Money Down a Rathole: College, Healthcare, Housing

by CHARLES HUGH SMITH August 13, 2012

Households are dumping trillions in hard-earned income down ratholes with marginal returns: costly higher education, healthcare and housing.

What happens when households dump huge percentages of their stagnant incomes down marginal-return ratholes? They get less wealthy, which is exactly what we're seeing. The average American household has been persuaded that pouring money into costly higher education, healthcare and housing are all "investments" that offer high yields.

Sadly, the opposite is true: the returns on these stupendously costly investments is marginal or negative. Let's start with higher education, a topic I have discussed at length numerous times.

In essence, a college degree has lost its scarcity value, and in an era of labor arbitrage (a.k.a. offshoring and international competition), automation and relentless pressure to lower costs, even advanced degrees in law, science and business management that once were perceived as guarantees of secure high-paying employment no longer have scarcity value: the number of people with advanced degrees far exceeds the number of open positions.

Meanwhile, the education cartel has raised prices at a rate that is three times the rate of inflation. The credulous "buyers" of expensive higher education continue to pay absurdly inflated prices for degrees that have marginal value in the real-world marketplace.

We can see the trend in the following chart: wages for college-educated workers have stagnated even as the costs of college have skyrocketed.

Banks that build lavish headquarters soon perish. There is something about erecting monuments of self-glorification and excess that exudes a fatal hubris. Please consider the lavish buildings universities have constructed in the supreme confidence that millions of debt-serfs will continue to willingly dump tens of thousands of dollars in hard-earned cash and crushing loans for degrees with increasingly marginal returns.

Sickcare, a.k.a. "healthcare," is another rathole of waste, fraud and malinvestment. I have covered the sickcare cartel in depth; the key metric of this rathole's depth is that we spend roughly twice as much per capita (per person) as competing developed democracies on healthcare and get questionable returns on the trillions spent.

Buying a house was sold as a "can't miss" avenue to build middle class wealth. Instead, it became a $10 trillion rathole that either loses nominal value or stumbles along, unable to keep pace with the rising costs of ownership (property taxes, special assessments, etc.).

When owners finally give up the idea that the housing bubble can be reinflated, the house is sold for less than the mortgage to an investor who offers to rent the home to the previous owner for half the cost of the mortgage he was paying.

As higher education and sickcare costs rise, labor's share of the national income is declining. Households are earning less when measured in purchasing power, and the costs of college and sickcare skyrocket even as the returns on those "investments" become ever more marginal.

With income stagnant and trillions being dumped into the ratholes of higher education, sickcare and housing, it's little wonder that median net worth has plummeted. Americans saw wealth plummet 40 percent from 2007 to 2010: The Federal Reserve said the median net worth of families plunged by 39 percent in just three years, from $126,400 in 2007 to $77,300 in 2010. That puts Americans roughly on par with where they were in 1992.

I am sickened by the vast sums I see households squandering on hopelessly marginal "investments" in expensive higher education, healthcare and housing. I too am caught in the crony-capitalist/State cartel web of waste, skimming and fraud: we have paid tens of thousands of dollars on no-frills healthcare insurance (no eyewear, no dental, no meds, $50 co-pay) in the past decade, and received perhaps 3% of this sum in care.

But to not have health insurance in America is to invite financial ruin should we suffer some serious illness. The same "must-have" argument supports the conventional wisdom about education: a young person "must have" a college degree if they hope to escape a lifetime of poverty. The issue isn't education per se, it's the ever-rising cost of an education that has arguably lost value in a global job market that faces a vast surplus of educated workers and a scarcity of secure, high-paying jobs.

Simply put, minting 10,000 PhD chemists (for example) does not magically create 10,000 jobs for PhD chemists.

I see family after family making enormous sacrifices to send their children to costly colleges or make bloated mortgage payments with little hope of positive return; I see families who did not have health insurance struggling to pay off crushing bills for hospital care. I personally know people with science PhDs and post-doctoral experience at top universities competing for scarce academic/research jobs against fields of 60 or more other qualified candidates.

Yes, education and healthcare are necessary, but cartels have leveraged this necessity into vast skimming operations that yield marginal returns even as their costs balloon without limit.

Housing is also a necessity, but it does not follow that it is a high-yield investment. Rather, it has become a sinkhole for hard-earned, scarce cash.

Ratholes are not investments, regardless of what the cartels profiting from the Status Quo claim.