Monday, December 05, 2011

Higher Education Bubble: A Simple Case of Inflation

Glenn Reynolds writing about the higher education bubble in Sunday's Washington Examiner:

"This is a simple case of inflation: When you artificially pump up the supply of something (whether it's currency or diplomas), the value drops. The reason why a bachelor's degree on its own no longer conveys intelligence and capability is that the government decided that as many people as possible should have bachelor's degrees. 

There's something of a pattern here. The government decides to try to increase the middle class by subsidizing things that middle class people have: If middle class people go to college and own homes, then surely if more people go to college and own homes, we'll have more middle class people.

But homeownership and college aren't causes of middle-class status, they're markers for possessing the kinds of traits -- self-discipline, the ability to defer gratification, etc. -- that let you enter, and stay in, the middle class. Subsidizing the markers doesn't produce the traits; if anything, it undermines them. One might as well try to promote basketball skills by distributing expensive sneakers.

Professional basketball players have expensive sneakers, but -- TV commercials notwithstanding -- it's not the shoes that make them good at dunking.  If the government really wants to encourage people to achieve, and maintain, middle-class status, it should be encouraging things like self-discipline and the ability to defer gratification. But that's not how politics works."

HT: Steve Bartin at Newsalert


35 Comments:

At 12/05/2011 9:47 AM, Blogger Jon said...

It's worth noting that public subsidy to higher education has been steadily declining. I have some discussion of this at my blog here. Reynolds seems to think the opposite.

Economist Ha Joon Chang writing in "23 Things They Don't Tell You About Capitalism" explains that one of the problems in capitalism is that something can be good on a micro level but bad on a macro level and the free market has trouble correcting for that. If you stand in a crowded theater you'll get a better view. But if everyone stands you still exert the effort but your view is no better. That's what we are seeing in the US. If you remain seated you're really in bad shape, so you must stand, but that comes with an enormous burden. The solution is some government management. I believe he recommends the model of Sweden, where college degrees are much more infrequent.

But the government screws everything up. The government screws a lot of things up, but also does a lot of things right. Like development of products that have too long a development cycle for a capitalist to find it a worthwhile investment. That's a market deficiency. Such things include computers, the internet, semi-conductors, satellite communications, GPS, commercial aviation, shipping container technology. We wouldn't expect these things to come into existence via purely market forces for the reasons I explained, and they didn't. And yet we are much better off for them.

Heck, if it weren't for the Air Force developing heat seeking missiles we would understand the greenhouse effect nearly as well and might be even more oblivious to the looming crisis than we already are. And it's the satellites that take the measurements that show we're hotter than ever. We wouldn't know that on pure free market capitalism. We'd just drive right of the cliff. So government intervention has obviously been very beneficial.

 
At 12/05/2011 10:01 AM, Blogger morganovich said...

jon-

but public lending for student loans has been soaring and that is driving the bubble.

ginnie mae is doing precisely what freddy and fannoe did, and the new proposed rules are going to make it MUCH worse.

also, you claim that semiconductors, the internet, gps, aviation etc were developed by the government are absurd.

that's not what happened at all. the government was not a developer, it was a customer. it said "we'd like the be able to do X" and the private firms developed it.

there is nothing wrong with the government being a customer as it tends to have a decent idea what it wants. but when they try to spur innovation, you get solyndra.

governments were the first to want networks and helped establish tcp/ip, but they did not invent the routers, computers, cables, optics, amplifiers, or any of the other stuff that made the internet work.

 
At 12/05/2011 10:17 AM, Blogger Larry G said...

" is that the government decided that as many people as possible should have bachelor's degrees"

can someone translate what is intended to convey with this statement?

" but public lending for student loans has been soaring and that is driving the bubble."

yes.

and the govt subsidizes/guarantees the loans but the loans are made by and profit by the private sector...

and loans go for all kinds of fields of study ..some in big demand....

that's the problem I have with the loans.. that they're not targeted to specific jobs that are in demand and so someone can screw around for 4 years.. run up tremendous debt and then have little or nothing to show for it... and start off their working career.. deep in debt... which sucks up finances that would pay for family, health care, 401K... and home ownership.

 
At 12/05/2011 10:42 AM, Blogger morganovich said...

sorry, i meant sallie, not ginnie.

 
At 12/05/2011 10:47 AM, Blogger morganovich said...

"can someone translate what is intended to convey with this statement?"

i believe what he is saying is that in the same way the federal government tried to push home-ownership through freddie and fannie (cheap loans and reduced criteria) they are doing the same thing with secondary education with sallie and, now mostly though direct federal loans and for the same reasons.

it's the federal loans that are really exploding and their terms keep getting better and better.

seems like the decided to skip the interstitial step this time (let sallie fail and nationalize it) and just nationalized student lending.

far from this being private profit, the current lending from the federal government for student loans is 10X the size of private lending.

 
At 12/05/2011 10:58 AM, Blogger sethstorm said...

Or just make the subsidy an ironclad one based on percentage as opposed to one that allows for $subsidy+1 hijinks. Have the internationals pay to make up for the difference while not taking up slots reserved for US citizens.

That, or bar post-secondary education from being any direct or indirect criteria for getting a job.

 
At 12/05/2011 10:59 AM, Blogger sethstorm said...

Perhaps the no-discharge-in-bankruptcy idea was not so good after all.

 
At 12/05/2011 11:23 AM, Blogger geoih said...

Quote from Jon: "... one of the problems in capitalism is that something can be good on a micro level but bad on a macro level and the free market has trouble correcting for that."

Who gets to decide what is "good" and what is "bad"? One of the problems with the state is that the people making the decisions for the state, picking winners and losers, deciding what is "good" and "bad", are the same flawed people that make the decisions in the market, only now the decisions are forced on to everybody at the point of a gun.

If somebody stands up in a theater in order to see better, then the theater owner will throw that person out in order to satisfy his other customers. The state in the same situation would most likely prefer the solution of throwing everybody out of the theater so that everybody is treated equally.

 
At 12/05/2011 11:26 AM, Blogger geoih said...

Quote from sethstorm: "That, or bar post-secondary education from being any direct or indirect criteria for getting a job"

How do you think these things up? Why have any criteria at all? Just pick people at random for jobs. Everybody is obviously the same as everybody else. Why would anybody need to go to college in the first place?

 
At 12/05/2011 11:41 AM, Blogger morganovich said...

geo-

"How do you think these things up?"

best i can tell, he starts with the question "how can i get a job without any work or possessing any skills or merit" and works from there.

he seems to believe that companies are somehow hoarding jobs and need to be forced to hand them out.

 
At 12/05/2011 11:41 AM, Blogger AIG said...

"If you stand in a crowded theater you'll get a better view. But if everyone stands you still exert the effort but your view is no better. "

Except that this example has nothing to do with "capitalism". Capitalism has a simple ground rule...you can't impose costs on someone else without their consent (externalities aside, but they are exceptions because the costs are hard to quantify).

If you stand up in a crowded theater, you are imposing a cost to others without their consent. Capitalism would correct for that not by having everyone else also stand up, but by making you sit back down.

 
At 12/05/2011 12:01 PM, Blogger juandos said...

"It's worth noting that public subsidy to higher education has been steadily declining"...

Interetingly enough it doesn't seem to occur to jon is why are there subsidies to higher education in the first place...

Glenn Reynolds links one to the following graphic: How President's Pay Compares with Professors' Salaries

 
At 12/05/2011 12:07 PM, Blogger AIG said...

This whole higher-ed bubble argument is suspect, in my opinion. There are several contradictory points being made, which don't support the argument.

1) One can get an Undergraduate degree, today, cheaper than ever before. Despite the graphs showing "higher ed costs", those graphs encompass a lot of things besides Undergrad degrees. For example, nearly half of Undergrad students pay less than $9,000 in tuition and fees a year. Now adjust this for inflation, adjust for % of income, and compare with previous times in American history.

Are we seeing undergraduate degrees going...up...or down in price?

2) On the other hand, it is true that there is a segment of Undergrad education where tuition costs are going considerably up. These are top-tier highly selective schools.

3) Now, there is no question that gov subsidies in higher ed do affect the prices and participation rates. But if we see a two-tier market; one where prices are pushed down, participation is pushed up, and quality is inevitably c***...and another market where quality goes up, participation is more selective, and necessarily prices go up...where do we think the Government subsidies are playing a role?

Lets be consistent here. This is NOT a linear relationship.

 
At 12/05/2011 12:07 PM, Blogger AIG said...

4) Graduate education. Over the past decades we have seen an explosion in graduate programs. their prices are considerably higher, and they drive the aggregate "higher ed" costs up.

5) BUT...what does this have to do with gov subsidies? Could it have something to do with the fact that undergrad educations is not enough anymore because, today, you need a lot more knowledge and specialization than before? And higher knowledge and specialization gets you more benefits...which necessarily means you will pay more to get those benefits. Most engineering undegrads aren't even 4 years anymore. They are 5.

6) So we see one force on the higher ed market coming from the employers...which are their CUSTOMERS (not the students). they demand better and more specialized knowledge. Universities deliver this in the form of more grad programs, and associated higher costs. Why are we ignoring this as if it doesn't exist?

7) If we remove government subsidies from higher-ed, are we likely to see many state schools that offer tuition prices of next to nothing go out of business? Probably. What effect does this have? Does this mean that the other schools which have higher prices because of higher quality or more focus on grad/research, are going to go down in price? Not necessarily. In fact, very unlikely since now there are fewer institutions providing such degrees, less participants...but the same market demand for knowledge and specialization.

 
At 12/05/2011 12:08 PM, Blogger AIG said...

If I would make the argument, I would make the argument that government subsidies of higher ed saturates the market with low quality schools and low quality students, putting downward pressure on wages for higher-ed graduates, and creating incentives to go into less value adding fields rather than high value adding fields; ie people go for education majors instead of engineering, because the rewards become somewhat similar.

BUT...it mainly serves to create downward pressure on undergrad costs, which is why you have mountains of state schools that cost next to nothing, chocked with tens of thousands of useless kids.

The PRICE of higher-ed, isn't as important if it is associated with higher value and benefits. In the high-tier schools where prices go up, this is associated with higher earning potential. In the state schools where prices go down, they are associated with lower-ING earning potential.

 
At 12/05/2011 12:09 PM, Blogger sethstorm said...


ow do you think these things up? Why have any criteria at all? Just pick people at random for jobs. Everybody is obviously the same as everybody else. Why would anybody need to go to college in the first place?

I'm just suggesting a solution that makes it a choice between a subsidy backed by international students or no postsecondary requirement can be made for a job.

How about training instead, viewing workers as a long term investment(where relevant training is provided) instead of a john-pimp-prostitute relationship(the contract work/staffing agency model)?

 
At 12/05/2011 12:20 PM, Blogger AIG said...

IE...what the "higher-ed bubble" argument misses, entirely, is a FUNCTIONAL UNIT.

The functional unit in, say, housing, is not "a house". Its something else (sq footage * location * any number of other factors)

What is the functional unit in undergraduate education and in graduate education?

A "degree" is NOT a functional unit, any more than a house is. A degree in engineering is not equivalent to a degree in visual arts, just as much as a Manhattan penthouse is not equivalent to a trailer in Alabama.

So whether there is a bubble or not, or whether the higher price is worth it or not, can only be determined if we compare one UNIT of "higher education" over time, and against other units of "higher ed".

Now, I don't know what that functional unit is. But it sure can be determined. And I'd make the argument that on a per unit bases...we see a bimodal distribution; one where the price per unit is getting BETTER, and one where it is getting worse.

The one that is getting better, is likely the schools that are going up in price!

 
At 12/05/2011 12:30 PM, Blogger juandos said...

"For example, nearly half of Undergrad students pay less than $9,000 in tuition and fees a year. Now adjust this for inflation, adjust for % of income, and compare with previous times in American history"...

Where is this happening at AIG?

Public four year colleges here in Missouri charge near $22K+ for a year's worth of student union fees, lab fees, insurance, books, and so forth...

The prices for some of the undergrad books in the hard sciences really gets crazy too...

 
At 12/05/2011 12:54 PM, Blogger Eric H said...

"Are we seeing undergraduate degrees going...up...or down in price?"

My anecdotal experience is that higher ed prices are way up. I graduated 19 years ago. Back then, tuition, room and board ran me about $5200 per year at TTU. Starting salaries for a BS mechanical engineering grad were $32-36k for white males (non-whites and non-males could make significantly more to start). Today, the same program costs over $14,000 per year. A 270% increase over 19 years. 15 years of design experience and a PE license have 'only' increased my salary about 100% in that time. Recent grads with no experience don't make that. No question that higher ed prices are far outpacing the market of their product here in TN.

 
At 12/05/2011 1:05 PM, Blogger Jon said...

but public lending for student loans has been soaring and that is driving the bubble.

How do you know that it wasn't rather the drop in public subsidy that fueled the demand for more loans?

that's not what happened at all. the government was not a developer, it was a customer.

Government created the demand and that demand generated the supply. The free market did not create the demand. Without the government demand we wouldn't have computers.

 
At 12/05/2011 2:37 PM, Blogger hal said...

actually it's because colleges don't grow enrollment and compete like businesses. If they grew to meet demand, and became more efficient, tuition costs would go down substantially.

 
At 12/05/2011 2:37 PM, Blogger morganovich said...

"How do you know that it wasn't rather the drop in public subsidy that fueled the demand for more loans?"

because the drop in public subsidy has been a tiny fraction of the increases in tuition and the schools that get little or no subsidy have been going up fastest.

also because the feds set loan targets and dropped rates like crazy to meet them.

then we get obama's new program with these terms:

"“That program allows borrowers with federal student loans — a key piece of information that is being left out of many reports — to have their monthly payments set to a reasonable amount based on their income and family size. Monthly payments can be capped at 15 percent of borrowers’ discretionary income. After 25 years of qualifying payments, the remaining debt, including interest, is forgiven.”

Under federal law, that cap is set to be lowered in 2014 to 10 percent and debt will then be forgiven after 20 years. Obama plans to use his executive authority to accelerate that change, extending the benefits to borrowers who took out student loans in 2008 and later. "

which will cause monstrous cost inflation.

who cares what you pay? you max out at 10% of 20 years of earnings.

at $50k, that's $100k all in, WAY below most private school costs now.

so who cares if they want $60k a year or $600k, just get the loan and it's all the same to you.

 
At 12/05/2011 5:52 PM, Blogger Larry G said...

the growth of college loans is enough like the housing bubble to be scary.

In both cases - the govt because the subsidizer and insurer and both businesses and consumers have run amok...

I cannot understand for the life of me why someone would go into the levels of debt that some are going into before they earn their first dollars.

Doctors.. yes...

but there are people with 20/30K in loans who don't have a likely job.. are in a track that has few jobs.

Used to be...back in the day...

if you did not have a college fund...you went to night school, scrounged around at part-time / summer jobs.... etc, etc... you could not even get a loan..

but now that the govt has gotten into it... everybody and their dog can get a loan...

 
At 12/05/2011 5:57 PM, Blogger Unknown said...

As 53 year old recent grad who is in $185,000 student loan debt (pharmacy degree), I think I am able to speak from experience; the schools can raise tuition & fees with impunity because they know the government will be sending them the check directly, and then when all is said & done, the student/graduate is left to pay it, so the school has no skin in the game when it comes to reigning in costs. That is why the cost of education has risen MUCH higher than pretty much every other aspect of the economy. As usual (always?), government meddling produces unintended consequences.

 
At 12/05/2011 6:35 PM, Blogger Jon said...

because the drop in public subsidy has been a tiny fraction of the increases in tuition

Why would you say that? Check these slides from U of Michigan, which is where I went to school. It does not reflect your claim. The rise in tuition has tracked the decline in state subsidy. See Slide 5.

No, unknown. The schools cannot charge with impunity. They are very constrained. I have a relative that is on the Board of Trustees of a large university. They are frequently imposing harsh cost cutting measures because of the decline in state subsidy. As Mark points out here faculty salary increases cannot account for the increase.

 
At 12/05/2011 6:40 PM, Blogger Larry G said...

The Richmond Times Dispatch in Va does a neat public service.

they provide a database that has all the salaries of state employees....

and if you take a look at it.. page after page after page of really inflated salaries are University college professors:

http://datacenter.timesdispatch.com/databases/salaries-virginia-state-employees-2011/

I suspect Virginia is not that different than a lot of states.

so you gotta ask yourself... where does the money come from for these 6 figure salaries?

 
At 12/05/2011 8:35 PM, Blogger Aiken_Bob said...

A lot of these comments just don't make any sense. A lot deal with engineering degrees (this must be a nerdie site). The reality is the bulk of the degrees do NOT ensure that someone will get a job that reflects the high cost college degree. The reality is that we now have about the same ratio of professor to students that we had a generation ago, the difference is the increase in staff and luxury dorms, etc. which don't any any value to the college degree but do inflate the cost. The reality is that a BS or BA isn't what it used to be, we have been dumb down. The only things that constantly grow faster than inflation are those things that the gov't helps us with.

 
At 12/05/2011 9:26 PM, OpenID Sprewell said...

Bob, that's just AIG, who got an engineering degree so he bangs on with dumb arguments defending the majors he likes.

AIG, you persist in commenting on all the education threads, making these ridiculous arguments defending the college degree, all of which I've debunked in detail in the past. I have to ask: what is your personal connection to this topic? Is it just that you got an engineering degree so you feel you must defend its value? Or do you work for a college or advocate for them? In my case, I attended college and graduate school and looking back, it was mostly a waste of time, particularly since most of the lecturers blew, even though my engineering program was ranked in the top 5 for my specialty, so I rarely went to class and the price was simply ridiculous.

Being young at the time, I figured I just had to pay my dues and get the degree to get a job, but I now try to warn everyone that going to college is a big mistake, particularly considering how online learning is about to destroy the college system. I would like to someday help place that dynamite to blow up the university system and replace it with online learning, but I have no personal connection to the education system at the moment. What is your personal connection to this issue, that you feel compelled to keep commenting with such ridiculous arguments?

 
At 12/06/2011 2:45 PM, Blogger Eric H said...

Bob said "The reality is the bulk of the degrees do NOT ensure that someone will get a job that reflects the high cost college degree."

True. I think you see the emphasis on engineering as it is one of the more potentially profitable degrees that can be obtained in four years, i.e., the best possible (kindest) scenario for justifying the college expense. My numbers are low because I am in a state with no state income tax and low cost-of-living, so the prices/salaries will typically be in the lowest quartile.

I agree with Sprewell. I can't justify the expense for my children (especially the loss of four years of experience) if they want to pursue a career that doesn't require the degree for licensing (such as medical or engineering).

 
At 12/06/2011 5:11 PM, Blogger Ron H. said...

Jon: "Government created the demand and that demand generated the supply. The free market did not create the demand. Without the government demand we wouldn't have computers."

What utter nonsense.

 
At 12/06/2011 5:15 PM, Blogger Ron H. said...

"but now that the govt has gotten into it... everybody and their dog can get a loan..."

One of the best anti-government arguments so far.

 
At 12/06/2011 5:24 PM, Blogger Ron H. said...

Jon: "Why would you say that? Check these slides from U of Michigan, which is where I went to school. It does not reflect your claim. The rise in tuition has tracked the decline in state subsidy. See Slide 5."

How would that look in constant dollars instead of percentages?

 
At 12/08/2011 10:42 AM, Blogger VangelV said...

If the government really wants to encourage people to achieve, and maintain, middle-class status, it should be encouraging things like self-discipline and the ability to defer gratification. But that's not how politics works.

The government needs to stop meddling. It created the problem in the first place, not only by encouraging and subsidizing too many degrees but by making aptitude testing virtually illegal during the hiring process. With everyone having a degree and no way to efficiently sort out the wheat from the chaff the return to employers from new hires has fallen as competent candidates are harder to identify and incompetent ones harder to fire.

 
At 12/11/2011 11:57 PM, Blogger Elizabeth said...

The higher education bubble is a speculative boom and bust phenomenon in the field of higher education. According to the theory, while college tuition payments are rising, the rate of return of a college degree is decreasing, and the soundness of the student loan industry may be threatened by increasing default rates. Thanks.
Academic Jobs

 
At 12/12/2011 1:10 AM, Blogger BassMan said...

Don't leverage your investment in a luxury student housing unit. Its not a good long term bet.

 

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