(from Carpe Diem)
The parallels with housing are striking. In the case of housing, government policy wanted to promote home ownership. In this case, government policy is to promote higher education. The mechanisms were also similar: the U.S. government (and Canadian provinces) expanded credit by subsidizing student loans and tuition. Low interest rates under the Greenspan years also made borrowing easier. The result, it’s easier to afford school.
Well intentioned? Yes. More people get university educations, and that’s good, right? Maybe. I’m sceptical. But there are some serious downsides: first, the degree costs more and is worth less. Second, the high demand has resulted in even higher prices. Cheap credit allows everyone to play, but when everyone plays, the price rises, and the ‘signalling value’ decrease. Who wins? The universities that reap the benefits of high tuition costs and skyrocketing demand. Who loses? The students: they overvalue the degree: too many people go to school. If you’re one of those people the reality is you’re not as rich as you think you are. Education is an investment. Students made what you think is a solid investment in school with the expectation of some future payoff and then realize when they test the market that they may have to accept a lower paying job or no job at all in their field. When the interest rates on student debt rise, the emerging graduates feel a little bit more like they’ve been ripped off: the actual cost of the degree (not to mention the opportunity cost) was a little bit more than it was worth. In short, you’re not quite as rich as you thought you were. Devalued human capital makes up the slack.
What about on the supply side? The artificially high price of education leads to further misallocation of resources: too many ‘resources’ are sucked into the education sphere. Universities are expanding based on these price signals. They are making commitments, investments etc… If the bubble bursts maybe some people are not going to get paid. Just like housing. Now the big question is: will the bubble burst? Obviously I don’t know. Since government student loan programs can keep hammering out cheap credit forever, this bubble may continue for a long time. But there are other factors: maybe employers may place less value on university as a signalling model. This makes sense because North American universities are turning out some pretty bad grads. Third, a major technological change in the way that affects how education is delivered might totally mess things up.
Another weird parallel is with gov. response to bad investments. In housing, creditors and
bankers received the now infamous bailouts. What about educational malinvestments? That’s really what the OWS movement was a calling for on this one… investor bailouts: the investor in this case: the beleaguered women’s studies grad.
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