Higher Education: the Next Bubble to Burst

(Everyone should get free healthcare)

Almost everyone knows the country went through the wringer after the housing bubble burst. Now a new bubble looms before us - the higher-education bubble.

Scholars and economists at the Mises and Cato Institutes have been campaigning to increase awareness about this issue for years. Those who understand market economics and the downsides of government interventionism are keenly aware of what happens in these situations.

Just as easy money, lowered lending standards and political hype came together to vastly overinflate the housing sector, a combination of easy money (federal grants and loans available for nearly every student), lowered academic standards (colleges that readily accept students with pathetically weak basic skills) and political hype (the notion that getting a degree will guarantee a huge boost in earnings) have produced a vastly overinflated higher-education system.

Why would any lending institution support a student who wants to take out tens of thousands of dollars in student loans to pursue a liberal arts degree, or another field in which the student is unlikely to gain employment sufficient to pay back loans? Lenders in the market see great risk, so they don't loan. The government steps in and guarantees the loans, so the universities accept the student anyway. And tuition costs skyrocket as a direct result.

The higher-education bubble has been inflating for decades, and it’s ready to burst, or at least deflate. That’s because many Americans are realizing that the huge cost of college is often a waste. Whereas college degrees used to be regarded as sure-fire investments, the labor market has become glutted with people who have been to college but can’t find “good” jobs.

Did you know that 22 percent of customer-sales representatives and 16 percent of bartenders have bachelor’s degrees?

Furthermore, at many schools, academic standards have fallen to the point where students can coast through without learning anything worthwhile. As University of Tennessee law professor Glenn Harlan Reynolds recently wrote, “The higher education bubble isn’t bursting because of a shortage of money. It is bursting because of a shortage of value.”

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More: LEEF: Burst the higher-education bubble - Washington Times

All we need to do is look at programs or industries where the government steps in to guarantee loans in this country to see how costs to consumers rise as a result. Higher costs are also passed along to taxpayers if those markets are subsidized. It's a failure of epic proportions, but one where the spoils of which are so willingly accepted despite the likely end result and market reactions. 

Both of the following examples are from a year ago, and they were not the first warnings from market economists.

A college degree once looked to be the path to prosperity. In an article for TechCrunch, Sarah Lacy writes, "Like the housing bubble, the education bubble is about security and insurance against the future. Both whisper a seductive promise into the ears of worried Americans: Do this and you will be safe."

But the jobs that made higher education pay off during the inflationary boom, kicked into high gear by Nixon waving goodbye to the last shreds of a gold standard, came primarily from government and finance.

In 1990, 6.4 million people worked for federal, state, and local governments. By 2010, that number had grown almost 6 times — to 38.3 million — with many of these jobs being white-collar.

Without sufficient private market jobs to support the revenue needs of the government (taxation of labor), it is easy to see how decreasing revenues can be a problem when paired with ever-increasing government spending. The appearance of cutting budgets is just that; appearance. Spending is cut for future budgets, and is usually cut from proposed increases, not overall budgets. More private market jobs are needed, not public sector. Public jobs contribute a net loss, not a gain.

In 1990, the financial sector was less than 7.5 percent of the S&P 500. By 2006, this sector had grown to 22.3 percent of the S&P, and that year the financial sector constituted 45 percent of the index's earnings.

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The Higher-Education Bubble Has Popped

One of the major complaints of the Occupy Wall Street crowd, many of whom have taken on significant student debt, is that the cost of college is too darn high. And they're right, but not because of greedy corporate fat cats. No, the real guilty party here is federal politicians, who for decades have been fueling high profits — and prices — at both for-profit and nonprofit schools.

Guaranteeing loans promotes those producers to increase costs to consumers. When it is student loans, that results in higher tuition costs, despite a lower likelihood that students will ever be able to pay them back. Those tuition costs are passed on to taxpayers as well without consent, and without ever enrolling in universities or receiving services. There is a reason private lenders will not invest in many students, but big government sure will, at the expense of other people. But we all are the other people...

Wait. Big profits at nonprofit colleges? Yes, money has been piling up even at schools you thought had no interest in profit. And Washington, D.C., is the biggest hand feeding the beast.

Thanks to recent congressional hearings and battling over new regulations for for-profit schools, most people — including many college-aged, profit-disdaining Wall Street squatters — are probably at least vaguely aware that for-profit colleges are making good money.

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D.C. Drove Up Your Student Debt

Anyone care to point out the next bubble being inflated now? I'll give you a hint; other countries which took this route saw increased costs and decreased quality.