You remember the housing bubble, yes? One version of that narrative goes like so: homeowners are better off financially than renters; therefore we decided it would benefit the economy to subsidize housing through cheap loans, mandates, low interest rates, etc. — the “ownership society”; this mainly served to inflate housing prices and saddle millions of Americans with unaffordable debts; in 2008, it blew up in our faces to the tune of trillions of dollars.
I said a while ago that I thought the next asset bubble would be green energy. I still think it will be a bubble, but I’m now convinced that higher education is the more imminent problem:
More than half of America’s recent college graduates are either unemployed or working in a job that doesn’t require a bachelor’s degree, the Associated Press reported this weekend.
By comparison, in December 2011, only a fifth of 16 to 19-year-old Americans couldn’t get work. Meanwhile, according to the OECD, just 18.4 percent of all Americans under the age of 25 were unemployed in 2010. By those measures, college grads are actually faring worse in the job market than the overall youth population. They’re also suffering terribly compared to the older college-educated populace, which has an unemployment rate of 4.2 percent.
So is a college education simply less valuable than in the past? In some respects, yes. According to the Census, the number of Americans under the age of 25 with at least a bachelor’s degree has grown 38 percent since 2000. Not nearly enough jobs have been created to accommodate them, which has resulted in falling wages for young college graduates in the past decade, as well as the employment problems we’re now seeing.
Here’s what’s left out of the analysis. The explosion in college degrees — an explosion which has made each college degree less valuable — has been heavily fueled by massive federal investment. The last three Presidents have made it a mission to make college more “affordable” through an ocean of subsidized loans and grants. The result has been a huge surge of new college students and, since loans have only driven tuition prices higher, a five-fold swelling of student debt to about a trillion dollars.
The analogy isn’t quite perfect. There’s no derivative industry in higher education creating a multi-trillion dollar market for bogus education (yet). But the government is making the same mistakes it made in the housing bubble, assuming that subsidized loans can drive prosperity. And just as subsidized cheap loans drove housing prices higher and put people into mortgages they couldn’t afford, the student debt push is driving college prices higher and putting people into educations they can’t afford. Only this time, we can’t blame Bank of America.
The reasoning behind the heavy push for higher education is just as sloppy as the push for home ownership. College graduates earn more than non-college graduates. Therefore, all we have to do is send everyone to college and everyone will have a good paying job, right?
Wrong. College graduates are paid more because some of the highest-paying professions — medicine, law, banking, engineering — require a college education. And, as the article notes, people who get degrees in those fields are doing fine. But most of the influx of students are not getting these kind of degrees. They are getting degrees in liberal arts and other professions which are not as in demand. You can imagine how the job interviews are going:
Employer: So it says here you have a Bachelor’s from Ohio State. What did you major in?
Unemployed: Women’s studies.
Employer: Uh, so do you have any marketable skills?
Unemployed: I can get angry really well.
Employer: We’ll let you know.
A real educational loan industry would not let this shit go on. They would not loan $35,000 to some dude getting a degree in puppetry. They would happily finance degrees in medicine or science, where the likelihood of future prosperity is good. But puppetry? Most of the liberal arts? I don’t think so.
And, yes, I’m seeing education in purely practical terms. I’m not saying that there isn’t value to someone getting a college degree and broadening their mind just for the sake of it. I am saying that I see little reason for the taxpayers to support it for everyone.
Just as our political class ignored the housing bubble until it was too late, we can expect our politicians not to do anything until the roof caves in and we’re facing tens or even hundreds of billions in loan defaults. Right now, both our Presidential candidates are trying to keep student loans cheap and subsidized, keeping the interest rates in the mid 3’s or so. Ironically, as Daniel de Vise points out, these two Nanny Staters are suddenly unwilling to act like parents and say, “No!” to young people. And that’s just for interest rates. It takes a lot more courage than either Barack Obama or Mitt Romney can muster to say, “Not everyone should go to college.”
But that’s what they should be saying. A lot of people getting college degrees would be better off getting more practical and technical education or job training than reading Das Kapital. A lot would be better off going to community or junior colleges, at least for the first couple of years.
The only alternative view that has gotten any attention is that of the Occupy crowd who want student loan forgiveness. If anything, this is more asinine. While student loan in aggregate is a concern, the typical student has $25,000 in debt when they graduate. While I think some have incurred that expense needlessly, that’s hardly crippling. It’s less than a loan for a nice car, and typically given on better terms. There are millions with bigger medical bills who muddle through. Spare me your sobs.
What we should be doing is making interest rates realistic, moving the loan industry back to the private sector and allowing student loans to be discharged in bankruptcy (the exemption of student loans from bankruptcy is a huge back-door subsidy). We should be capping loans or linking them, in some way, to potential earnings. But neither side wants to risk the wrath of young voters (or academia).
The final act in this drama, of course, will be finding someone — anyone — to blame other than the people who caused the problem. Thankfully, the Left is hard at work on that. For a while, for-profit colleges were the target, but they aren’t really fitting the bill. The recent meme has pointed to a slight decline in state contributions to higher ed as the reason for such high tuition and so much student debt. But the figure they use in their analysis is dollar per student. The absolute dollar amounts poured by states into higher education has fallen in recent years — Pennsylvania just cut higher ed funding by 25% and want to cut it by a similar amount this year. But overall, the last decade has seen these contributions remain steady or rise. The real factor is the explosion in the number of students (hence the drop in dollar per student) and an explosion in tuition, both driven by cheap subsidized loans.
Never forget that when people use the wrong number in an analysis, it’s because they don’t want to use the right one. The problem is not cheap GOP-controlled state governments, no matter how much Daily Kos wants it to be. The problem is a splurging federal government. We’re spending too much on college, we’re sending too many people to college and we’re building a bigger and bigger bubble. And the real victims, in the end, are the students, who are in debt and unable to find good jobs. And it will probably end the same way the housing bubble did — with huge bailouts for the politically powerful and ruinous debt for the masses.
How can this be seen as a good thing? And how can we keep listening to the people who are causing the problem?
Post Scriptum: I am informed by British friends that the UK is experiencing this problem too. The Labour government massively increased the number of students going to college. As a result, the degrees have become less valuable and there are a lot of unemployed college-educated Brits. The Cameron government tried to reign this in and provoked riots, which just demonstrates that the British haven’t learned anything about economics since Adam Smith died. I’d appreciate some confirmation of this.
Update: Please don’t tell me that the government is profiting student loans. It is … now. And mainly based on accounting gimmicks. Again, the analogy to the housing bubble is unavoidable.