February 17, 2010

Is the higher education bubble about to burst?

Let me start off by saying that I am asking questions rather than stating facts or opinions in this post. On October 9th of last year I wondered about how sustainable our current system of higher education was and concluded that we (higher education) may be in for an unpleasant surprise in the next decade. I recently gave a talk at my school's Institute for Teaching and Learning Excellence (link to talk here) where I brought these questions up among faculty and stimulated some lively discussion. So today's post is devoted to expressing concerns and asking questions.

An article in today's Chronicle of Higher Education reports on the result of a study that shows the public is becoming less tolerant of the increasing costs of college.  In the last decade the percentage of people who believe college is necessary for success has gone up 24% (from 31% to 55%) while the percentage of those who feel that college is affordable for most qualified students has dropped 26% (from 54% to 28%).  A second article from Inside Higher Ed also reports on the finding and contains a quote from Richard Vedder about college:  "The bubble’s got to burst on this thing.... The staying power of colleges is amazing..."

I generally don't pay much attention to economics, and admit my (profound) ignorance of this field.  As an engineer my world is much more certain; tied more to physical reality and less to perceptions of value.  But to a non-economist, several trends appear if you look at data comparing the cost of five separate items from 1978 to now as shown in the figure below.  (Click figure to see it full size)

In my simplistic interpretation this figure says that if you had invested $100,000 in the Down Jones Industrial Average in 1978 your wealth world have peaked at $1,800,000 before the economic crisis and be about $1,200,000 today.  Your $100,000 home would have peaked at around $500,00 and be worth $400,000.  However $100,000 worth of "stuff" in 1978 would cost you $300,000 today unless that "stuff" was medical care or college.  A $100,000 hospital stay in 1978 would cost about $600,000 today while the $100,000 bill for sending four kids to college in 1978 would be over $900,000 today!  So hey, if you had invested in the stock market (ignoring mandatory fees and taxes) you would be on Easy Street.  Of course most of us don't have the good fortune to get a big windfall to make a one time investment.

Now lets be engineers at look at not only the values, but the slopes of the lines. Medical care and "stuff" have been going up at a pretty constant rate for 30+ years.  Houses have too, until around 2004 when the slope of the line increased- this was the housing bubble.  If you extrapolate the slope you'll see that house prices are about where they should be if the slope had been constant.  The DJIA, on the other hand, has been much more prone to fluctuations in slope.  However each increase in the slope (bubble) is followed by a correction.  The cost of college also followed a pretty straight line until around 2003, when the slope increased.  Is this a permanent change in the slope, or does it indicate the inflationary phase of a bubble? And what does a "college bubble" look like, does this term even have meaning?

One point to make is that what we are plotting here are fundamentally different things.  A home is a physical object that has value both from how desirable it is when you want to sell it, but also its ability to provide shelter.  A home has characteristics of both "want" and "need".  "Stuff" also includes both wants and needs. Both houses and stuff have actual value.  Medical care probably falls into the need category for most people and since you are buying a professional's services, it too has actual value as a service.  Stock prices, on the other hand, reflect peoples' perceptions of many factors; mainly their faith in the future performance of a company and the economy as a whole.  It isn't really a want or a need.  Nor does it have actual value, it has perceived value.  College, in my opinion, falls in a grey area between perceived value and actual value.  You actually buy some goods and services for the four or five years you're in college which have actual value. Education does provide better opportunities, but only to the extent that a college degree is perceived to have value.  If people did not perceive the value of college degrees, they would lose much of their value.  On the want-need scale, college seems to be moving more towards the need side in the public's perception.  Tying all of this together, it appears to me that things which rely on perception of value are more prone to rapid increases followed by deflationary bubbles.  Look at the change over 30 years in the DJIA and "stuff".  Things that people need likely sustain their value longer than things they simply want, particularly during hard time. 

College, in the grey area between actual need and perceived need is thus more prone to price fluctuations than homes, but less so than stock prices.  If these observations are correct, and I freely admit this is speculation, then if the perceived value of college decreases, one would expect a rapid drop in costs with commensurate pain for higher education.  So, as pointed out in the Inside Higher Ed article, the survey contains both good and bad news.  Good in that college is increasingly perceived as a need rather than a want, but bad in that we are unable to control costs and the public perception of college as a filthy venal house of slimy pandering reptiles is increasing.  So will the need of college continue to allow us to drive prices higher, or will the public's increasingly negative perception and a weak economy lead to alternatives to a degree that will pop the bubble?  It is probably good to remember that in every bubble people convinced themselves that they could pay inflated prices because the value of their investment would never go down.  It may not take that much to change peoples' perceptions and pop the bubble (if it exists).

So what does all this mean?
  • First, universities need to begin to plan for what happens if this hypothetical  bubble pops.  If the perception changes, then a college degree loses much of its value and we're going to have to pay the piper for years of living beyond our means.
  • Second, engineering educators should work for social justice within our own institutions.  We are pricing a larger fraction of our own citizens out of any real chance to make it in the world, and in my opinion this situation is intolerable.
  • Third, we need to consider what the public's perception will be if the bubble bursts, and the college degree they have paid so much for loses its perceived value.  Are we the next Wall Street?  Will we see signs like that below posted on our quadrangles?

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