The Higher-Education “Bubble”

Glenn (Instapundit) Reynolds continues to push the notion that there’s a “price bubble” in higher education, with some sort of dire consequences for colleges and universities that continue to employ massive quantities of bureaucrats and provide mid-range resort facilities to their students. His argument, essentially, is that the price of higher ed will eventually rise to a level where middle-class Americans can’t afford it. At that point, some sort of crisis will hit, causing widespread famine or something among professors and educrats.

This argument is wrong in so many ways that it’s hard to know where to start. Facts are probably as good as anything to begin with, I suppose, so here they are.

First, here’s the chart that worries Insty so:

Posted tuition has risen faster than the price of health care! According to Insty, no prices can rise faster than the CPI over a long period of time (check the video–he really does say this). Of course, this is nonsense, since the CPI is nothing but a weighted average of all prices. It’s like saying that nobody can be taller than average for his entire lifetime.

To see why Insty is being stupid on this point, consider one more chart, showing the rate of change in the price of personal computers since 1997:

In case you’re wondering, that’s about a 94% decline in personal computer prices over 14 years, which is roughly equivalent to a 20% per year compounded rate of decrease. So, despite what the Instapundit thinks, the prices of individual items in the Consumer Price Index can behave in all sorts of ways that are different from the average of all prices. There is neither an  arithmetical reason nor an economic reason why college prices can’t keep rising faster than the CPI, in principle. That’s Point Number One.

Point Number Two is that tuition hasn’t really risen as fast as it seems at first glance. The reason is very simple: What universities list as their “tuition” is merely the price they charge to their wealthiest customers. Students who are not from well-to-do families get discounts, which simply aren’t called discounts–instead, they’re called “grants” and “scholarships.” What’s been happening is that the spread between the “list” price and the actual average price has increased by quite a lot in the last 15 years. According to data from the College Board, here’s how important that difference is when measuring the increase in tuition in “real” terms (i.e., relative to the change in the CPI) at 4-year institutions over that period:

       posted private tuition +52%                               posted public tuition +92.5%

       actual private tuition +22%                                actual public tuition +30%

To be fair, this is something that the Bureau of Labor Statistics (which produces the CPI) is aware of, and has tried to take account of in calculating its college-cost index in the past few years, but it nevertheless appears to overstate actual tuition increases substantially.

Point Number Three is best expressed as a question: Suppose college tuition does indeed rise so high as to eat up all the value of the excess earnings of college grads over high-school grads? Will disaster ensue? In a word: no. To the contrary, until this pricing point is reached there will still be pressure for expansion of higher ed, with the increasing costs that commonly result from any industry’s expansion. The “disaster” would simply be an end to higher-ed growth, with a stable proportion of high-school grads going to college or entering the workforce. Not a big deal at all, really.

Lots of people look at the schlocky product being offered by colleges and universities today–massive lecture classes taught by indifferent faculty, uninterested students looking for the easiest classes en route to a useless degree in a stupid major like Wiccan Studies, and a bloated administration full of PC-obsessed bureaucrats–and assume that the whole edifice is teetering on the brink of collapse. They understandably see an industry whose prices are way out of proportion to value; a bubble just about to pop.

What they ought to see is simply one manifestation of the pathetic state of K-12 education in this country. One reason why it can still be worthwhile to get a college degree is simply that a high-school diploma is approximately worthless. The value of a college degree is the earning power it adds relative to a HS “education.” Even if what passes for a college education is getting worse over time, its value can increase if high school education is getting worse at a faster rate. It’s not a pretty picture, but it’s probably what’s actually going on.

It’s not a higher-education bubble. It’s an elementary- and secondary-education sinkhole.


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