Three Misconceptions About the Economy That Should Die

The world would be a better place if we stopped telling ourselves a few things.

We should stop saying that college tuition has increased at three times the rate of inflation. Saying so is at best incomplete, and more often it's totally wrong.

While the sticker price of tuition has indeed ballooned over the last two decades, so have grants and scholarships.

According to the College Board, the annual sticker price of attending a private four-year college increased from $17,040 in 1992 to $29,060 in 2012, adjusted for overall inflation. But grants and scholarships more than doubled during that period. On net, the median annual cost of attending private college went from $10,010 in 1992 to $13,380 in 2012, meaning the amount students actually paid grew half as fast as the sticker price suggests.

Ditto for public four-year schools. The sticker price of tuition was $3,810 in 1992, and $8,660 by 2012, adjusted for overall inflation. That's a gain of 4.2% per year. But the actual amount students paid went from $1,920 to $2,910, or an annualized gain of 2%. Adjusted for grants, the inflation-adjusted cost of two-year college has actually declined over the last 20 years.

Why would schools balloon the sticker price but make it up with scholarships? A lot of it is marketing. If I say, "Billy, tuition is $20,000 a year," it sounds high. If I say, "Billy, tuition is $40,000 a year, but we'll give you a scholarship to bring it down to $20,000," it's an offer he can't refuse. There's also a rich student, Jimmy, whose parents will pay $40,000 without batting an eye. Jimmy is actually making Billy's scholarship possible.

What's happened over the last 20 years isn't so much that tuition has increased, but that prices have become more discriminatory based on your parents' income. Given the rise in income inequality, that's an awesome thing. It equalizes opportunity in an economy in which education is more important than ever.

If actual tuition hasn't gone up that much, why has student debt ballooned from $600 billion in 2006 to $1.2 trillion today? Mostly because of rip-off for-profit schools, and because more students are attending college overall. Per-borrower student debt amounts for public-school students rose less than 1% a year from 2000 to 2010, adjusted for inflation.

The more we repeat misleading statistics about how expensive college is, the more young people will turn away from it. There are easy and affordable ways to get a great education.

We should stop saying that how the government measures inflation is a conspiracy to fool you. I have no interest in defending governments, but some of the criticisms waged against how we measure inflation are just wrong.

The U.S. Bureau of Labor Statistics measures inflation by tracking the change in price of a bunch of products. This sounds straightforward, but it's actually really complicated.

Eight years ago, a cell phone cost maybe $100. Today, the price tag is $500 and up. But that's because old phones could make calls, but do little else.Today's smartphones are miniature computers. It's wrong to say the price of cell phones has surged fivefold, because the quality of those phones is night and day. 

The BLS fixes this problem with what it calls "hedonic adjustments," tweaking the price of some products to reflect improved quality. In this case, it would adjust the price of smartphones down, making inflation look tamer.

Hedonic adjustments are fodder for pundits to claim the government is fiddling with the numbers to make reported inflation appear lower than it really is. Complaints spiked over the last 15 years as more adjustments for technology products were introduced. (See here, here, and here.) 

But on net, these adjustments don't change reported inflation the way critics think they do.

Some products, such as computers and cell phones, improve in quality over time. Hedonic adjustments tweak their prices down. Other products, like rental housing, deteriorate over time. Hedonic adjustments push those prices up. Of all the new adjustments introduced since the late 1990s, the net effect has increased reported inflation. The BLS writes:

The hedonic quality adjustments introduced since 1998 have had an upward impact in five item categories and a downward impact in five. The overall impact of these newly introduced hedonic models has been quite modest and in an upward, not downward, direction. To be precise, the use of the models has increased the annual rate of change of the all-items CPI, but by only about 0.005 percent per year.

To reiterate: If we got rid of all the new hedonic adjustments people complain about, reported inflation today would be lower, not higher.

For the first time, everyone in the country has easy access to economic data. That's a great thing. When the quality of that data is unfairly criticized, people lose trust in something that is an indispensable public good.

We should stop exaggerating how much corporate taxes have declined. Corporations use all kinds of loopholes to lower their tax bills. But there's one popular way to show the decline of corporate taxes over time that isn't fair.

Measure corporate taxes as a percent of all federal government tax receipts, and you get this:

Source: Office of Management and Budget.

This chart is a popular way to show that corporations used to carry their fair share in this country, and now they're ducking out. I've used it in the past.

But I now realize how misleading it is.

The chart shows corporate taxes, which are very different from business taxes.

Corporate taxes are paid by corporations. But most businesses aren't corporations. They're LLCs, S-Corps, sole proprietorships, and so on. These businesses don't pay taxes themselves. Instead, profits are passed to the individual shareholders, who pay personal taxes on their share of profits.

Over the last half-century -- particularly the last 30 years – far more businesses have chosen to be LLCs and S-Corps than corporations. S-Corps didn't even exist until the 1950s. Before that, most businesses were taxed as corporations. By the late 1970s, 83% of all businesses were LLCs and S-Corps that passed income to their individual owners. Today, 95% are.

That shift in business structure explains a lot of why corporate taxes as a percentage of all taxes have plunged. It's not that businesses aren't paying their fair share, like they were in the past. It's that more business income is being taxed as individual income, which doesn't show up in this chart.

If all businesses were corporations, as they nearly were 60 years ago, corporate tax receipts would have been $187 billion higher than the $370 billion that was actually paid in 2007, according to the Congressional Budget Office.

Our tax system is a mess and needs a massive overhaul. But if a chart looks too shocking to be true, it probably is.

"People will generally accept facts as truth only if the facts agree with what they already believe," Andy Rooney once said. Take these as you wish.

Check back every Tuesday and Friday for Morgan Housel's columns. 


Read/Post Comments (24) | Recommend This Article (42)

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  • Report this Comment On September 03, 2014, at 10:46 AM, TMFCheesehead wrote:

    Great stuff Morgan. The third point especially was something I was completely unaware of.

    Brian Stoffel

  • Report this Comment On September 03, 2014, at 11:15 AM, SkepikI wrote:

    <It's that more business income is being taxed as individual income, which doesn't show up in this chart.>

    Bravo Housel...I wait often disappointed for MF writers to look closely at HOW "facts" and "statistics" are gathered and reported. I hope this will prompt more of your colleagues to be energetic and curious about this sort of thing...

    In fact I would urge YOU to extend this kind of thinking to HOW BLS reports lots of its "statistics" including inflation. I agree with you its not a conspiracy, but it is flawed. One wonders IF they could do better, but nobody seems to ask. Even if they can't do better, understanding exactly what is "measured" and reported is essential. Most consumers if they understood the methodology would not agree with you or BLS that its "prices" at least as they pay...WHICH is why we all see the disagreement from various individuals who experience something different.

  • Report this Comment On September 03, 2014, at 11:21 AM, mdk0611 wrote:

    "Given the rise in income inequality that's an awesome thing" Maybe if you're talking about the 1%, but not necessarily so if you're talking about parents who are in the 85% to 95% levels on the income scale. Unless you're talking about the Ivies and a few other schools with multi-billion dollar endowments, there's not much grant money available for those folks.

    Also, a slight correction with respect to "business" as opposed to "corporate" taxes. While S Corps have been around for 50+ years, LLCs really didn't exist before the 90's (with the exception of South Dakota). However, I agree with your central point .

  • Report this Comment On September 03, 2014, at 12:08 PM, watson14 wrote:

    But ... shouldn't gasoline and food be included when figuring the rate of inflation?

  • Report this Comment On September 03, 2014, at 12:13 PM, TRILLIBRO wrote:

    So the Government punishes me for making more than some folks, and their going to stick it to me again by charging me more when my kids go to college. I guess I should cut back on my 70 to 80 hours a week work schedule, and get the right offs, and grants the less fortunate receive. What a Country! This is why I like the gas tax, everyone pays the same no matter what your income level.

  • Report this Comment On September 03, 2014, at 1:05 PM, jlclayton wrote:

    As usual, I learned some very relevant things in the article. The inflation in the college costs, however, are very real for many people and not just those who are rich. Our household income put us just above the line where our daughters could get any grants, so all they qualified for were student loans. They went to a local community college before finishing at the state university in order keep costs down and all had to have jobs while attending college. But after getting 4 daughters through school over a period of 10 years, we felt the rapid rise of tuition costs very acutely.

  • Report this Comment On September 03, 2014, at 1:06 PM, TMFHousel wrote:

    <<shouldn't gasoline and food be included when figuring the rate of inflation?>>

    That's a fourth misconception that needs to die.

    The BLS does include food and gas in the CPI. It does. That's a fact. You can see it here:

    http://www.bls.gov/cpi/cpiri2011.pdf

    It also publishes about 16 other series of CPI series, one of which is called "CPI All-Items Ex Food and Gas."

    As the name implies, that's the CPI minus food and gas.

    If you assume the ex-food/gas is the only series the BLS publishes, then you're right. But it's not. And they do include Food and Gas.

  • Report this Comment On September 03, 2014, at 1:43 PM, bamasaba wrote:

    Unfortunately, I think that you can add (but probably won't) to the end of this title. All three of these are fallacies that support people's ideology, except perhaps the college tuition one. As you well know from your other articles, most people are very unlikely to believe facts that don't jive with their ideology.

  • Report this Comment On September 03, 2014, at 2:50 PM, bamasaba wrote:

    Morgan, your third misconception here is a good point. Is there a way to get a meaningful measure of the history of corporate tax rates that doesn't exaggerate the decrease?

  • Report this Comment On September 03, 2014, at 3:00 PM, bamasaba wrote:

    Actually, I think I can answer my own question a bit from the info you gave. You say that in 2007 tax receipts from corporations would have been $187B higher. From the chart it looks like the $370B paid by corporations in 2007 represented around 10% of total tax receipts. Therefore, if we add the $187B back in we find that the share of taxes paid by corporations in 2007 was ~15% of the total. Am I missing something here? That still seems like quit a decrease.

  • Report this Comment On September 03, 2014, at 4:23 PM, sagitarius84 wrote:

    Wow, that is a really nice article. This is the reason I started reading your posts in the first place.

    My main problem with your articles is that it is difficult to find the complete archives of them.

  • Report this Comment On September 03, 2014, at 4:40 PM, TMFJCar wrote:

    @bamasaba

    Hey, I pulled up some info a the Brookings Tax Center and I should be able to help you here.

    Subtracting $180 billion from the individual tax side and adding it to the corporate side yields a corporate tax percentage of 21.4% as opposed to 14%. Here's the link: http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Doc...

    Morgan, good stuff but when measured in profits and revenues aren't those other structures insignificant? I thought I read that corporations commanded nearly 90% of both, but I can't find that stat now.

    Thanks!

    TMFJCar

  • Report this Comment On September 03, 2014, at 7:14 PM, sheldonross wrote:

    So your first point is like saying food prices aren't going up because more people are getting foodstamps?

  • Report this Comment On September 04, 2014, at 12:13 AM, grankh wrote:

    One quibble. The most often reported inflation number I hear about on the TV news shows is "Core Inflation", which does exclude the "volatile" food and energy categories. And I have been told by people on Social Security that their COLAs are based on "Core Inflation" numbers, though I have not verified that for myself.

  • Report this Comment On September 04, 2014, at 8:13 AM, fourthquintile wrote:

    Re #1, are you sure the College Board study only included grants and scholarships as offsets to the tuition sticker price? Colleges tend to think of "financial aid" as including all manner of loans. For that matter "fees" may well account for a higher amount than before; were they included in the sticker price?

  • Report this Comment On September 04, 2014, at 9:00 AM, BMFPitt wrote:

    @sheldonross

    More like MSRP is going up, but street price is staying about the same.

  • Report this Comment On September 04, 2014, at 10:36 AM, Mathman6577 wrote:

    The decline in the % of federal revenue due to corporate taxes is a welcome trend and ideally it should go down to zero. Corporate taxes are mostly passed on to other businesses and consumers and is really a hidden tax (which in general governments like).

    A taxation system that is based on consumption and not income (and flat so crony capitalism can't influence how businesses operate) should be investigated.

  • Report this Comment On September 04, 2014, at 10:40 AM, TMFHousel wrote:

    Taxes that get passed onto consumers are bad so we should switch to a consumption tax. Got it.

  • Report this Comment On September 04, 2014, at 10:51 AM, Mathman6577 wrote:

    I never said that taxes that are passed on to consumers are bad, did I ? I said that a consumption tax (and businesses would have to pay that as well as consumers) should be investigated.

  • Report this Comment On September 04, 2014, at 4:05 PM, RenegadeIAm wrote:

    RE: Tuition:

    1. Cheap/Free money drives prices up.

    2. A subsidized education )(either from the government or from various scholarships) in a useless skill (you know it's useless when the person calls themselves "overeducated") STILL costs all of us, no matter how you calculate the "true" cost of tuition.

    3. People with little to no college education can often be the richest and most successful among us.

  • Report this Comment On September 04, 2014, at 4:36 PM, Alg0rhythm wrote:

    I think the point about financial aid is a good one- I believe the total package with loans has gone up with tuition. I do not believe that grants have increased to keep up, where would all the extra endowment have come from in a down economy?

    Coming out of school 150K in debt is terrible, the whole system is terrible. Europe pays for college, and England is way more lenient with the loans. What has gone up so much that college prices are double inflation? The prestige in their own minds, and their greed to expand.

    Shackling children looking to expand their minds to 20 years of debt is terrible for the morale of a nation.

    It also makes some people choose work over school- maybe it works, and maybe they were a mind that works best on a high level.

    The government should stop reporting inflation without gas and food, just a useless measure of cost of living.

    The tax code needs an overhaul. Corporate taxes should be in place, to pay for the decreased liability the execs take. Stop treating capital gains different.

  • Report this Comment On September 04, 2014, at 8:27 PM, duuude1 wrote:

    Yo, Renegade duuuude,

    1. Can't disagree that cheap money drives prices up - but... ummm so what? Are you saying cheap money is the cause of higher tuitions? If so then I have to disagree - because tuitions have increased steadily for decades despite fluctuations in the "cost of money".

    2. Apparently writing is a useless skill too (couldn't resist duuude). Staying sober during classes is a valuable skill, which they don't teach either - so I say disband higher education! So there... If you want to hang onto every penny have have a country full of uneducated, inefficient, incapable citizens - well you get what you pay for - right? I am willing to pay some small fraction of my income to have everyone have the *opportunity* to get educated (if they have the motivation to chase it down)... We see examples in the news today of poorly educated countries and the extremists they breed - I'd pay even more not to have a country of ignorant thugs like that.

    3. I fully agree with your last point IF you make a small change:

    "People with little to no college education [] can be the richest and most successful among us." Not *often* though. Statistics bears this out clearly - that a lack of education reduces most people's chances of success. An education doesn't guarantee success - but significantly increases your chances. Smarts, education, and laziness is a recipe for failure. A demonic work ethic will overcome a lot of deficits including lack of education - but who of us have a demonic work ethic? So why should we require that of others? Give everyone a boost, and give everyone an opportunity to be educated - and to work hard like we did.

    Best,

    Duuude1

  • Report this Comment On September 05, 2014, at 12:31 PM, econoglose wrote:

    While I can agree with your 2nd and 3rd points I feel your 1st point has a fairly large hole.

    Without having seen the data you used it seems to me that you're comparing the cost of college for undergraduate students only while adjusting the tuition based on grants and scholarships available for all students (undergrad, grad, etc). My experience with undergrad and grad school leads me to believe that grants and scholarships are given out more heavily to grad and above students (case in point, 100% of my grad school was grants while only 10%-ish of my undergrad was grants/scholarships).

    I do not doubt your premise that there are a lot of over estimations about the rising cost of college but, I also think you are over estimating the amount of grants and scholarships available to undergrad students.

  • Report this Comment On September 05, 2014, at 1:50 PM, reevj42 wrote:

    Lies, damn lies and statistics - Mark Twain

    Morgan, your first misconception about college costs smacks of junk science (propaganda). Somehow you twisted around various things to try to make the case that college costs haven't increased much and may have even declined. Nonsense.

    Yes, it is different for everyone as some of the grants and scholarships doled out are based on parents income. Are you aware of the income levels where most of this aid becomes unavailable? It ain't that high. The College Board and most colleges websites have an expected family contribution (EFC) calculator and the EFC as a percentage of income for many middle income families has been going way up for awhile. If you talk with the colleges they won't even deny any of this. If income aren't going up by much but the costs of attending college are, then it gets tougher and tougher to afford for many people.

    Colleges and universities have been increasing costs at much higher than average inflation rates because they can. They've gotten very greedy and bloated and providing an important service for society is not a high priority. As society becomes more and more stratified many people are thinking the only way they may have a chance at what seems to be a shrinking and more selective pie have either been paying these crazy amounts or taking on very large student debt.

    Joe

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