. I should be willing to trade savings now for higher earning potential in the future, right?

Well, yes. There’s something different between savings and earnings that I’ll get to later (spoiler: compounding). But beyond that, I can’t help but notice that after this little speedbump on the road to prosperity, bigger and scarier ones loom on the horizon.

For example: if I want to fund an undergraduate education for my children (whose cost is designed to be borne by parents), we’re looking at $45,000 per year per child in 2018, growing at 4% per year.

If the growth in the cost of a Bachelor’s degree magically slows to 3% (is anyone in the whole world optimistic about that? I’m just trying to be conservative here…), it’s going to cost me $45,000 * (1.03 ^ 20) = $81,275 per child per year. Or $325,100 for all four years. 

That’s an expense that won’t hit my budget at all for at least 20 years. And then in one four-year period $325,100 will come due. For my parents’ generation, a 4-year undergrad education cost them $3,100 — $6,200 per year, in real July 2018 dollars or $12,400 to $24,800 for all four years. ($2,500 — $5,000 in 2007 dollars per the most-recently-updated stats at that link, updated to July 2018 dollars using the official calculator)

This year we were reminded, as I think we’ve been reminded every year since 2008, that most Americans don’t have $1,000 in cash. I wonder how many American couples in their ~40s have $45,000 * 4 = $180,000 to spend on four years of their child's education?

Oh. That’s interesting.

Assets (Wealth) of married couples. 35-54. Kids probably about 18-ish: $142,425.

That’s damn convenient. The sticker price of college pre-loan or pre-financial-aid is about the same as the median net worth of married couples in America. Just enough to hit the reset button on those savings.

In that light, perhaps the cost of college for my parent’s generation ($20,000 for four years, per above), won’t look so outrageous if we compare it to the net worth of median Americans back then, which presumably was also lower?

wealth_collapse.png

Yeah, about that.

Now that’s not quite looking at the same age bracket as our married couple example, but the numbers make some sense. 538 wrote in 2014 that “the average american hasn’t gotten a raise in 15 years” — and note that if inflation was a constant 2% for 15 years, overall prices would have risen (1.02^15) = 35% over that same time period. If wages are flat and expenses are up, we might expect median net worth to be flat-to-down.

This is the problem. Not that the assets or wealth or wages are up or flat or down, but that the price of required-middle-class-purchases consumes all the wealth you can generate within one or two standard deviations of the mean.

Wealth Building

I’ve done a deeper dive on Education here, partly because a number of my friends have gone off or are going off to get their MBA recently, and partly because an Undergraduate degree has become an unavoidable prerequisite to entering the wealth-building middle class in America. Required. Wages might be stagnant in America, but if you don’t have a Bachelor’s degree, they aren’t stagnant, they’re declining. Good luck.

wages_by_education_over_time.png

Because building wealth is what this is all about. You don’t want to be rich — rich comes and goes. You want to be wealthy, to be investing in more businesses, growing money not spending it. Wealth compounds, it builds on itself and it builds the future.

Most people don’t understand compound growth at all, and most humans have terrible intuitions about exponents and catastrophes. A dollar today is worth more than a dollar tomorrow — because you can put it to work. People can understand that. What they can’t appreciate intuitively is the growth that comes when the additional dollar they earn gets put to work too. And the thing about compound growth, exponential growth, is that it often has a long-tail before meaningful returns are realized. You earn more money when you have more money you can put to work, and building that base takes time. See: the most valuable companies in the world (as of 2018)

So yes, a dollar today is worth more than a dollar tomorrow. And $180,000 today, is worth a lot more than a dollar tomorrow. They don’t pay those wages exponentially.

The Devil’s Triangle

bermuda_triangle.png

Here, then, is the Bermuda Triangle, wherein wealth vanishes. Illusory, magical, spiriting ships away, but at the end of the day it’s all babbling fake news and tabloid specials, right?

The southernmost point of the triangle is, and always must be, cost disease and stagnant wages. That’s the foundation of this whole phenomenon. Costs of some major products and services — of particular importance to the rising, aspirational, wage-earning middle-class — rise more than 1,000%, but nobody in the system seems to get paid more. Everyone outside the system also sees stagnant wages and declining wealth, the quality of the product barely improves, even declines in some cases, and we’re all left asking: “what the hell are we paying for?”

The westernmost point, closest to home, touching the Americas, is the personal point. The observation that the cost of relevant major products and services hasn’t just risen, it’s risen precisely to the level at which it consumes the entire snowball of wealth being built by the median-middle-class. You may request financial assistance, on bended knees, so long as you lay bare your bank account and declare the full value of your (meagre) assets. Kiss the ring — it’s the closest you’re gonna get to wealth for the next 10 years. College, health insurance, mortgage provider. You can’t hide wealth from their all-seeing eyes, their information is perfect and their price becomes simple.

guldan.gif

The northernmost point, the strangest one, the namesake of this whole phenomenon, the magical act 3, is the fact that inflation has been at-or-below its target of 2% for 15 years and counting. Indisputably. The measure measures what it measures, and it measures it well, and it says 2%. Trillions of dollars of quantitative easing entered the banking system and didn’t rock the boat. Wikipedia confirms for us that: “In economics, inflation is a sustained increase in the price level of goods and services in an economy over a period of time.” And that is exactly what our CPI measures, and it says 2%, which means inflation isn't the driving force behind this problem.

And yet the very next sentence in that link says something that has a familiar ring to it for a certain (middle) class of Americans: “When the price level rises, each unit of currency buys fewer goods and services; consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy.” 

How many years of education did $20,000 provide for my parents generation? How many did it provide for me? And how many for my children? 

If you could convert the savings of the median-middle-class family into “effective-years-of-rent”, how many years did my grandparents have left after paying for my parents college? How many did my parents have left after paying for mine? How many will I have after spending $325,000 to send one child to college for four years?

The Bureau of Labor Statistics provides the relative weighting they give to each factor in the basket of goods that is the Consumer Price Index:

I’m not saying this weighting for College tuition is wrong — if the BLS says 1.613% (left-image), then that’s likely a very good estimate for what percent of all expenditures in the US went to College tuition. That’s what the measure measures.

I am saying that by focusing that 1.613% every year on the select group of Americans who have 18-22 year old children and who want their children to experience stagnant wages instead of declining wages, and who’ve been competing somewhat successfully in the labor market and building wealth, it is possible to wipe-out that snowballing wealth and delay their ability to invest and compound that wealth by decades compared to prior generations. All with just 1.613%. The result is that one four-year window reduces the purchasing power of Americans who want the best for their kids for up to a decade.

Every year. Applied to every cohort of middle class Americans as they pass through this Great Filter. The middle class’s expenses are not evenly distributed throughout their life.

$180,000 on a 4-year degree in 2018 would’ve been a $160,000 downpayment on a house for my parents generation, plus the $20,000 four year degree. Invested in the S&P500 for 10 years, $160,000 would’ve become $350,000. Or perhaps an investment in a new business. Or two $80,000 properties to develop.

Speaking of property, housing also experiences the same phenomenon. “Shelter” accounts for 32.720% of the weighting in the CPI calculation, per the table on the right above — and again, that’s certainly the right number for what Americans spend each year on rent and mortgages.

However, for the smaller segment of America that is making a first-time purchase, as opposed to making an annual lease payment, the segment that might be in the 30-50 year old bracket, the same segment that has to navigate the costs of their children’s education, whose cohort represents only a small fraction of the total population in any given year, they come face to face with a one-time expense that makes their savings disappear, magic trick, rabbit goes into the hat, no investing, no wealth-building for you.

Thanks, that’ll be $1,358,500, growing at 8-10% per year.

Of course, the CPI only includes actual expenses, not considered expenses, so if you think about buying a house but decide not to pull the trigger and blow your savings out, then you’re not going to show up in any stats. You’re invisible.

Come back after you’ve collected another 10 years of wages. Try not to have a heart attack in the meantime — I hear 50 can be a tough milestone to reach.

Spot the odd way out.

Up And To The Right

All these graphs with stagnant and declining lines are quite depressing — surely costs can’t be the only thing that’s grown faster than GDP?

But of course, not all of these purchases are made with cash outright, with equity, with wealth. Down payments fund mortgages, interest doesn’t even accumulate on college loans until graduation (how kind!), medical expenses can be deferred until after your life is saved and you’re back at work. 

America is a place where you can defer payment today, attempt to build wealth and equity in the meantime, and make payments at a later date. Our system loves debt because it gives those with capital an avenue to invest in people with aspirations and drive, and people with aspiration and drive find they often need that capital to fund their (ever-more-expensive) ventures.

So we come, finally, to debt in America.

Consumer Credit Outstanding up 50% from its 2008 high — GDP up 17% over same period

consumer_credit.png

Outstanding Mortgage Debt recently surpassed its 2008 high…

mortgage_debt.png

Student Debt up 132% since Q2 2008, now $1.5 Trillion…can you spot the recession?

student_debt.png

Whence the Debt?

And to bring this full-circle, I am reminded that Debt does not come from the ether. Someone must “buy” the Debt, someone has to give you the loan.

If nobody was there to take the other side then the whole show might grind to a halt, and we almost had that happen in 2008 and nobody wants to go there again.

This time, though, the loans aren’t “bad”. SUBPRIME echoes in the mind of everyone who listened to the news any time from 2008 to 2013, but don’t bother fighting the last fight. We’ve learned since then (probably). The euphoria, the crazy loans, the risk taking, it’s all been tightened up a bit (I’m told). Dodd-Frank might’ve done something, although I hear some of it has been repealed now. I’d like to have an opinion or at least a hot-take, but it’s 2,300 pages to read the original version and ain’t nobody got time for that. Especially not members of congress. That’s pre-2008 thinking anyway. The Old World.

In our New World lenders only ask for EVERYTHING from those who can spend 10 years earning it back. Nothing subprime about it. And they look under the skirt at all the checking accounts, just to be sure.

Pictured: definitely not the end-state of the game.

Pictured: definitely not the end-state of the game.

And just in case things do go tits-up, the banks still have $1.8 Trillion on their books in excess of what they are required to keep by law. Just in case. 

Sometimes, in my chocolate-and-tea-fueled conspiratorial moments, I wonder who really controls our monetary policy now, the Fed or the private banks, given that such a huge cash balance sitting in excess reserves likely makes private banks somewhat impervious to rate-changes. Thankfully, much smarter people than me already thought of this and the New York Times helpfully explained earlier this year how the Fed changed its method of control:

Before the crisis, the Fed raised rates by selling bonds to reduce the availability of reserves, which banks are required to hold in proportion to their holdings of customer deposits. But banks now hold plenty of excess reserves. Rather than reversing its bond purchases completely to drain those reserves, the Fed instead decided to raise rates by paying banks to leave reserves untouched.

The Ben Bernanke himself helpfully explains this New System for a New World in a short essay of his here, if you like reading about macroeconomic policy but missed the memo.

For What, the Debt?

Why does any of this impact the middle class? Because it’s important to know where the debt is coming from in order to evaluate what it’s being spent on. Per Big Ben’s essay, banks don’t have to be desperate and reckless and wasteful with their deposits anymore — the Fed has them covered to some baseline.

Which means all this debt piling up faster than GDP in the charts up above — that isn’t some bubble waiting to pop. That isn’t desperate money chasing reckless profits — that’s the last battle. This debt has been calculated, the loans have been weighed, and something obvious has been rediscovered: the productive class in America can bear more. A lot more.

If you think this magical ride plateaus at the rational maximum value of an education (or a home or medical care), you’ll enjoy learning about Dollar Auctions.

The New York Times also reported this week that “The Student Debt Problem Is Worse Than We Imagined”, explaining that default rates have risen — particularly at some unnamed “private-for-profit” institutions, which is of course true and bad and also misses the point. Because what they can’t show you is Default-Rate-by-College and Default-Rate-by-Major.

1,845 private 4-year institutions in the US? Can anyone name 200?

Here are the US News and World University Rankings and College Rankings lists, which are based on a mix of hard data and tea leaves, much like my own writing. Ignore the dispute for a moment about whether your college is #1 or #10 or #30 or #50 and you might notice that the actual rankings themselves stop at #223 and #168, respectively for universities and colleges. The rest apparently don't merit a ranking, even in our society driven by putting numbers on things.

Wayne State University ranks in at #223, losing the seven-way-tie for Worst Ranked University in North America thanks to the Alphabet. In-state tuition is apparently $13,278 (plus all the other costs associated with being a student, housing, food, books, etc). The average salary for graduates with <5 years of experience is $48,800, rising to $88,300 for graduates with 10+ years of experience.

And this is the WORST university we give a ranking to? A $309,000 estimated return on investment, not-adjusted-for-major. You have to visit Payscale, click “See Full List”, and scroll past 1,752 colleges before you find one that doesn’t have a positive RoI — not-adjusted-for-major.

The Kids might not be All Right, and it might take them much longer than their parents to build any wealth, but the Debt is going to be just fine.

Translation: The cost of a degree in STEM or business ought to go up $3.4 million, discounted. Kids: Make smart choices.

Translation: The cost of a degree in STEM or business ought to go up $3.4 million, discounted. Kids: Make smart choices.

What’s the Solution?

To the cost disease? To the removal and delaying of wealth from middle class Americans at every major step of the ladder? To the systemic problem? To inflation of 2% for both the rich and the poor, and something-that-isn’t-inflation-but-massively-wipes-out-wealth-and-lowers-purchasing-power for the middle class?

I don’t bloody know.

But the solution on a personal level, for you, for me, is crystal fucking clear.

Preferably without dying. But wealth compounds, so the risk is worth putting some stress on your body.According to the American Psychological Association, chronic stress is linked to the six leading causes of death...”

Thus Moloch. Thus War: “won by those who sacrifice everything to achieve victory.” Shout out to Kratos for that one. Thus the price of a college education will rise further, as we all sacrifice current savings and future income to take the next step on the ladder and hopefully begin compounding wealth before our peers. 

I paid off my loans in just two years, which means the college and the bank missed out on earnings and my MIT degree was underpriced by 3-8 years of expected earnings (pre-tax, because you can pay these debts pre-tax unless you make over $80,000 a year...oh, right).

Multiply 3-8x if you're a bank and want to see what you missed out on

Multiply 3-8x if you're a bank and want to see what you missed out on

So long as the debt is there to fund it, or the surplus wages there to support it, the show will go on. This is the struggle of the middle class in America today. It’s not the only struggle in the country, nor even close to the worst one. There’s nobody behind it, no grim cabal to blame. But it is a struggle, and one that seems to evade stats and articulation and empathy and sympathy and an escape. The only enemy is your failure to beat the median quickly enough and by enough standard deviations.

Success only begins when you build enough wealth to pay for:

  • Your own continuing education: $0 — $125,000

  • A home for your family: $750,000 — $1,500,000 (depending on how far you are willing to move from a major urban center — but don’t move too far because the wages go down too)

  • Education for your children: $180,000 — $325,000 (start at the bottom of the range if your kids are 18 today, move up accordingly)

  • Medical expenses: $50,000 guaranteed between childbirth and insurance, more with pre-existing conditions or any large event

  • Your own medical care as you age: $0 — $LOTS

Adding all those up, the bottom of that range is $980,000 in cash for one-time expenses and it tops out at $2,000,000.

Just to get to back to $0 balance.

Competitive Spirit

Of course, you can perform standard-deviations above the mean, fulfilling 50 Cent’s dream, dragging the mean-or-median wealth ever so slightly upwards along with you, and thereby raising costs for everyone else who couldn’t make it. One standard deviation and you get Avocado toast in your twenties. Two standard deviations and you get a nice car. How many for a home before thirty? You’d have to be The Six Sigma Man, as The Six Million Dollar Man becomes The Six Billion Dollar Man because we all know $6,000,000 isn't enough to build a superhero anymore.

Or you could perform standard-deviations below the mean, be left behind in a world where there is slim hope of real wealth, aspirations are more about next month than next decade, but at least inflation for everything you care about will be about 2% every year. And, once more, you’ll be raising costs of any major services (Education, Housing, Medical) you do use for your peers at the median because someone has to pay.

The result is that the solution on a personal level, “Get Rich or Die Tryin’”, raises the bar for everyone else no matter the outcome, and is a driving force behind the systemic problem of personal wealth-building that it is trying to solve. And America’s middle class has been an absolute workhorse, and it has beaten the median, and it has raised the bar higher and faster than almost any other nation has ever raised it in history. 

That’s not a coincidence. The promise, the deal, was almost unheard of: “work hard, work smart, create value for society, and you’ll become wealthy, your own master for all eternity.” The slave works for his owner. The indentured servant for his master. The communist for everyone. The American for himself. It’s a powerful idea, a powerful motivator, and a powerful system. A grand competition, where advancement can be achieved through merit and competence — so don’t be shocked when those with merit and competence flock to compete. And they make perfect competitors.

For those who have forgotten their first Economics lecture:

Perfect Competition: “In a perfect market the sellers operate at zero economic surplus…This equilibrium will be a Pareto optimum, meaning that nobody can be made better off by exchange without making someone else worse off.”

Oh. Right. That sounds fun. What does that look like, again?

perfect_competition.png

 I’m not saying we’re there. Middle class people still get to build wealth — economic surplus — when they sell their labor in America if they can beat the median a little. College still has a positive RoI. The median American can own a house and pay off the mortgage and still have savings left to spend on end-of-life-medical-care if they’re willing to move suitably far from centers of employment. This isn’t Perfect Competition. But if you squint hard enough, you can see it from here.

That’s the race and the clock is ticking for you and your great-great-grandchildren. The starting pistol fired in 1776.

Disregard Emails, Acquire Currency

Wealth compounds, but wages don’t grow exponentially. You’ve got to start that compounding yourself, the sooner the better — which is why we taught everyone in school how important this was and how to balance their budget. Or at least why we taught them that getting into college was the most important thing in their life, anyway. Those are about the same, right?

Want to hear a joke?

Knock, knock.

— Who’s there?

The taxman. I’d like 30% please. 40% if you got a bonus this year. Good job.

— You realize I’m still paying you back those student loans, yeah?

We tax income, not assets and liabilities, and anyway you can pay your debts to me pre-tax unless you made one-standard-deviation-above-median income this year

— But if you let me compound wealth I’ll be able to pay the loans back faster!

We’re not interested in that

Here’s another:

Knock, knock.

— Who’s there?

A recession. Your wealth is reset to zero.

— But I have to pay for the kids college this year…

Don’t worry, I looked under your skirt and saw you earned a healthy income from wages last year, so I’m sure you can afford it. Besides, last year you said your house was worth a million dollars!

Or an old classic:

Knock, knock.

— Who’s there?

Medical conditions! Your income means you have to pay out of pocket

— But doesn’t my one-standard-deviation-above-median income mean I’ve paid more in premiums to cover it?

What premiums? Oh. We’ve reset those too. You should’ve said you had conditions!

Of course, all these costs can only scale so far. The middle class must be able to fund them — and since wealth in America is distributed exponentially, what’s all-consuming for the middle class is peanuts to the wealthy. So Wealthy begins with a race to $2,000,000, adjusted-annually-to-the-cost-of-education-housing-and-medical-expenses.

See you guys at the finish line.

wealth_compounds_wages_dont.jpg