How not to save for college
Twenty years ago, my wife and I faced the question of how to save for my daughter’s college education. (BTW, why did I have to pay for both my college education and my daughter’s?)
Suppose I had suggested the following plan to my wife:
We’ll invest $10,000/year in collectables. We can buy some Song dynasty porcelain, ancient Greek coins, 17th century French furniture and etchings by Durer, Goya and Rembrandt. Then we’ll sell them after 18 years to pay for her college.
I’m guessing that my wife would accuse me of mixing up two very different issues, how much to save and how much to indulge my passion for antiques. You can save money by investing in antiques, but the return is likely to be disappointing given the extreme illiquidity in the market for collectables. Instead, we chose a mutual fund.
In sum, there is a plausible diagnosis and a logically consistent argument under which fiscal stimulus could help: We are experiencing a strong portfolio, precautionary, and technical demand for government debt, along with a credit crunch. People want to hold less private debt and they want to save, and they want to hold Treasuries, money, or government-guaranteed debt. However, this demand can be satisfied in far greater quantity, much more quickly, much more reversibly, and without the danger of a fiscal collapse and inflation down the road, if the Fed and Treasury were simply to expand their operations of issuing treasury debt and money in exchange for high-quality private debt and especially new securitized debt. . . .
My analysis is macroeconomic, and does not imply anything about the specific virtues or faults of the Obama team’s spending programs. If it’s a good idea to build roads, then build roads. (But keep in mind the many roads to nowhere, and ask why fixing Chicago’s potholes must come from Arizona’s taxes funneled through Washington DC.) If it’s a good idea for the government to subsidize green technology investment, then do it. (But keep in mind that the internet did not spring from industrial policy to improve the Post Office, the word processor did not come from a public-private consortium to rescue the typewriter industry, and that a huge carbon tax is much more likely to spur useful green ideas, and the only way to spur conservation.) The government should borrow to finance worthy projects, whose rate of return is greater than projects the private sector would undertake with the same money, spreading the taxes that pay for them over many years, after making sure its existing spending meets the same cost-benefit tradeoff. Just don’t call it “stimulus,” don’t claim it will solve our current credit problems, “create jobs” on net, or do anything to help the economy in the short run, and don’t insist that we have to pass this monstrous bill in a day without thinking about it.
If you like antiques, it might make sense to buy some antiques. But don’t pretend that you are saving for your daughter’s college education, and don’t time your purchases of antiques to coincide with the need to save money for college.
If the government needs to issue debt to stimulate the economy (I doubt that it does), then use it to buy some highly liquid assets, and sell them off when the economy no longer needs such a large supply of Treasury debt. But don’t mix up the completely unrelated issues of the appropriate level of government spending with the need for more public debt. Boosting government spending as a way to stimulate the economy makes no more sense than buying antique French furniture as a way of saving for college.
PS. My favorite line from Cochrane’s 2009 article:
Some economists tell me, “Yes, all our models, data, and analysis and experience for the last 40 years say fiscal stimulus doesn’t work, but don’t you really believe it anyway?” This is an astonishing attitude. How can a scientist “believe” something different than what he or she spends a career writing and teaching? At a minimum policy-makers shouldn’t put much weight on such “beliefs,” since they explicitly don’t represent expert scientific inquiry.
PS. Durer portrays Cochrane contemplating the state of modern macro.