“If something cannot go on forever, it will stop.” – Herbert Stein’s Law
Herbert Stein was an American economist and a senior fellow at the American Enterprise Institute. There are not a lot of economists who get laws named after them, but Stein did. It may seem obvious when one simply reads it, but the idea that something which cannot go on forever will stop is not that obvious when one lives it.
Take, for example, the incredible explosion in the cost of college education. I have used this example many times but it still warrants repeating: My senior year at Wake Forest University, the cost of attendance was approximately $12,000. Upon graduation I purchased a Toyota Camry for $16,000. Today a similar Camry costs $24,000, while the cost of Wake Forest University is $72,000.
During the last twenty years the overall inflation rate has been quite low, but the cost of college tuition and the cost of healthcare have gone through the roof. There are several reasons why. Specifically for college, we had a combination of the millennials being a very large generation, especially compared with Gen-X, which means more people going to college. This was magnified by the fact that a higher percentage of the population started going to college. On top of that, people started borrowing money to go to college. All of these trends came together to accelerate the rise in college tuition costs.
If something cannot go on forever, it will stop. No product or service can have price increases which outpace the overall rate of inflation forever, so it must stop. According to The Wall Street Journal, that process is under way. Tuition discount rates at private colleges have increased to 49.9 percent for full-time freshman students. According to the National Association of College and University Business Officers (NACUBO), the per-student net tuition (the amount colleges actually get after all the discounts) fell 0.1 percent this year. That is not a huge drop, but it is an actual drop.
For our young family clients who are concerned about saving enough for college education this is great news. It is not the news most expect. We are hard-wired to see what is happening today and project that into the future. We do it with everything. The NBA playoffs are going on and many believe it is a foregone conclusion that the Golden State Warriors will win it all once again. They might, but just like the Celtics, Lakers and Bulls of the past, the Warriors’ run will eventually stop…sooner than we probably think.
For many of our clients, college education costs are a thing of the past. They are approaching retirement and concerned about the cost of healthcare. If something cannot go on forever, it will stop. Healthcare is no different. The rapid increase in cost is unsustainable and it will reverse itself. I know many doubt those words, even if they are comforting. People doubted that college costs would ever slow, but now they are doing exactly that.
Take heart is Stein’s law. Your kids will be able to go to college. You will be able to afford healthcare. Their rise cannot go on forever, it will stop; and it may be stopping even now.
Chuck Osborne, CFA