8.08.2011

Education bubble? I don't think so.

As a professor and parent, I read with interest claims about an "education bubble" for some time.  I use bubble in quotations, because I am not sure "bubble" is the right word, but I don't have a better one.  I see it a lot like medical care - rapidly increasing prices largely created by government interference.  ALL previous bubbles that I am aware where in products, commodities, and stocks - things that could be bought and sold.  That is not true of education or medical care.  Whatever you decide to call it, I do not see a rapid change in either the prices or the attendance in our university system anytime in the near future.

From what I understand of economics, a bubble starts in a speculative environment where something is bought with the express purpose of selling it at a higher price to someone else, rather than for consumption.  In some sense education can be seen to fit this pattern, as students speculate that the education they are buying will be worth more than the salary gain they will get for it.  And since education is a service, there is no consumption in the traditional sense.  But speculation does not a bubble make.  Whether using credit or not, students are making a calculation that the value of college is worth the cost of tuition.  If that calculation is irrational or without consideration of all the facts, it could lead to a bubble, but I am not convinced that is the case.

What about the demand?

Some sort of post-secondary education is a necessity into today's world.  That need will only increase, not decrease with time as more careers require advanced skills.  Yes, there some some careers/jobs/business opportunities that do not require that extra education.  Those opportunities are becoming fewer and farther in between.  Most people realize this, so the demand for post-secondary education will not go away.

What about cost?

College costs are going up faster than inflation, yet the output arguably is not.  Government pressures, federal grants, and subsidized loans are all helping drive up the costs (which I believe are huge mistakes for practical and moral reasons) in both private and public programs.  That certainly is a problem, but one that won't change unless our government sudden decides to reduce those entitlements.  If that stops, certainly demand will lessen, leading to a drop in prices.  In fact, a 2009 change in federal education loans directly impacted my last school's enrollment numbers.  But that does not seem to be the argument of education bubble claimants.  Their argument seems to be that, like the housing bubble, easy credit has created an inflated value of education that in and of itself will pop without a change in government policy.

When I think about this, I ask "What would happen if there was an increase in defaults on educational loans, like there was in home loans?  Would this decrease the net present value of a university education?"  Not that I can see.  This is in part because education is a service, not product.  This is a critical difference.  Because education cannot be resold (at least not in the traditional sense a product), once provided, it can not be taken away.  So one student defaulting on a student loan will not impact other students' value from education.  Unlike the housing bubble, where homes in foreclosure drive down the value of all homes, education loans in default will not drive down the value of education to new students entering a university.  How one student values education does not impact the value of education to another student.  A student who miscalculate the value of their education, taking on more debt than they will be able to repay, directly impacts their own financial situation, but does not directly impact other students who take on dept they can pay back.

As a service, universities essentially certify that their graduates have the initiative, knowledge, and skills necessary to work in a particular area (degree).  Students are held accountable to professors for really understanding the material (at least they should be), not just good at memorizing content to pass a certification.  Until another system provides that accountability, universities are the only game in town.  So we can expect a similar percentage of students going to college in the future as do today, perhaps more.  Elite colleges with high tuition, may experience a drop in demand, but given the current extremely high demand to get into those colleges, its doubtful that even a slight drop will effect the prices.  More likely, students (and their parents) will start demanding majors with greater returns on their investment.  Less liberal arts majors and more professional degrees like engineering, journalism, business, medicine, or law.

Is it possible to provide high quality post-secondary education at a much reduced price?  Absolutely.  Administration cost in many universities have lots of run for cuts.  Technology could also provide a means to reduce the number of professors.  I've been working on a solution to the latter myself, as have others.  Will it be rapidly adopted?  Depends on what you mean by rapid.  First you have to prove that a specific innovation really is better.  That can take years.  Then the proof must be disseminated into the culture.  That can take even longer.  As of now, the best medium for dissemination is the university system itself.  Could a disrupter educational model change the game?  In the computer industry, where I work, I see the vast number of certifications available in practically all IT areas.  10 years ago, some people in our industry claimed that you could get jobs with certifications alone.  Some did.  It promised to be a great disrupter to traditional university education.  That promise never came to fruition.  Could it eventually?  Possibly, but even today, most new IT workers come from the university ranks.  I just don't see it changing the cultural expectations of the university experience because certifications are too one dimensional.  If change does come, it'll be a slower 10-20 year process, not a quick 1 or 2 year change as a bubble would predict.

Because of all these reasons, I do not think there is an education bubble.  I fully expect a shift in the university system during my career, but the nature of the change will be slow.  There will not be mass movement away from colleges anytime in the near future, nor will there be a huge drop in prices without some outside influence like a new technology or a change in government policy.  It is far too ingrained in our culture for an alternative educational system to rapidly change this approach.  Even with increasing costs, there are cheaper community colleges and regional universities that do a fair job at education at prices that are affordable without large loans.  If prices do drop, it will be because universities figure out a way to educate larger numbers of students at lower prices and pass those savings on.  Perhaps something like the Khan Academy, adopted at the university level (HT to Paul Hsieh for reminding me).

This by no means I endorse all aspects of the current educational system.  I, like many of you, see many problems with this system, including the massive increase in tuition.  I just don't see a "bubble".

6 comments:

  1. It's an interesting topic. I'm not sure that economics alone can adequately explain the cost of higher education. There are intense social pressures to go to college after high school without any consideration of tuition cost, opportunity cost, or future salary. Many go to college because it's "what they're supposed to do." I think that plays a large part.

    I see something analogous to the housing bubble as well. I don't view the increase in available credit as a cause in either case. But I DO see people doing both who shouldn't be. Buying a house because credit is now available to you even though you could have always afforded it will increase demand but not produce a bubble. Going to college because you always had the skills but now have the credit available will produce higher demand, but not a bubble.

    Now what DID produce a bubble in the housing market (and possibly in the education market as well) is the admittance of people into the aggregate demand who never had the capital/income/skills to be there. I had no problem in the 90s through the present of expanding credit to those who previously were ineligible so long as they were capable of making payments. And I have no problem with giving credit/scholarships/etc to students who would not have been able to attend college otherwise but who have the skills to make the grades.

    I wonder if that makes a difference? People going to college who have no business going to college. Like I said, that script is strong.

    As for defining a bubble, I believe the determining factor is market irrationality. That doesn't mean that market irrationality and speculation are mutually exclusive though. It just may be a different way of saying the same thing.

    If the cost of college is going up and wages are stagnant, that certainly seems irrational to me.

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  2. I think you missed the point of those talking about an education "bubble". The problem is not the same as in other bubbles--the problem is that you pay more for less education that does you less good.

    There are PLENTY of jobs out there that ought not to "require" a degree, but many employers refuse to consider non-degree candidates because they are too lazy or stupid to actually vet candidates themselves. THIS is what is causing the "bubble"--people being required for imbecile reasons to get pointless education they don't actually need. This means there are tons of ill-prepared and ill-equipped people going to mindlessly to college (and running up huge unsupported debts), for no real reason.

    The education bubble is not an *economic* bubble, it is a result of treating a college degree as if it were some kind of generalized job prep or vocational training. The economic woes are a *result* of *degree inflation*.

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  3. John, the people who use the work "bubble" do not think in essentials, and fail to recognize the obvious differences between assets and a service (education, or medical care, for that matter). What is happening in educatio is exactly like our experience with medical care, for the exact same reasons. As Dr. Leonard Peikoff explained clearly in "Medicine, Death of a Profession", the governemnt has been pushing large quantities of funds into these two areas for decades. Of course, they have put much more into medicine than education, but the process is similar. Both sectors have seen large, consistent, rising prices for decades. In the case of education, I know that it has been rising for 7% or more since before 1990.

    It really isn't inflation, or even price inflation, because both could be financed through taxes or borrowing but the government. It is a redirection of the nations income and wealth. In both cases the government's action has been destructive.

    So, your good. Neither of the other two suggestions offered here would account for the constant increases over so long a time nor without the constant flow of money from the feds. There certainly could be other factors that could affect prices, but they are really trumpted.

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  4. Curtis, I certainly see lots of students like you describe, just going through the motions. That in and of itself does not make a bubble.

    Jennifer, I recognize the some of the same issues, but if it is not a bubble, then they should not call it one. Let's not confuse terms.

    C.W., thank you. The more I think about what a bubble is and is not, the more I realize education is not in one for the same reasons you specify.

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  5. Grant9:46 AM

    The point Jennifer Snow made is the real issue here. Whether or not that is technically a "bubble" is another issue; the one you raise in your response to her. Let's discuss that issue then.

    The ostensive definition of "bubble" would be the overevaluation of an asset. Technically, overevaluations without government interference would qualify as "bubbles." They *could* exist in a laissez-faire economy. However, nothing exists in a vacuum. Thus, any overevaluation which occurs cannot be said with certainty to have occured independent of government interference. Even relatively free markets - like high-tech, with its famous "bubble" - don't qualify. In fact, not coincidentally, the " tech bubble" occured at the same time as, and largely because of, government government interference in education.

    Why was high-tech over-valued? Supply exceeded actual demand. Even though much of the product was *hypothetically* valuable it wasnt *actually* valuable (a la the nerds who spent the 1990's *insisting* that Mac was "better" than PC? "Better? For what, and for whom?) For most in 2000, being able to track the topping-by-topping status of their delivery pizza, or compulsively checking their email, or shooting virtual M-16s at fellow gamers in Shanghi in real time on virtual battlefields just wasnt worth the cost.

    Why did it occur nevertheless? Excess disposable income aside (which is also caused by the same thing I'm talking about right now), one reason was *government encouragement of education* Many people, unable to find work after high school (because of government interference in the labor market causing off-shoring) had no choice but to go to college. It was either that or a dead-end job. Once they had invested all that money (read: maxed out their credibility) and time in college, they're going to make it pay come hell our high water (incidentally, the only reason why this was allowed to happen was because many people in finance - the people *evaluating* high-tech - thought they, too, were *entitled* to work in that industry simply because it was their major in college).

    But, as it already does, reality prevailed, and the "bubble" "popped."

    Did that stop the government from encouraging people to learn specialized, yet unmarketable (to say nothing of the "anti-skills" of most humanities degrees)? Of course not. America's strength and momentum could absorb smaller "bubbles" without having to whose the larger, more pernicious "bubbles" underlying them. That it what is happening now, however, because we've reached the point where America's strength and momentum has reached the beginning of its end.

    Anyway, I'll still concede that "bubbles" can occur in laizzes-faire, but for the life of me I can't think of one without the government's prints all over it. In any case, by ignoring Jennifer's point, youre just arguing semantics.

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  6. Grant, without coming to an agreement on semantics, the rest of Jennifer's and your argument is very confusing. So let's stop applying concepts in situations where they do not make sense.

    Here's how I see it:
    Is there an education bubble? No, because bubbles occur for assets, not services.
    Is education prices increasing dramatically? Yes, in part because of government initiatives.
    Are those initiatives wrong? Yes, they are immoral.
    Do these initiatives encourage students to enter unmarketable majors? Probably, yes.
    Do entry level workers need post-secondary education? Here we may disagree. I believe (given the poor state of many primary and secondary schools) that many jobs do need post-secondary training (not necessarily university training).
    What percentage of jobs need that training? I don't know. But the percentage has been and likely will continue to grow as fields become more specialized.

    However, you and Jennifer both seem to have a very low opinion of people in general (making poor education choices). I'm not quite so pessimistic. I've talked with enough students to realize that will many are confused about the best choices for their future, they mostly want to find that best choice for themselves. Obviously there are wide variances, but that's what I've observed.

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