Thursday, April 14, 2011

Are we in a Higher Education Bubble?

This question has actually kept me awake at night. My oldest child will be going to college in two years, and my youngest one will be heading that way two years after that. I have been keeping track of the rising cost of a college education and the decreasing number of fields where a college education pays for itself.

Check out this article by Sarah Lacy at The article explains the arguments by Peter Theil, the co-founder of PayPal, supporting the premise that we are in an higher education bubble. Theil focuses on the competition for scarce places in prestigious private universities, but I think the bubble theory is supportable all the way down to internet trade schools.

Politicians say we should solve the unemployment problem by having the displaced workers go back to school to learn a new trade. That sounds good, and it works sometimes, but often it doesn't and for very good reasons. We keep hearing that we need more scientists and engineers to start the new industries that will replace the jobs that are being outsourced to China. What are the odds that that B-C student that is directed into an expanded engineering program is going to be the the standout that creates the dream product of the future? A more likely result is that we are going to have a lot of middling-quality engineers who can't find a good job but are saddled with hundreds of thousands of dollars of student loans.

Microeconomic theory says that a firm makes intelligent decisions on how much product to produce when all of the costs of the product are internalized by the firm. It's only natural for a company who needs one engineer to want five to pick from. Not only does that depress wages by creating competition between the engineers, it wastes the resources devoted to training the five. In a perfectly efficient economic world, the firm would have to pay for all of the specialized education for all of its employees up front.

With a global population of 6 billion or so, labor at all levels is getting to be less and less a scarce commodity. To put this in perspective, let's say you have a 1 in a million aptitude for mathematics. That's great. There are 6,000 people just as smart as you. You might have to compete against all of them. Enhanced transportation and communication technologies bring competition not just to the manufacturing worker but also the knowledge workers. In this environment it doesn't make sense to waste our capital or our human resources. For that reason, it is important that our higher education infrastructure is efficient and prepares students for the situations they will face in the real world without burdening them with debt they can't pay. Our public subsidies for education at every level need to be re-examined.

I'm not sure what the answer is to dealing with the education bubble. I think one key is putting a hard cap not just on higher ed out-of-pocket expenditures, but also student loans. If that puts certain institutions out of reach, then so be it. Oh yes, consumers need to be able to discharge student loans in bankruptcy. If a school has too many alums discharging loans, then that's a sign that the education provided may not be that valuable after all.

On the subject of bubbles - a marginally relevant video:

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