Tuesday, April 26, 2011

Is Higher Education a classic bubble? 7 reasons to think so

Peter Thiel, co-founder of Paypal and first major investor in Facebook, has a track record in spotting bubbles, namely the internet and housing bubbles. He thinks he’s spotted another: Higher Education. But he’s not alone, an increasing amount of commentary and evidence points in this direction. Like the housing market, where people rushed to take out loans (mortgages) based on the belief that the value of their asset will always rise (or at least stay the same), many suffered a shock when the value dropped.

Interesting idea, but where’s the evidence?

1. Blind belief

Criticising Higher Education is like “saying there’s no Santa Claus” claims Thiel. This is a feature of all bubbles, believes Thiel, where ‘groupthink’ takes over and false assumptions become absolute beliefs, and even debate of the negative consequences is seen as ‘party-pooping’.

2. Pricing

Huge hikes in prices for the buyer (almost tripling in UK), now seem unrelated to the real price of the degree. Since ’78 a US degree has increased by 650 points above inflation, compared to the housing bubble at only 50. This is exactly what happened in everything from tulips to internet stocks and housing. There is no compelling evidence that the future worth of degrees will be guaranteed. That’s the mistake made in all bubbles.

3. Unintended consequences

In a bubble, real demand is brutal, and in a buyers’ market may lead to degrees being simple indicators of ‘class’ rather than intrinsic value. In adopting the £9000 (or close) fees, Universities may be creating their own bubble, dislocating cost from real value. Institutional brand ranking, and they are brands (academics & students come and go, and content owned by publishers), may lead employers to dismiss degrees from institutions perceived as second-rate. In short, your degree may become a liability while your debt remains all too real.

4. Student short-termism

Decisions made by young people are measurably short-term, with factors like ‘fun’ or ‘easy’ often playing a part in their decisions. This is a distorting factor, as it over-values some subjects and degrees over others. This generation could become the most indebted generation ever, in a time when debt has been shown to be an indicator of failure. What makes this bubble so dangerous may be naivety.

5. University short-termism

No one could really claim that the huge hikes in pricing reflect corresponding hikes in the value of University tuition. So what’s happening? Universities are complicit in this. They raise prices because they can, without attention to lowering costs through online learning, fourth semesters etc. In fact the quality of tuition may have fallen, with more students and less qualified lecturers, matched by salary inflation at the top, higher numbers of administrators and wasteful capital expenditure in largely empty buildings. I've blogged on this before.

6. Context changes

Just because degrees lead to value now, doesn’t mean they will in the future. The chicken that comes out for its feed from the farmer every day, may suddenly find its neck wrung. When a bubble bursts, the rising tide that raised all ships, suddenly falls, leaving huge numbers stranded. As unemployment rises, a similar effect takes place with large numbers of debt-laden graduates on the market. There is already evidence of graduate wages stagnating or falling.

7. Tsunami of debt

The student debt bubble in the US has reached $1 trillion and raising eyebrow. Delayed payment means the accumulation of huge debts by students, and in this case, ultimately, the bailout would come from the state. Heard that before? In the US SLABS (Student Loan Asset-Backed Security) underpin students loans and have Federal Guarantees. A recipe for a massive default?


The truth of the matter, I suspect, is that Higher Education has become simply an extension of school, but with delayed school fees. Shortly the majority will be moving seamlessly from school to higher education. Many will enjoy the fruits of a meander through University but may (literally) pay a heavy and disproportionate price later. However, as Shakespeare said in The Merchant of Venice, ‘All that glisters is not gold’, and debts, as that great play so eloquently shows, distort human behaviour in unpredictable and distasteful ways. A degree should be seen as more than a fiscal investment, but that does not mean taking ridiculous risks when you’re only 18 years old.


Rob said...

Up to a point. But Thiel is talking about the situation in America. As this article suggests, "Here, the cost will continue to be significantly subsidised (for now at least). And if you don't earn enough, you'll never pay back a penny. The term for this is not bubble but moral hazard. As with the banks, the state is insuring students against economic failure."

Donald Clark said...

Didn't finsd this article convincing as it lacks any sense of forward looking analysis.
Loans are not straightforward commercial debt in US as they are underwritten by SLABS and have federal guarantees. It’s more circuitous, but similar to the UK. One could argue that we are in a worse position, as a massive default would leave us with the bill, and not the students themselves.
Debt is debt and the fact that the state is picking up the tab makes no real difference – that tab is our collective debt. We’re picking up the tab for the housing and banking bubble that doesn’t make it less of a bubble. Remember that the money will have already been paid out to the Universities – it’s already spent and converted in to a long term debt, accumulating in value.
I agree that the value of a degree is more than its earnings potential. However the subsequent return on investment through earnings is easy to calculate. Sampled data and actual earnings does the job. That’s why the treasury can come up with a default figure.
Overseas students argument is a red herrring. Those fees are paid by the parents of a tiny elite. In fact foreign student data in the UK shows that only a tiny number of vocational degrees are sought after. This is far from congruent with the western liberal arts idea of a University.
This, or next, year’s figures are not that relevant. The bubble is the cumulative number of graduates hitting the market year after year accompanied by the law of diminishing returns.
The ‘philosophy’ example is close to my heart as that what I did. It proved to be lucrative, then, as the number of graduates was relatively small, compared to the population as a whole. I should point out that almost every cabinet minister on both sides of the house did PPE ;). Seriously though, the Walker data should be worrt=ying because of the trend, not the snapshot. This article is weak because it’s all present tense analysis. Thiel takes a longer economic look at the growth of a potential bubble.

Ken Carroll said...


I don’t know that much about how UK universities are funded but it seems to me that the system is a recipe for inefficiency and the kind of bubble that Thiel alludes to. It seems they get huge government subsidies and extract exorbitant fees from foreign students, while they also have the freedom to Jack up their fees for British ones. Meanwhile, they don’t really have to answer to anyone and they’re staffed by a good number of un-firable, tenured professors who disdain the notion that they should be held accountable in any sense. Having worked all my life as an entrepreneur in the private sector I see these things as indicators of trouble ahead. I also wonder if we really need more graduates in ‘poi studies’ or indeed anything with the “media” attached to it? I’m not sure these things make a contribution to the society that pays for them (in part.

Ken Carroll

. said...

"higher education" has become an oxymoron.

The man who changed the world in our time was a college dropout.

'nuff said.

(oh, yeah, college grads pushed papers for him and probably trimmed his hedges).