Higher Education - Next Bubble

Will Higher Ed Be Next Bubble To Burst Open?

By MICHAEL BARONE
Posted 07/20/2011 06:42 PM ET

 

 

 

 

When governments want to encourage what they believe is beneficial behavior, they subsidize it.

Sounds like good public policy. But there can be problems. Behavior that is beneficial for most people may not be so for everybody. And government subsidies can go too far.
Subsidies create incentives for what economists call rent-seeking behavior. Providers of supposedly beneficial goods or services try to sop up as much of the subsidy money as they can by raising prices. After all, their customers pay with money supplied by the government. Bubble money, as it turns out. Sooner or later, bubbles burst.

We are still suffering from the bursting of the housing bubble created by low interest rates, lowered mortgage standards and subsidies to Fannie Mae and Freddie Mac. Those policies encouraged the granting of mortgages to people who should never have gotten them — and when they defaulted, the whole financial sector collapsed.

Now some people see signs that another bubble is bursting.

They call it the higher-education bubble.

For years, government has assumed it's a good thing to go to college. College graduates tend to earn more money than non-college graduates. Politicians of both parties have called for giving everybody a chance to go to college, just as they called for giving everybody a chance to buy a home. So government has been subsidizing higher education with low-interest college loans, Pell grants and cheap tuitions at state colleges and universities  The predictable result is that higher education costs have risen much faster than inflation, much faster than personal incomes, much faster than the economy over the past 40 years.

Moreover, you can't get out of paying off those college loans, even by going through bankruptcy. At least with a home mortgage, you can walk away and let the bank foreclose and not owe any more money.

Peter Thiel, the co-founder of PayPal, is adept at spotting bubbles.

He sold out for $500 million in March 2000, at the peak of the tech bubble, when his partners wanted to hold out for more. He refused to buy a house until the housing bubble burst.

"A true bubble is when something is overvalued and intensely believed," he has said. "Education may still be the only thing people still believe in in the United States." But the combination of rising costs and dubious quality may be undermining that belief.

For what have institutions of higher learning done with their vast increases in revenues? The answer in all too many cases is administrative bloat.

Take the California State University system, the second tier in that state's public higher education. Between 1975 and 2008, the number of faculty rose by 3%, to 12,019 positions. During those same years, the number of administrators rose 221%, to 12,183. That's right: There are more administrators than teachers at Cal State now.

These people get paid to "liaise" and "facilitate" and produce reports on diversity. How that benefits Cal State students or taxpayers is unclear.

It is often said that American colleges and universities are the best in the world. That's undoubtedly true in the hard sciences. But in the humanities and to a lesser extent in the social sciences, there's a lot of garbage. Is a degree in religious and women's studies worth $100,000 in student loan debt?

As economist Richard Vedder points out, 45% of those who enter four-year colleges don't get a degree within six years. Based on the low achievement level of most high school grads, many of them shouldn't have bothered in the first place.

Now consumers seem to be reading the cues in the marketplace. More students spend their first two years after high school in low-cost community colleges and then transfer to four-year schools. Out-of-staters are reportedly flocking to low-tuition North Dakota State in frigid Fargo.

Politicians, including Barack Obama, still give lip service to the notion that everyone should go to college and can profit from it. And many college and university administrators may assume that the gravy train will go on forever.

But that's what Las Vegas real estate developers thought in 2006.

My sense is once again well intentioned public policy and greedy providers have produced a bubble that is about to burst.