The Other McCain

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Higher Ed: A Bubble About To Burst

Posted on | April 6, 2012 | 18 Comments

special guest post by Meika Jensen

[I was approached via email by the author with a request to post on the higher education bubble. Give her constructive feedback, you scalawags.

In economic terms, a pricing bubble occurs whenever a commodity is traded in high volumes for prices that are far greater than the products actual worth. The inherent problem with type of market is that by the very nature of a bubble, eventually it has to burst. We’ve heard a lot about the US Housing Bubble, the China Stock and Property Bubble, and of course the Dot-com Bubble of the late 90s and early 00s. In each case, a period of euphoric buying and selling gave way to a sobering reality that purchases were worth far less than most consumers had been lead to believe. Recent chatter among economists and pundits is suggesting that the next economic bubble, a Higher Education Bubble, has already been forming for some time, and may soon burst.

Since the global economic collapse in 2008, more people have been delaying retirement. According to the Bureau of Labor Statistics, from 2008 to 2009, the number of people over 65 years looking for work increased a staggering 46%. From 2000-2009, the number of students enrolled in college increased 5.8%. An ever-increasing numbers of college graduates flooding the workforce where no one is retiring.

Meanwhile, according to the National Center for Education Statistics, from the 1999-2000 school year to 2009-2010, prices for undergraduate tuition, room, and board at public institutions rose 37%, and 25% at private institutions, adjusted for inflation. What does this all mean? Well, if the value of a college degree is determined by how much it positively affects one’s job prospects, then a college Bachelor’s Degree or Master’s Degree is becoming less valuable every year.  Simply put, the product (college) is becoming more expensive while its rewards are diminishing. A classic economic bubble scenario.

On paper, it appears a Higher Education Bubble is imminent. However, there are some experts who refuse to strap on their tinfoil hats just yet. They suggest that there are intrinsic differences between the value of Higher Education and the value of, say, a house or an internet domain name that will protect the institution from the traditional bubble-burst cycle.

According to Sandy Baum, senior fellow at the George Washington University School of Education, “When people lost their jobs or the economy turns shaky, a lot of folks return to school to learn new skills or bolster their resumes”. Unlike an individual who purchases a house that is inflated in value and has to deal with the repercussions after a real-estate bubble bursts, Baum suggests that the skills learned at university will still put an individual in a much better position than one without a degree. Even completing just part of a masters degree program may actually help. A recent Pew Research Analysis supports this view, showing that a worker with a bachelor’s degree still makes over $650,000 more than a high school graduate over their lifetime.

With markets becoming ever more globalized, competition is greater than ever. For the time being, it is difficult to argue with the lifetime earning advantages of a college degree. Current statistics, coupled with a culturally embedded belief in the importance of higher education create an environment where avoidance of a potential Higher Education Bubble burst seems nearly impossible. What an individual can do is make the most of their education. Take out as few loans as possible. Learn valuable and marketable skills, build an invulnerable resume and hope for the best. Even still, though, it might be wise to prepare for the worst.

Update: thank you, Instapundit!


18 Responses to “Higher Ed: A Bubble About To Burst”

  1. AnonymousDrivel
    April 6th, 2012 @ 6:37 pm

    I agree with the prediction of an inevitable burst of the bubble in academia. Ultimately it boils down to, “Those who can, do.” And the degree has less and less to do with that success in the marketplace.

    The better question is, “Of those credentialed, who actually learned anything of consequence and then, how did they apply that acquired knowledge?” A degree for the sake of a degree can be a pretty empty caloric dessert if there’s no intellectual meat in sight. Time will bear that out as it’s generally pretty difficult to hide ones inadequacies in an ever-expanding market of potential laborers.

    And let’s not even get into the dumbing down of credentials as academic institutions a) expand as a market while b) promoting their products to c) customers buying the illusion of riches no matter the parchment “earned.”

    The collapse will be hard. It will be long. And it will be evolutionary.

  2. newrouter
    April 6th, 2012 @ 7:19 pm

    For the time being, it is difficult to argue with the lifetime earning advantages of a college degree.

    with tuition at these price levels, its easy to argue that most college “education” is worthless.

  3. BLBeamer
    April 6th, 2012 @ 7:39 pm

    a pricing bubble occurs whenever a commodity is traded in high volumes for prices that are far greater than the products actual worth.

    I don’t believe that is a useful definition.  No commodity has any inherent worth except what consumer(s) are willing to give up to attain it.

    Bubbles occur due to buyers’ high degree of speculation as to their (mistaken)  belief in the future prices of the commodity.

  4. Huggy
    April 6th, 2012 @ 7:50 pm

    The US is about to go into reverse immigration. Free health care is worthless if there are no providers or if the providers are scam artist. Food stamps can’t buy food that doesn’t exist. All the debt slaves will move south. Since the US military is being gutted the well trained soldiers will start carving out kingdoms. I hear Venezuela is about to go up for grabs.

  5. Evi L. Bloggerlady
    April 6th, 2012 @ 8:14 pm

    I hope you sent a copy to the Blogfather because you know how he loves talking about the education bubble.  

  6. Adobe_Walls
    April 6th, 2012 @ 8:20 pm

    Higher education suffers from excessive funding largely if not wholly due to the federal government. More money thrown at any product whether it’s heavy equipment or schooling increases it’s cost. Subsidies that increase demand due not automatically increase supply, some percentage will go to increased costs of the product.

  7. Adjoran
    April 6th, 2012 @ 8:32 pm

     The federales increase subsidies to both schools and students regularly, but all it does is get the tuition and fees raised to match the student support, and allow institutions to feather their endowments while living off the taxpayers.

    There should be no role for government in education.  It’s not an enumerated power, and it is obviously not something which can be done either effectively nor efficiently from a centralized bureaucracy.

  8. Adjoran
    April 6th, 2012 @ 8:38 pm

     Venezuela was one of the jewels of the hemisphere before the socialist Chavez took over.  He did for them what Castro did for Cuba, and what Obama will do for America if we let him.

    But the Venezuelans are a great people with lots of resources, it would be a good place to rebuild.

  9. Pathfinder's wife
    April 6th, 2012 @ 8:45 pm

    I’ll weigh in as somebody who used to teach at the college level and at secondary ed:  the biggest issue has been the loss of cultural value in trade schools imhao.
    Some time back (when I was a kid even, so it’s been a while) there was a concerted effort to convince people that everyone could go to college (who did this is anybody’s guess, but I have my hunches).  In order for everyone to go, the colleges had to lower their standards; lower standards and a larger market of bachelor’s and then master’s degrees does the usual thing to the product.  However, there was an ever increasing demand for the vaunted college education (which people were told was the gold chip to the good life)…so the colleges, by this time getting a lot of federal and state money not for the work they did but how many students they enrolled, raised prices (in part to keep up with federal/state requirements for said money) and lowered standards more (and not just in the students they accepted, but in curriculum and in instructors).  Trade schools in the meantime vanished, and the junior colleges have taken up some of the niche, but they themselves are often saddled with the false notion that they are somehow just smaller versions of 4 years rather than the glorified trade schools they really are.
    Also, there has been a concerted push which can only be described as political in regards to not only the curriculum taught but how the professors instruct within their classes.  So, there has been a steady erosion of the very curriculum (part of this is also due to the larger audience of students: the syllabi and classroom content has to be dumbed down and become more “attractive” to the students to get them in the auditorium chairs with the resultant drop in curriculum standards).

    I could go on all night about this and provide personal examples, and this is just a slight overview of what I see as the main issue, but this is a small summary — now, of those trends which came first is a chicken/egg arguement, but the fact remains that it is there…and it also affects what happens at the secondary level, which affects primary.  
    All I know is it has made education (for anyone who actually cares about educating) an excercise in masochism and has turned what was once one of the better education systems in the world into a cesspool in short order (and if you think America is bad, you should see some of the kids from overseas…I taught ESL…the average foreign student of average abilities is, sad to say, if anything in worse shape than ours are…that’s not a compliment to us).

  10. Pathfinder's wife
    April 6th, 2012 @ 9:11 pm

    I might also add: that as long as the economy and corporate hiring practices remain the way they are (which  the unemployment/economy figures will support, so they aren’t going to change anytime soon) there will be no let up.

    In a lot of ways this is very reminiscent of what I saw and read a little about, and heard some more  in regards to the education system in the U.S.S.R.  You have a whole bunch of overeducated, but completely lacking in holistic knowledge and critical thinking skills, people who are working very low end jobs.  It isn’t going to go away I’m afraid — not unless something really drastic happens.

    And private schools/home schooling/vouchers isn’t going to cut it: that isn’t fixing the cultural mindset at all and you could wind up missing out on some of the best and brightest because their families couldn’t afford such things (remember: the old system of merit scholarships is also almost decimated).

  11. Claude Hopper
    April 6th, 2012 @ 11:39 pm

    Come Nov let’s pop the Bama bubble.

  12. Adobe_Walls
    April 6th, 2012 @ 11:58 pm

    I’ve no problem with local schools run and financed by local governments.

  13. Adjoran
    April 7th, 2012 @ 2:24 am

     Me either – hence the “centralized” . . . I mean federal, the states are free to do as they see fit.

  14. Amit Kumar
    April 7th, 2012 @ 4:57 am

    Thank you,

    The given information is very effective.

    I’ll keep update with the same.

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  15. teapartydoc
    April 7th, 2012 @ 9:28 am

    Enrollment statistics this fall will be telling.  Already, some law schools have noticed a decline in applicants despite freezing or lowering tuition.  The Chinese are a big part of the out-of-state money that is propping up Big Ten universities while the states lower how much they put in, and the Chinese economy, along with the impending decline of college-age Chinese will have a big impact.  Every time the BLS statistics come out, we see an increase on the number of people looking for work.  How many of those have been or are going to school?  How many of them are dropping out of school as well as out of the workforce? 
        I have been watching the numbers at our local university closely, and last year predicted that that year would be the peak, expecting a leveling off, or decline this year.  We’ll see.  But one thing is almost certain:  it is going to start sometime, and I think it will be sooner, rather than later.  And the earlier post is dead-on.  The thousand year reign of  the Anti-Christ that is the university is about to come to an end.

  16. ThePaganTemple
    April 7th, 2012 @ 11:21 am

     Venezuelans are leaving the country in droves, and according to what I’ve heard, they wouldn’t be in a big hurry to go back to help in that rebuilding. Its more than just Chavez, the so-called Bolivarians, just a South American term for socialist, has infested the country like so many dens of vipers. It wouldn’t be an overnight transformation, to put it mildly. And by the time it gets around to where its remotely possible to transform the country, most of the people that have left will have put down new roots here, started  brand new lives, and won’t have the inclination to go back to what they remember as the hell hole it was.

  17. Joe Kranak
    April 7th, 2012 @ 12:39 pm

    I agree with you that higher education is in a sort of bubble, but I don’t think it’s going to necessarily burst like most other bubbles because it’s a different type of bubble.  With a speculative bubble, like say 90s the stock market bubble, a big part of what drove the bubble is that people bought internet stock in the hope that it would go up in value.  In other words, buying stock was divorced from any real assessment of the value of the stock, but was rather driven by the hope that other people would be willing to buy it at a higher price.

    In higher education the situation is slightly different.  People don’t pay for education because they think it’ll go up in cost.  They buy it because they think it’ll get them a better job.  The bubble is created, as other commenters have already mentioned, by the subsidizing of education.  I think it primarily comes from student loans, which are disseminated to all students who want them.  This increases demand and insulates colleges from the normal types of price pressure that would keep prices in the realm of reason.

    Now, you might think that this is similar to the housing bubble, where loans were thrown at lots of high risk borrowers, driving up demand and prices (though the type of speculative pressure of people buying in hopes that the price would go up were also in play here).  But the difference is that when borrowers in the market got in over their head and defaulted, it had direct effect on the housing market.  Their foreclosed homes went on the market, driving prices way down.  In the higher education market, the situation is different because a) students can’t default b) if students struggle to pay back loans, the higher education market is unaffected (since the education is already over and paid for).

    So long as the student loan market remains the same and is protected by the same regulations, banks can give out loans with low risk to even high risk borrowers and higher education prices while remain inflated.  This is why the higher education has persisted now for decades, while other bubbles usually pop in a few years.  So, I wouldn’t expect it to pop any time soon, unless changes are made in the law.

  18. CService on-hold
    April 8th, 2012 @ 6:25 pm

    Hey Kumar, instead of “keeping update  (sic)  with the same”, how about re-installing my Windows Vista, like you promised?  What am I paying you for anyway, curry-breath?