Instapundit blogger Glenn Reynolds writes in the Washington Examiner how student-loan debt and debt consolidation will affect the United States:
It’s a story of an industry that may sound familiar.
The buyers think what they’re buying will appreciate in value, making them rich in the future. The product grows more and more elaborate, and more and more expensive, but the expense is offset by cheap credit provided by sellers eager to encourage buyers to buy.
Buyers see that everyone else is taking on mounds of debt, and so are more comfortable when they do so themselves; besides, for a generation, the value of what they’re buying has gone up steadily. What could go wrong? Everything continues smoothly until, at some point, it doesn’t.
Reynolds is discussing not the housing market but college tuition and student debt. As I wrote in a prior post, the chart pictured above shows the extent of the housing bubble. Frightening, isn’t it?
But the housing boom was nothing. If you compare housing prices to the Consumer Price Index (CPI) and include the cost of college tuition, another bubble emerges — one that is immensely larger:
In fact, the cost of college has increased — relative to CPI — even more than the cost of health care:
The debt-fueled college bubble is poised to wreak more havoc on the U.S. financial system than the housing bust, and the cost of college is hurting people more than that of health care. (The second chart is originally from Business Insider.) There were many reasons for the increases in housing, health-care, and college costs — some were the result of pure greed, but many were not.
In the health-care industry, the American biotech and pharmaceutical industries conduct much, if not most, of the research and development in the world. And it is expensive — especially since most R&D results in dead-ends and companies rush to make a profit from the few medical drugs and devices that gain FDA approval before patents expire (usually in twenty years). Firms usually obtain patents at the beginning of the testing, and the entire process — clinical studies through three stages, obtaining FDA approval, developing a marketing strategy, and then going to market — can take many years. (Most drugs never make it through Stage 1 of the testing process.)
This leaves a window of just a few years to recover the R&D expenses and make a profit before another company can swoop in and release a generic version (at little cost since the research has already been done). Since most of the world cannot afford any price increases for drugs, pharmaceutical companies pass the costs along to U.S. consumers. In business and economic terms, this is at least understandable — even if Americans suffer as a result.
The housing bubble was a mix of altruistic intentions as well as corporate and personal greed. The Clinton and Bush administrations — mainly the latter — wanted to create an “ownership society” by encouraging banks to help more people own homes. (Of course, this sounds good on the surface.) The U.S. Federal Reserve, led by Alan Greenspan, kept interest rates historically low over understandable fears of a deep recession after the dot-com burst and the September 11 terrorist attacks. But the government encouragement and low interest-rates greatly increased demand (which then increased prices as well).
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