Inflation! (And the real elephant in the room.)

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The Economics & Inevitability of Inflation

With the rise of longer-term inflation, it is essential that Christian schools get their financial house in order. If you have time to understand the real economic issues at play, click the pull down. Otherwise, let me get to the implications for your school.

The Economic Issues Issues at Play

What is clear is for the next 18 – 24 months at least, inflation will be higher than we have experienced in almost two decades. Midterm prospects for inflation are understandably less clear. Dr. Nouriel Roubini, who correctly called the Great Recession of 2008 several years before it happened, believes that significant stagnation is coming, a position he has held for several years now. Other Nobel-prize economists, such as Joseph Stiglitz and Paul Krugman, either do not agree, or say the verdict is still out.

Over the Christmas break, I read Ray Dalio’s sobering 2021 book, Principles for the Changing World Order: Why Nations Succeed and Fail. I read a lot of books, and this is truly a MUST-READ book for any leader or wannabe leader. 

Dalio’s book is currently an Amazon best seller (#15) for good reason. Dalio predicts the future in probabilistic terms. Lawrence Summers calls him a world-class academic who happens to run a hedge fund. In fact, he was the highest paid hedge manager in 2021 – $2 billion dollar annual salary. So Dalio predicts the future – because clients representing $150 billion in assets depend on it – with an unlimited budget. He has access to the world’s leading experts, every possible computer resource, and genuine intellectual honesty and humility. Dalio’s research is based on his study of 500+ years of the history of empires, and his extensive knowledge of the continued rise of modern China.

Most economists view inflation sticking around in 2022 and 2023, and 4% per annum is a respectable estimate. What happens after that? If you think the problem is mostly “supply-chain” related, as many talk about, then inflation is likely to subside. If you think its more a function of “too many dollars chasing too few goods”, so-called “demand-pull inflation,” then it is likely to stick around awhile, or get worse. There are other possibilities for economic problems ahead – Roubini’s take on this is worth a careful read.

Inflation can take on “a life of its own” as people purchase more goods anticipating more inflation, resulting in “wage-price spirals.” Very smart people at the Federal Reserve Bank are trying to avoid this, and interest rates will have to go up this year by a percentage or two. Most of what they do will be behind the scenes, both unknown and, even if known, practically incomprehensible to the general public.

Let’s talk about the harder inflation problem, “demand-pull” inflation. Dalio convincingly makes the case that in mature empires like the United States, it is inevitable that given the choice between higher taxes or cutting back spending, governments in the later stages of their life cycle will choose to print more money. Today, that is done in highly sophisticated ways, ways that the general public does not understand.

Printing money is far less painful than raising taxes or cutting back on spending. I am not saying it is good, it is what it is. What you need to know is that in the long-run, more available money drives demand-pull inflation.

One sophisticated way of printing more money called “quantitative easing” has been going on for some time now – at least since 2008. This has happened throughout both Republican and Democratic administrations. This is not a political issue particularly – both parties like a seemingly “easy way out.” But read this article: The long-term risks of doing this are high. 

This is related to the idea of “Modern Monetary Theory,” (MMT) embraced by the Left and tacitly assented to by the Right. MMT asserts it is OK to borrow money as a fiscal stimulus for the economy IF – through various Central bank monetary tactics not understood by the general public – inflation remains reasonably low. That is a very big IF, and not a given at all.

Ray Dalio asserts that two trends are inevitable: (1) Modern Monetary Theory will become the norm (regardless of who is in charge). (2) Over the long-run, all currencies dramatically devalue. (Translation: More money is required to purchase the same goods, AKA inflation.)

Perhaps you noticed that the latest increase to the debt ceiling readily quietly passed with little opposition. The reason for this is that the US Dollar is the “world’s currency,” desired by governments and individuals around the world. Because it (still) is, that makes it much easier for the US to run record deficits without significant consequence. However, any sort of squabbling about the debt ceiling, or some sort of default, could shake the world’s confidence in the US dollar. That would make it much more expensive for the United States to borrow money, causing all kinds of problems, including double-digit inflation.

Whether we have higher or lower inflation will depend partly on who is in charge. If we have experts in charge, people who really know what they are doing, we will have lower inflation, and we will stretch out the time before Modern Monetary Theory quits working, possibly by decades. The opposite is true if we put neophytes in charge. Over the long run, however, MMT will quit working.

Here’s the bottom-line. Inflation is inevitable over the long-run. It’s a given for the short-run. It seems more likely than not for the midterm as well. As Dalio carefully documents, various versions of trendy economic theories that justify huge deficits have been tried over the last 500 years, and over the long-run they are inflationary (or worse). (Here’s the 800-year version of that same idea.)

There are no simple answers here. Going back to the gold standard won’t help – there isn’t enough gold. Neither political party has the will to dramatically cut the federal budget. Who wants to increase taxes? If you think crypto currency, consider what is really happening as it becomes more mainstream. Now individuals and non-government entities are printing their own money, in a more random, less controlled way. How can this be anything but inflationary? (Again, the demand-pull variety.)

The bottom-line here is that as Christian schools, we MUST get our financial house in order.

The Real Elephant in the Room

Four years ago, I started a book on Christian school finance that I never had time to finish. Here’s how it started out:

There will come seven years of great plenty throughout all the land of Egypt, but after them there will arise seven years of famine

(Ge. 41:29-30a)

We are in the seven good years, right now. 

That’s the single most important message of this book for leaders in K-12 Christian school education. We are in the seven good years. 

It is time to give up the desperation measures. We must stop kicking the can down the road another year. It is time to get our financial house in order.

This is not about cutting costs – or for that matter, generally accepted accounting principles, financial controls, or salaries and benefits. In working exclusively with PK – 12 Christian schools over the last 11 years, I’ve met hundreds of Christian school leaders who could write that book.

This is about the big topic, the real elephant in the room: How to stop leaving hundreds of thousands of dollars of revenue on the table – year after year after year.

Consider all the ways that we leave money on the proverbial table:

(1) In most K-12 Christian schools, parents pay less than the cash costs to educate their children. Current parents who can afford these cash costs are not asked to do so. And cash costs are not the entire cost to educate a child.

(2) “Lowest possible cost” pricing means that higher-income parents – who shop value, not price – do explore higher-priced, seemingly higher-quality, alternatives first, even exclusively.

(3) Automatic discounts are granted to parents, many of whom do not need them.

(4) Because of automatic discounts and unrealistically low tuition, parents who still need help do not get it, because the school cannot afford to do so. These families don’t enroll, and the tuition they could pay is lost.

(5) With little hope of getting significant needs-based help, current parents who hit hard times quietly walk away – and many prospective parents won’t bother. In both instances, Christian schools lose the tuition revenue these families could have paid.

(6) By prominently displaying tuition costs, prospective parents will not inquire in any way, concluding: (A) “We just can’t afford it”, or (B) “The school is not ‘worth it.”

(7) The poor financial practices above require “gap” funding appeals, one of the weakest cause concepts for fund development in Christian education. Out of necessity, most K-12 Christian schools are then shut out of raising money for the strongest cause concept, which is a needs-based scholarship. This can only be fixed if we change our tuition-related practices.

(8) Many schools in voucher and tax credit states are struggling with the exodus of private pay families and dollars, simply substituting government dollars, whether paid to the family or not. Overall enrollment is not increasing in voucher states.

All of these remain issues for most Christian schools today. Inflation only makes all these problems worse. Probably the toughest toll will be on our teachers. Inevitably public-school teachers will get substantial raises. What about your teachers? 

For 2022-2023, you should be raising your tuition to match the rate of inflation, and increasing your teacher and staff salaries by that same amount. It is wishful thinking to believe that inflation will retreat to 2%. We will be looking back at 2% as “the good old days.” Assume that inflation will be 4-5% this year. If you don’t increase your teacher’s pay in 2022-2023 you will likely be behind in double digits for 2023-2024. 

Note that parents would inevitably expect a higher tuition increase year to year during periods of inflation. At the same time, more parents are likely to “hit the wall” financially if their own employers are not able to keep up. Your financial aid requests and amounts will continue to increase and will need to be tracked carefully.

Jay and I are recording the key lessons we’ve learned over the last 15 years and including them in brand new program, which will roll out soon. If you’re not already on the launch list (many of you joined last week), you can join below.

We have also developed the Enrollment Pro Dashboard which will keep track of where you are financially for the upcoming school year – in real-time (and it allows you to compare yourself to other schools.) More on that to come.

CIAB Launch List

Over to you…

How has inflation impacted your school this year? Are you struggling to keep teacher salaries inline with rising costs? Have you been considering a tuition increase?

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