Tuesday, February 15, 2011

The Education Bubble II

Last month I posted about how educational subsidies are a significant factor in driving up the cost of higher education. I asserted that we are building a bubble of false value similar to what happened in the housing market. I did not think myself a good enough prophet to accurately forecast how this would play out.

Perhaps it is important to understand why people seek a college degree. It is generally understood—and is heavily promoted by the higher ed establishment—that the chief purpose of getting a college education is to improve one’s career prospects. Although some have suggested that this shouldn’t be the top reason for going to college, spending $50,000 to $150,000 and four to six years of one’s life to improve one’s academic understanding without expecting to be compensated throughout one’s career is simply unrealistic for the vast majority. The fact is that most people pursue a college education to improve their career prospects and — whether they admit it or not — to enhance their social status.

Writer Joshua Fulton adds some fuel to the arguments in my post with this article on the Ludwig von Mises Institute website. Fulton begins by explaining the role a “free” university education is playing in the unrest in Tunisia and Egypt. After noting that nothing provided “free” by the government is actually free, Fulton cites the incredibly high rate of unemployment among college graduates (especially recent graduates) in countries like Tunisia and Egypt that heavily subsidize higher education.

There simply isn’t enough demand for what these graduates are trained to do. Their less educated counterparts have fared far better as far as employment goes. They are performing jobs for which demand exists. Few of these are high paying jobs. But a job that pays something is better than no job at all. Fulton notes that those that are angry, idle, and well educated have played a significant role in many revolts at least since the French Revolution.

While the U.S. isn’t currently running in the same realm as Middle Eastern countries that fully fund college education, “we are headed in the same direction.” Fulton writes:

“From 1997 to 2007, full-time enrollment in US tertiary education increased 34 percent. The average college student graduates with $24,000 in debt, a 40 percent real increase from 1997. In 2008, only 57 percent of students enrolled in a four year college graduated within six years. The unemployment rate for 16 to 24-year-olds is 52 percent. The underemployed as a group may be as large as the unemployed in America. For example, in 1970 only 3 percent of mail carriers had a bachelor's degree, while today the number is 12 percent.”

Fulton explains that government aid promotes higher ed inflation. This is not dissimilar from the way subsidies skewed the housing market.

Only 40 percent of student loans are actively being repaid. Since government picks up the tab on defaulted student loans (that are subsidized via low interest rates already), the system is rife with perverse incentives. Lenders feel free to give loans to those that would otherwise be considered a bad risk. Debtors that have been pushed into this trap while still very young feel less obligated to pay. For-profit universities are among the greatest benefactors of this taxpayer largess.

When it comes to student debt, many of the benefits are privatized while many of the costs are socialized. That’s a bad system.

As we continue along this trajectory, we will eventually cross the point where education consumers perceive that the cost of the average college degree outweighs its value in the labor market. When that happens the education bubble must burst as did the housing bubble when a similar realization hit that market.

As I said in my previous post, I don’t know if the bubble will rapidly collapse or will slowly deflate. I’m not prescient. But the day of reckoning must come. It will no doubt result in a lot of pain.


Charles D said...

So it's wrong to provide a free higher education to your citizens if there aren't jobs for them? Or is the theory that the money spent on education should have been spent (by the government?) on job creation? Is there any demonstrable connection? I doubt it. The unemployment in Tunisia is probably a result of the horrific levels of corruption in the Ben Ali regime and their demand to get kickbacks even from impromptu fruit stands.

The mismatch between college graduation rates and professional/technical employment opportunities can be corrected in two ways: either you increase the cost of education so as to place it outside the realm of affordability for most of the population (thus reducing supply), or you adopt economic policies that promote the creation of good paying prof/tech jobs (thus increasing demand). If you go with the first solution, you end up with a large population of frustrated, unemployed, undereducated, angry people. If you go with the second, you end up being the economic powerhouse of the 21st century. Your choice.

Scott Hinrichs said...

I appreciate your thoughts. However, I do not believe that our only choices with respect to funding of higher education are inflationary public subsidies or greater exclusivity than currently exists.

Charles D said...

So how should we fund higher education? If we don't subsidize, then prices will continue to rise. If we provide tax breaks to parents, then those parents whose taxes are high enough to take full advantage of the credits will be able to send their children to some colleges, but the poorer parents will not.

Should universities cut down on the pay and benefits of faculty and thus lose the better professors? Should they stop spending money on fund raising and alumni campaigns and fancy dorms to attract students? If so, where will they cut to make up the lost revenue? Should they eliminate varsity sports? Arts? Religion courses?

I would strongly support a measure that eliminated all subsidies, grants and loans that benefit for-profit colleges since they generally provide low-quality education and very high prices and only exist because of government spending. That would free up more money and more students for decent public universities and community colleges. Agree?