The Education Bubble

Talk of the—and I mean the—education bubble is everywhere. But nowhere is it more succinctly or beautifully demonstrated than in a picture created by Mark Perry of the American Enterprise Institute.

It has been shown in many places, but for ease, it is re-pictured here (I wish I would have thought of this).

Education Bubble

What first hits you is the red bump—i.e. the bubble—in housing prices compared to the “consumer” price index (in blue). Everybody knows what happened when this bubble was pricked and burst. But just look at the tuition line (in brown)! It’s been called a bubble, but that’s clearly too weak a word. This is Weimar Republic-style inflation and it cannot last.

An anecdote: The place I am teaching has increased its tuition over 300% in something less than a decade. This is, as the chart shows, typical. Glenn Reynolds (a.k.a. the Instapundit) quoted from a Money magazine story which said, “After adjusting for financial aid, the amount families pay for college has skyrocketed 439 percent since 1982…Normal supply and demand can’t begin to explain cost increases of this magnitude. [ellipsis original]”

If you have any sense of the value of money, you should be agog. Over 400 percent since 1982! Over 300 percent in just the last ten years! (Look at the “kink” in the brown line in 2001.) Again, this cannot last. But why is this trend here and when will it end?

Reason number one: too many kids are going to college. This is usually expressed as “a greater percentage of high school graduates are attending college”, the tone suggesting that this is a good thing. This means that more professors must be provided to teach the influx. And more buildings must be created in which to teach and house them.

And, best of all, more administrators must be hired to strengthen and enlarge the educational bureaucracy. Why, at the place in which I am visiting, there are no fewer than four separate offices devoted to “diversity.” This is natural: the larger a bureaucracy becomes, the larger is seem to need to be.

At least the kids are benefiting, right? Wrong. According to Barone:

The National Center for Education Statistics found that most college graduates are below proficiency in verbal and quantitative literacy. University of California scholars Philip Babcock and Mindy Marks report that students these days study an average of 14 hours a week, down from 24 hours in 1961.

The American Council of Alumni and Trustees concluded, after a survey of 714 colleges and universities, “by and large, higher education has abandoned a coherent content-rich general education curriculum.”

They aren’t taught the basics of literature, history or science. ACTA reports that most schools don’t require a foreign language, hardly any require economics, American history and government “are badly neglected” and schools “have much to do” on math and science.

Reason number two: too much cheap government-provided—meaning out-of-your-pocket-provided—money. Michael Baron agrees: “Government-subsidized loans have injected money into higher education, as they did into housing, causing prices to balloon.”

Reynolds quotes a New York Times profile of “Courtney Munna, a 26-year-old graduate of New York University with nearly $100,000 in student loan debt.” Her “degree”? Religious and Women’s Studies. Does it make sense to you that a bank would make Munna these loans?

Remember Obamacare? To pass it, Congress had to invent a screwy legal maneuver that would make it appear that Obamacare would be “cost free” in terms of the federal budget. To do this, the government took over all student loans. Make sense? Congresspersons reasoned that if the government issued loans, the process would be more efficient and cheaper than if private businesses did so. I hope you weren’t drinking when you read that.

Anyway, the result will be: look for more loans and more money pumped into the system. This will be supported by university bureaucrats (they get bigger offices) and teaching unions (they get bigger offices, too). Nobody will have the guts to turn down what appears to be “free money.”

Reason three: Businesses are lazy and growing dimmer. In some sense, people like Munna are being rational. They are told by unthinking businesses that “You need a ‘degree’ to work here.” The specifications of the “degree” don’t matter, just that you have one: a “degree” functions more like an amulet than as a marker of ability. Since any old “degree” will work, why not one that is easy and content-free like Women’s Studies?

This system feeds back on itself. Perhaps Munna will be awarded a job in a business that requires a “degree”. Our Munna will then likely be involved in selecting future new employees at her organization. Using the skills instilled into her from her Women’s Studies studies, the first question Munna will ask is, “Does the prospective employee have a ‘degree’?”

And so the great cycle of college education returns to the beginning.

See also these stories by Mike Riggs and B. T. Donleavy.

22 Comments

  1. why not one that is easy and content-free like Women’s Studies?

    I’ll just step back out of the way now.

  2. This is very interesting stuff but …

    The link in Mr. Perry’s article doesn’t lead to the tuition data. I suspect that the chart is based on “list” prices rather than the actual prices paid net of scholarships and grants (not loans) which would bring the line down a little.

    If the rising tuition is multiplied by the rising number of students the story would be even more dramatic. But community colleges claim to be playing a role in keeping cost down through lower tuition, convenient location and on-line classes.

    Many of Ohio’s 23 community colleges are reporting record enrollment, said Matthew McClellan, director of communications for the Ohio Association of Community Colleges, a non-profit organization that advocates for the schools at the state level.

    The 2009 statewide enrollment of 202,000 was an increase of 32,000 students from the previous year, he said. Projected enrollment this fall is about 220,000.

    McClellan said community colleges have attracted students while remaining affordable and accessible.
    http://blog.cleveland.com/metro/2010/08/community_colleges_post_record.html

  3. Speed: for some analyses, the list price is all that matters. After all, the university IS getting that amount from someone, whether student, scholarship fund, state, or federal taxpayers.

    My big concern about the Higher Ed Bubble is how we Lowly Lecturers are going to ride it out. Doing the same old Talking Head lectures 3 matinees a week certainly ain’t going to get it, and pushing out multiple-choice workbook exercises over the internet just invites ridicule from anyone with a grain of sense. I’m working my butt off trying to restructure my courses to offer every student ~$1000 of added value over what they could get by doing inexpensive self-study with a Schram’s Outline and some Khan lectures. Right now I figure I’m at about $200, and I’m running out of low-hanging fruit…

  4. “After all, the university IS getting that amount from someone, whether student, scholarship fund, state, or federal taxpayers.”

    Are they? I thought a lot of schools had scholarships that were paid with other people’s tuition. Maybe not.

  5. Once you have established your college as elite, you can charge any rate of tuition you choose and someone will pay. Many of these colleges have applicant falling over one another to get in. In fact, the exclusivity of the college is a big selling point. “XYZ college accepts only 1/23 applicants.” Who does this serve? But if there are 23 people in the wings to take a student’s spot, should the administration care if some students can’t afford the latest tuition hike? Once Harvard hikes the full freight tuition, the next tier down, makes a proportional rise. There is no association between cost and price.

    There is an obsession to climb the ladder to “elite university.” Colleges spend a lot of money to attract a small number of students. They upgrade perfectly serviceable facilities. They hope gee-whiz aesthetics will attract better students. And create ever more esoteric degree programs.

    There has been a large redirection of funds from programs to endowment. The theory behind this is that income from the endowment would be a smooth source of cash flow compared to sources such as grant funding. With the market meltdown it has actually had the opposite effect.

    I haven’t seen any official statistics on the matter, but I am willing to wager that the ratio of administrators to professors has doubled in this time period.

    Don’t worry that kids are not required to learn economics. It is one of the most popular majors as it is. And, economics, as taught in the academy, is largely bullsh!t.

  6. I agree that the idea that to get a job you need a “degree” regardless of type, is a ridiculous one. Of course, it is true in the practical sense since so many employers require a degree or pay more if you have one. But if the degree does nothing to aid or inform your ability to perform your job functions, or add any value to the company at all, what use is it to require a degree?

    I’ve heard arguments that a degree shows the candidate’s dedication, perseverance, or some such but I don’t buy it. Many degrees are easy, content free, and require little if any effort from the student to complete. The mere fact that you can graduate with a C average when most classes grade on a curve shows how it is nearly impossible to not graduate if you manage to show up to any classes at all ever.

    All that aside, there are many professions that require actual training to perform the tasks required. Some of these professions benefit from knowledge and experience gained from a related degree program, but many others require certificate or licensing programs, trade school, or even on the job training. Some professions that benefit from a degree program are just as well served by a technical degree (akin to an associates rather than bachelors degree), or other form of training that is very specialized.

    All in all, college isn’t for everybody. Even those who learn a lot and have a good time aren’t well served by their educations. This is especially true since colleges neglect many important fields of study that round out a person’s knowledge in favor of additional specialized classes (or electives, or filler courses that add no value whatsoever).

  7. Recalling the professor’s recent admonishment a “college education” is not the same as “job preparation”, I’m also wondering if the vanishing US employment situation might still be contributing to the higher education bubble just because of uncertainties in the marketplace. “Nothing dynamic to “do” for a living so might as well stay in school longer – living off the folk” reasoning, don’t you know.

    The other part of this is those of you currently “in” higher education have got to be wondering what happens to you personally when the bubble bursts.

    It was the best of times. It was the worst of times. Bummer.

  8. It would be interesting to see a separation in the graph between state universities and private universities.

    Private universities have generally higher tuition it has been that way for a long time as they have to cover nearly all of their costs out of tuition. My susspicion is that the trend is being driven by state universities that started out with artificially low tuition due to state funding being driven to raise tuition to levels approaching private universities due to declining state funding. There are far more state universities, with generally larger student bodies, than private universities so I think it likely that a much lower trend in tuition increases by private universities would have little impact on the over all trend.

  9. Slyfield has a very good point. I tried the ‘data here’ link in the Perry article and it seems to lead to a paywall. Without the raw data or at least futher explaination, we can’t tell if or how the tuition average is weighted. If high priced, small enrollment schools are simply averaged with moderate priced, large enrollment schools, the result over estimates the effect.

    This is kind of like the global warming debate. Show us the data. I don’t doubt there is a tuition bubble, but have no confidence in the magnitude portrayed.

  10. If you want to know a little bit about Everything Wrong With Higher Education in America, have a look at Webster University:

    http://en.wikipedia.org/wiki/Webster_University

    Over 15,000 GRADUATE students, but less than 5,000 undergrads at over 100 campuses world wide. “Over 100 campuses?” you ask.

    Make sure to click through to their list of campus locations. Almost every Army and Air Force base in the country has a Webster Campus. Gee, I wonder who is paying the tuition for all those GI’s?

    And Webster is almost entirely staffed by adjunct and part-time faculty (not that there’s anything wrong with that, I used to be one myself, though not at Webster).

    They are perhaps the prime example of the “degree as talisman” phenomenon that Briggs refers to. I had several colleagues who taugt part-time at Webster, they all quit in disgust, and joked that WEBSTER stood for “We Educate Below Standards To Enhance Revenues.”

    Your Tax Dollars at work.

    End Rant.

  11. Doug,

    That does not provide the requested information and is likely already figured into the overall CPI line in the graph above.

    The graph shows over all CPI, Housing prices (which are also figured into the CPI) seperate from CPI and college tuition separate from CPI.

    My theory is that if the graph was re-done to show separate trend lines for state universities and private universities, that the trend for the private universities would be much closer to CPI and that the state universities would be a close match for the graph show as is.

    My reasoning be hind this is that private universities all along have had to cover most if not all of their operating costs from tuition while state universities to start with had nearly all of there operating costs covered by thier state government and tuitions (at least for state residents) were very low, nearly nomial in some cases (on the order of 1/10th private university tuition if you go back far enough). However over the period graphed nearly every year there have been news stories about one state university or another raising tuition and almost every one of these stories has the university officals blaming the increase on state budget cuts.

    For the state university tutitions to simply catch up with the private university tuitions (assuming no increase in private university tuition) would require a 1000% increase in state university tuitions, which is about what the graph shows.

    That is why I think that the trend shown is amost entierly about state university tuitions having to play catch-up with the private universities and would like to see the two groups graphed separately to see if this is realy the case.

  12. I’ve always found it interesting that many of those who think that the government should step in and limit price increases for goods and services such as food, energy, pharmaceuticals, hospital care, insurance, etc. are often the same people who insist the solution to rising educational costs is more government money.

  13. Colleges are indeed in the business of selling degrees. They are also largely government monopolies, so the market is non-responsive to pricing. And the quality of the product is difficult to ascertain.

    The solution is not to limit consumption, however. The solution is competition. Private colleges that offer better degrees for less cost should become increasingly successful as (bankrupt) government subsidies dry up.

  14. Former Education Secretary Bill Bennett said long ago that the ability of the education market to absorb money was proportional to the amount of money that was available.
    But then again, what should we expect from a seller that gets to look through your complete financial information, including your tax return ? In most commercial exchanges, it the other way around .. “buyer beware.”
    The education-industrial complex get to run the whole deal as “seller beware” with a strong assist from the federal government, who seems unable to determine if the end product is satisfactory.

  15. Re: Scholarships

    The inclusion of financial aid has added to the complexity of pricing college tuition. Many selected students may have full scholarships (such as athletic), and therefore their tuition and fixed fees are fully covered by scholarships. Since these students pay no tuition and fees, they are not eligible for pricing.

    http://www.bls.gov/cpi/cpifacct.htm
    (thanks to Doug M for the link)

    So while (school proviced) full scholarships reduce the net average tuition paid, it is not reflected in the published numbers. This is like including automobiles in the CPI based on sticker prices, not the prices negotiated by the buyer — certainly lower in hard times.

  16. You seem to be missing the main reason though. The implausibility of getting anything approaching an upper-middle class lifestyle without at least a BA. The fact is the premium of a BA has gone up, so it would make sense that more people would feel compelled to get one.

  17. According to FinAid.org, tuition has been rising on average 8% a year since 1958. This claim is based on data from the College Board. (What they define as “tuition” is not really explained, however.) Here is where to find their analysis:

    http://www.finaid.org/savings/tuition-inflation.phtml

    “A good rule of thumb is that tuition rates will increase at about twice the general inflation rate. During any 17-year period from 1958 to 2001, the average annual tuition inflation rate was between 6% and 9%, ranging from 1.2 times general inflation to 2.1 times general inflation. ”

    I sent an email to Mark Perry to ask him to look at the analysis and conclusions but didn’t get a response.

    Now, obviously, this organization is in the business of finding aid for people who want to go to college so their conclusions could be seen as self-serving. However, if the claim is accurate, it implies that college tuition has been in a bubble for about 50 years, which begs the question is it really in a bubble?

    Any comments?

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