The Great Education Bubble
The recent meltdown of the mortgage bubble illustrates a basic insight of Austrian Economics: cheap money leads to distortion and malinvestment, which can only be resolved through mass liquidation. Liquidation is an anodyne term, but in real life it means lost jobs, declining wages, “upside down” bank notes, bankrupt businesses, and stagnant housing values. The Federal Reserve’s decision after the September 11 attacks to drop interest rates precipitously—at one point lowering the federal funds rate to 1%—contributed significantly to the situation the country finds itself in. The sheer cheapness of this money created various pressures on lenders to loosen lending criteria, which in turn led to massive real estate speculation, artificially inflated housing values, and, now that the gap with actual economic demand has appeared, a necessary and precipitous drop in prices.
The real estate boom is not the only bubble in our economic life, and when these other credit-driven bubbles burst, similar episodes of liquidation will be necessary. Federal subsidization, coupled with immaturity and ignorance by borrowers, has created another bubble that threatens to burst: the great education bubble.
The latter half of the Twentieth Century has led to an explosion of spending on higher education in the United States. In 1900, 2 percent of young people went to college; today the percentage is above 30%. The GI Bill was a major factor in expanding college attendance after WWII. Avoiding the Vietnam draft was another. In the years since, the number of educational institutions and offerings expanded. Many small teachers colleges became universities. Notoriously unrigorous “for profit” universities appeared on the scene, while large and growing McUniversities are found in every state. The cost of education has risen, as well; in fact, it is an order of magnitude larger than the rate of inflation in the economy in general. All of this growth—in institutions, students, degrees, and educational investment—is driven by government-subsidized credit. As in housing, excessively cheap credit has created the conditions for a correction, which will lead to fewer universities, fewer degrees, recalibrated obligations to lenders, and, one should hope, a change in the culture of higher education in the United States.
While it is laudable that the United States has become more of a meritocracy with few barriers to higher education for qualified students, human nature has not changed. Only a small percentage of students can really benefit from a traditional university education. Yet many people desire a degree for themselves and their children, even if they don’t really care for what it entails. Underlying much of what we do is the great American goal of upward mobility and social respectability. As Paul Fussell observed, “In the absence of a system of heriditary ranks and titles, without a tradition of honors conferred by a monarch, and with no well-known status ladder even of high–class regiments to confer various degrees of cachet, Americans have had to depend for their mechanism of snobbery far more than other peoples on their college and university hierarchy. In this country, just about all that’s finally available as a fount of honor is the institution of higher learning.”
Nonetheless, money is the other great American passion. People do not attend modern-day universities to study Plato and Aristotle and Shakespeare, so much as to get a credential to obtain a job that gives them access to an upper-middle class standard of living: plasma TVs, SUVs, a nice house in a neighborhood with “good schools,” and the like. To accommodate the ranks of modestly intellectual students, educational offerings have become more vocational in nature, including such dubious degrees as “packaging” and “communications.” For a lot of reasons, university graduates typically earn more than those without a degree. Aspirants and their parents have reasoned that the degree itself—rather than what it once signified in terms of IQ and work ethic—is the key. This is a confusion of correlation and causation of the worst kind. Parents and students of modest IQ are starting to realize that a $100,000 student loan obligation for a Nova University degree hinders, more than it advances, the goal of an upper-middle class lifestyle. As this happens, this racket will collapse. Indeed, the decline of male university attendance suggests that this process is already underway.
There are several reasons degrees, universities, and the associated educational debt load has risen so dramatically. For starters, the folk wisdom persists that universities are a good investment. More important, the young decision-makers delay payments on their student loans for four years or more. Like adjustable rate mortgages, the tangible pain and constraints of these obligations are hard to fathom. Unrealistic hope about future earnings encourage additional indebtedness, and everyone from parents to guidance counselors encourage educational investments without rigorously considering the student, institution, and degree involved. Students and their parents may even reason that the market itself is revealing the relevant information and that the return on investment must be some multiple of the present-day cost of education.
Universities certainly have little incentive not to maximize tuition and encourage the acquisition of student loans, because they get paid up front by students. Subsequent defaults do not affect the university and only create burdens for the lender, the borrower, and the federal student loan insurance programs. Finally, the near impossibility of escaping student loans—even through bankruptcy—is not fully appreciated by borrowers. Everything from deficiency judgments on mortgages to credit cart profligacy can be set aside through bankruptcy, but not student loans.
Lenders are already starting to get the message. As the federal government has withdrawn its once generous support for student loans—through the (now private) Sallie Mae Corporation and its insurance programs—banks have tightened up lending criteria as well. While the Harvard and Princeton students will still do fine, folks at the Novas, Fiskes, and Culinary Institutes of America will face more rigorous scrutiny. Many lenders will likely leave the field altogether, a process already begun because of the meltdown of secondary markets in securitized loans of all kinds, including educational loans.
But the biggest revolution will have to come from students and their parents. As young college students working as secretaries, paralegals, and restaurant managers see the kids from shop class, military technical skills programs, and other “blue collar” fields buying nicer homes, nicer cars, taking more vacations and generally doing well, word will trickle down to the buyers and their parents. This is the essential thesis of the best-selling book: The Millionaire Next Door. Instead of repeating hoary and well-meaning advice about education, it’s becoming clear that the most secure jobs will remain those that must be done locally. Everything that involves a mobile product—from programming to engineering and other fields that require college education—have been pummeled by outsourcing and will remain less appealing. If it happened to telephone engineers in the late 1990s, why not accountants and marketers tomorrow?
The declining economic fortunes of college graduates, coupled with tales of white collar drudgery, suggests that necessary and high skill blue collar jobs—plumbing, car repair, cable installation—will become more appealing and more renumeritive. Graduates of high school and community college vocational programs, far from dooming these students to second class status, are starting to have the last laugh as marginal college graduates (and drop outs) enter default status on their student loans. As the information of inflated degrees expands, businesses will likely drop college degree requirements to obtain quality employees, instead giving high marks in “two year” training programs more respect than four years of partying at State U. Not available when Fussell wrote his work Class, the U.S. News college rankings have done much to demonstrate to the general public how little a degree from a third or fourth tier institution is worth.
A certain percentage of students belong in college, benefit from it, and have higher wages afterwards. Their ultimate life successes stem from the qualities that got them into a top school: brains, a work ethic, comfort with complexity, and creativity. An education for these kinds of skills and abilities is not for everybody. And this is not a tragedy. In America, folks of average intelligent are neither handicapped nor destined to a life of unproductivity. An advanced economy like the United States’ provides many opportunities for nearly everyone to do well, engaged in everything from service occupations, repairing complicated devices, people-centered occupations, and the like. But most of these occupations do not justify or require a four year degree. The reasonable (though modest) incomes of these positions make a $75-150K student loan burden a very real one.
Government insurance, government subsidies, borrower ignorance, and a culture of excessive optimism have done their part to create a distorted market filled with mediocre colleges and mediocre college graduates. Just as the McMansion bubble couldn’t last forever, neither will the education bubble as defaults from low-earning borrowers put extreme stress on lenders to marginal applicants. The borrowers themselves may soon create a political constituency demanding relief in a way that shifts costs from the government to private lenders in the form of more generous bankruptcy protections. This will be easier for liberal politicians to promote than a government bailout, but it won’t be good news for the University of Phoenixes out there, nor all the other mediocre institutions propped up by disappearing cheap credit.
Comments
Mr. Roach:
Please comment on the relationship of tuition rates to the private wealth redistribution goals of universities. Tuition is very high at many of these institutions, but in part because not many people pay full tuition. Rather the full-payers subsidize the discount tuition payers—chosen for their discount for reasons of athletic prowess, relative poverty, or skin color.
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Much of the emphasis on higher education rests on the tendency of many employers to not want to train their own employees. Also, degrees still give some notion of competence in the hiring process where the slightest misstep can result in a law suit. If businesses were more open to things like apprenticeship programs and internships, the need for overly expensive higher education could be minimized. The most important change in higher education in the U.S. is the rise of the community college. Here, one can learn most everything necessary for career change in an atmosphere where the faculty are generally practitioners of their craft, and are rewarded by classroom performance, not useless articles in obscure academic journals.
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This certainly drives some of the nominal increases in tuition rates. At many schools, 80% or more of students receive some financial aid. In practice, this has driven the lower middle classes out of the ranks of top schools. Upper class ($150K+/year household income) families end up subsidizing middle class families ($50-150K in household income). So the ostensible purpose of many grants and loans is apparently creating system-wide impacts that hurt the most needy students and families. (The dirt poor technically qualify for a lot of grants, but relatively few of them can make it into, say, the top 50 colleges and universities for a variety of reasons, not least IQ.)
The financial in many cases consists of authorization to take out subsidized educational loans. So this seems to depend on the cheap credit, while driving the nominal price of education higher.
I’m not 100% sure how this all shakes out from the standpoint of the bubble, other than the fact that I do know costs and educational investment in general is many times higher than it was in the past in the aggregate.
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Mr Roach, you just bashed Libertarianism a while ago in an article, so why the sudden discovery of insightful Austrian Economics?
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Economics, like all social science, is value neutral. It is fundamentally descriptive of the unintended consequences of human action, including things like fiat currency, central banking, price controls and the like. Knowing those “unintended consequences,” we can still choose for a variety of reasons to have the state intervene in the economy to, for example, prevent fraud, define property rights and their boundaries, enforce contracts, and the like. Just because I don’t like loose monetary policy doesn’t mean I have to like gay marriage, pot-smoking hippies, or the like, which one can rightfully oppose for a lot of reasons, none of which are primarily economic in nature.
Every discipline has its proper scope. I wouldn’t look to Ludwig von Mises for insight into what makes a great painting, how to command a platoon, or how to cook a quiche either. In other words, let’s not get more mileage out of great economists and proper economic thinking, just because they have written obiter dicta about philosophical and political matters. This is not to say their opining is wrong on these matters, just that the quality of such opinions is distinct from the more rigorous and intrinsically value-neutral insights of economic science. Surely, as a student of Austrian Economists, you know that the heart of their system is the supposed “subjectivity” of economic values. I think this may be true in economic matters--bread vs. butter vs. DVDs vs. old Camaros--and need not lead to nihilism in moral matters, nor traditional matters of legislation dealing with morality. In other words, we mus step outside of economics and get our values from some other source to apply the insights of economic science.
In other words, we can dislike loose monetary policy and loose morals, and there’s no reason the state’s intervention in the latter means we have to accept fiat monetary policy or other stupidities.
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Incidentally, I was a 1993 graduate of the Ludwig von Mises Summer Institute and had the good fortune to meet Murray Rothbard before he passed; I even have an autographed copy of What Has Government Done To Our Money? So, this may seem confusing to you, but it all makes sense to me, and I think it would even make sense to Murry et al., though I’m sure he’d disagree with my more authoritarian and paternalistic impulses, but not for economic reasons.
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As an incoming college freshman I must agree with Mr. Roach in the statements of the above article. Many schools(my own included) see college enrollment rates of 70 percent or higher, of which only a handful are to institutions in the upper echelons, such as the Ivies or schools like Carnegie Mellon or Rensalier. This inevitably leads to the failure of the hoards of “fringe students” who would never have thought to attend school in an earlier age. While it is true that the majority of upper echelon students are from the upper income brackets it must be noticed that a growing minority of such students come from the lower brackets. This minority, realized by the growth of standardized testing, is an obvious cause of the rising cost of education in that their, or shall I say our, so-called need for massive loans places the nation at a paradox: to tighten the market by raising the cost of debt or to foot the bill through loans and/or tax breaks and hope there isn’t a wave of defaults. In all honesty, the latter part is a question of politics. I would like to ask Mr. Roach for his opinion of what shall realistically happen in the field of government assistance for those defaulting on student loans.
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“doesn’t mean I have to like gay marriage, pot-smoking hippies..”
I don’t like them either but that doesn’t mean we have to burn them at the stake
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Jerry,clearly, things must either be capital offenses or be completely lawful. There’s no in between. Why, just yesterday, I heard of someone burned at the stake for failing to obtain a zoning variance.
Do you concede my point on the value-neutrality of Austrian Economics? (Incidentally, Rothbard presumed to deduce libertarian philosophical-value positions from the same supposed metaphysical foundations of Austrian Economics in a specific theory of “human action.” I’m not sure how much Austrian Economics depends on this expansive theory of behavior to be valid, but, nontheless, he recognized that the two concepts--moral philosophy and economic--were distinct.)
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I agree with your economic analysis, and I don’t want to bring this comment thread off topic, but I did want to bring up questions about your last post but I was not sure if you checked it anymore.
I did not mean to imply “all or nothing” but what I simply meant was that government is supposed to deal with protecting lives and personal property rights, anything else is left to the individuals. Since if we try and regulate anything besides those, then we enter the whole mess of who decides what is right and wrong, under what right and reason do they do so, what are the punishments and what of those individuals who have behavior that they don’t have full control over and that don’t affect others.
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My very middle class cousin got into Cornell, but only received a small amount of aid. She ended up taking a full ride to a lesser school.
They had money saved up and could have done it by stretching, probably taking some loans too, but in the end she elected not to do so.
I understand the choice, but I supported her going to Cornell.
It is a hard for someone who is not used to those types of figures to take such a huge step and spend that much money.
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In many ways college has becomes what high schools was for much of the last century,
a place where middle class can use its diploma to get into the job pool. There are simply
not enough jobs where a high school education or GED is enough to get by anymore, not if
you want a middle class lifestyle. So instead of college being an intellectual community
it becomes vocational and research community, because that’s where the money is. Steve
Berg is right that if we had more apprenticeships and business training for students, we
can restore the proper balance and return the college and university system back into
what it was orginally intended to become.
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I agree with the author’s analysis, but I think there’s an additional degree of complexity that needs to be considered.
This isn’t so much an issue of good college v. bad college. Sure, there are plenty of marginal institutions around these days, but their status alone does not determine the chances of their graduates.
As someone who is graduating from a very good college this week, I’ve found that many of my friends have had significant difficulty getting jobs while others have gotten Fulbrights, excellent starting jobs at large corporations, and great grad school offers. If one relies exclusively or almost exclusively on his degree to market himself in applications, he is going to be in for a rude awakening. A degree alone won’t guarantee very much. You need to be active, engaging in leadership roles, getting involved on campus, finding quality internships or summer work, and you must be able to get high-quality letters of recommendation. Too often, students simply ignore this and think that going to college will get them a job.
I know students who have attended lesser institutions and done just fine. They worked hard and did what they needed to get ahead. Sure, there may be some employers that are prestige whores, but students at less rigorous institutions will be fine as long as they put in the extra work and don’t expect their degree by itself to get them where they want to go.
Those who attempt to skate by on their college degree, and sometimes meager internships, are the ones who seem to end up in entry-level jobs with pitiful hours and pay. They’re the ones who become “white-collar factory workers” and wear suits to work even though they make less than their mechanic or plumber friend. They often sit in tiny cubicles for large portions of their career and devote their time to meaningless work, all the while making a few others very wealthy.
Those who take advantage of college, put in the extra effort, and graduate with stellar resumes and prestigious job offers are the ones who I think have the opportunity to lead a far more interesting life.
Overall, while I agree with most of your analysis, I think the college name on the degree is less important than the qualities, drive, and motivations of the individuals who earn them.
The problem is that so many marginal individuals are spending time in four-year programs and racking up absurd amounts of debt when they would be better off elsewhere.
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“They often sit in tiny cubicles for large portions of their career and devote their time to meaningless work, all the while making a few others very wealthy.”
Well since their work is meaningless, they really aren’t making anyone wealthy. They actually represent an inefficiency in the economy. That’s what you get when you make employers use an increasingly meaningless criteria to screen their employees - i.e., a Bachelor’s degree.
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I enjoyed reading the article; however, I believe the author’s emphasis on blue collar
jobs as a means to upward mobility failed to consider a) the impact of legal and illegal
immigration on wages in service and construction jobs, and b) the inadequacy of public
education in many metropolitan areas. Massive immigation since LBJ’s “Great Society” in
the 1960’s have kept an artificial lid on wage inflation in many blue collar or service
sectors. Even if this were not the case, many students likely need post-secondary
education to fill the wide gaps in basic knowledged missed by our public education
system.
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David,
I should have better explained myself.
What I meant by meaningless is that the job has little meaning for the person doing it. Many people find meaningful work (some doctors, pastors, lawyers, nonprofit workers, teachers, etc). However, I have a difficult time believing that someone working for an insurance company finds meaning in his work. Such environments are like white-collar assembly lines, with each person doing a portion of what the corporation needs to function.
However, while meaningless, such work does make a few rich. Those running large corporations certainly profit from the work done by the lower-level workers.
That’s what I meant by my above statements.
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“A certain percentage of students belong in college, benefit from it, and have higher wages afterwards.”
In the grand scheme of our species, it doesn’t really matter if the student benefits from college. College is a quid-pro-quo, and what matters is whether society is benefiting from the education of the students, and how many need to actually be highly educated. The current system is simply additional years of entertainment at a high price, so everyone is fooled into thinking they are getting more than they would from experience and books on their own simply because the credential allows them to buy more ‘stuff’.
I think we only need the 2% going to college, and the rest should be simply studying for life as they do useful work. We could also eliminate about half to 3/4ths of the high schools in this country and not see a significant change in innovation or technology.
What are people FOR? It’s time to grow up as a species and start planning our behaviors as though individuals can be useful to the world as something other than consumers of services and resources.
Great work. Thanks.
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Ryan,
It is certainly true that many supposedly white collar workers are actually performing work that is equivalent to an assembly line factory function. And if you are saying that a college degree with its attendant debt is actually more harmful than helpful in these cases, your point is a very good one.
But I think you will see after you’ve been out of college for a few years that there are a lot of people that get hired into positions that require a college education and then basically just hang around until the next recession forces the managers to contemplate an unpleasant round of firings.
While this is a major inefficiency in the economy, there is one benefit of this system that goes to the workers who do prove productive. With the bar set so low, productive workers can find time during the day to devote to unproductive (to the company at least) personal pursuits, such as for instance, posting comments on blogs.
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