Why It Is Not a Bubble
by Gary North: Why
I Hung Up on a New York Times Reporter
Before I begin,
I am going to give you a permanent edge. I am going to show you
forecasters do their work. The general public is unaware of
this procedure. I suggest that you keep this information in mind
whenever you read reports on what is ahead for the economy.
As an example
of how this procedure works in practice, consider a recent theme:
college education as the next economic bubble. I did a search on
Google for "college" and "bubble." Here
is what I got.
Over 41 million hits. I don't think there are 41 million separate
documents, but there is no question that this is a hot topic.
in packs. Last month, I got an email from a reporter at Newsweek.
She wanted to discuss this topic with me. Some editor had assigned
it to her.
Why me? Maybe
because of my
article in the New York Times on the Ph.D. glut. I wrote
it in 2006.
By 2006, I
had been writing on this topic for over three decades. The Times
finally picked it up.
Here was my
main point. The Ph.D. glut hit in the spring of 1969. It had been
foreseen as early as 1964, when Allan Cartter, the chancellor of
New York University, wrote an article on the looming Ph.D glut in
the sciences. He targeted the exact date: 1969. Clark Kerr, president
of the University of California, in the mid-1960s had verbally warned
a group of elite students that it was coming. I was in the organization.
I heard him say it. But I did not drop out of grad school because
of this. I doubt that any of my peers did, either.
In May 1971,
four decades ago, Time Magazine ran an article, "Education:
Graduates and Jobs: A Grave New World." It raised the same sorts
of issues that the "Is College a Bubble?" articles raise today.
It quoted Allan Cartter.
year applications to graduate schools are up slightly over 1970
totals, despite the fact that it is now clear that the long climb
up the ladder to the Ph.D. no longer guarantees secure footing at
the top. Economic recovery will provide some new jobs for these
specialists, but not enough of them. Says New York University Chancellor
Allan Cartter: "We have created a graduate-education and research
establishment in American universities that is about 30% to 50%
larger than we shall effectively use in the 1970s and early 1980s."
Yet every year
since 1971, the American higher education system has certified anywhere
from 30,000 to 65,000 new Ph.D. degrees a year. The number is accelerating.
In 2010, The
Economist reported the following. The number of openings
to teach are about one-quarter of the annual output of the universities.
Why do the
universities do this? Because professors love the system. The grad
students and post-docs teach undergraduates, especially freshmen
and sophomores, for $20,000 a year. They do lots of research, which
professors then use.
But there is
something else, which is rarely mentioned in articles aimed at the
general reader. Universities have a funding system called FTE: full-time
equivalent. It assesses the weight given to students for fulfilling
departmental teaching load requirements. The FTE varies, campus
to campus, but generally a graduate student is worth at least twice
what an undergraduate is. So, a professor with a course with ten
graduate students has met his obligation. He would have to teach
20 undergraduates to meet his obligation. Teaching graduate students
reduces his workload. So, faculty members do not warn grad students
that they are not investing their time and money wisely. It would
not be in their self-interest to issue such warnings.
ECONOMICS OF SOCIAL STATUS
In the best
universities, we find mega-classes of 500 to 1,000 students. Lower
division students sit in huge lecture halls and listen to a professor
give a lecture that could just as well be in a digital format on
a server. If an Ivy League school charges $35,000 a year for tuition,
that is $1,166 per semester credit. So, a college generates well
over $10,000 per student per one-year mega-course. The student is
taught by a $20,000 per year graduate assistant, who runs discussion
sessions. Put 1,000 students in a lecture hall for a year, and the
school earns gross revenues of $10 million.
Is this worth
the money? Parents think so. Donors think so. Students think so.
Why? Because of the perceived prestige of the diploma. Also, the
parent thinks the student will make personal contacts with high-earners.
Is this strategy
working? No. Has it ever worked for most students? No. But the myth
goes on. It has gone on for centuries.
A student can
earn a B.A. from an accredited college by taking CLEP exams and
courses by examination from anywhere in the country. The liberal
arts degree will cost as little as $11,000. A student can stay at
home room and board and work part-time in a local business,
learning the basics of that business. Maybe he or she can graduate
in three years. I am working with an 18-year-old who has a B.A.
He got it while he took his high school work. He was home schooled.
Is a $200,000
degree from an Ivy League school going to pay off with lifetime
income 18 times higher than someone who paid $11,000 to get a degree
at a no-name college? Not likely. Yet there are ten applications
for every freshman slot at the big-name schools. These students
are the best and the brightest.
This is no
bubble. This has been going on since 1636 in Harvard's case. Parents
want to get their children certified as the best. They will pay
the price. Is this foolish? I think so. But let's not call it a
bubble. A pricing structure that works for almost 400 years is not
a bubble. It has worked in Europe for 900 years.
buying a consumer good. "My child just got into [Prestige U]." The
parent gets bragging rights. He does not perceive this as a neon
sign over his mortgaged front door that says, "Sucker!"
Then in year
three the kid drops out. What is the investment worth then?
stories are grist for journalism's mill. Some girl borrows $100,000
to get a B.A. degree in some useless liberal arts field like art
history. She is now unmarriageable. No young man wants to add $100,000
to his debt.
I have a department devoted to these stories.
read lots of articles on how this is a bad idea, but nothing changes.
The lemmings continue to pour in. The "Time" article in 1971 changed
few minds. The stories on "Is college a bubble?" will change few
was the last state to abandon tax support of churches. That was
in 1832. Within five years, it had begun state funding of education.
A new established church replaced the old one. This established
church spread in popularity.
are convinced that state funding is necessary for K-12 education
generally believe that state funding of another educational establishment
is mandatory: higher education.
the range of 3.1% of America's GDP was spent on higher education
in 2007, according to the annual publication of the Organisation
for Economic Co-operation and Development (OECD), "Education
at a Glance, 2010: OECD Indicators." Some 2.1% of this was tax-funded
(table, p. 220). This was in the range of $300 billion a year.
is a gigantic industry. As with any bureaucracy that is funded by
the government and which is granted a licensing monopoly by the
government it exists above all to make sure that the funding and
the puffery from inside the industry was an article summarizing
the 2009 edition of the OECD report. It appeared in The Chronicle
of Higher Education, the mouthpiece of America's professoriate.
The title: "Across
30 Nations, Public Spending on Higher Education Pays Off, Report
Says." We read:
periods of economic difficulty, the "opportunity costs" for opting
to remain in higher education versus joining the work force are
low, he said, adding that with those costs now at historic lows,
demand for higher education will continue to grow.
was a subhead: "Benefits of Public Spending." We are told that the
investment in putting a male (note the gender specificity) though
college gets a return to the public of over $50,000 in the OECD
But how did the author determine this? Was it based on lifetime
tax receipts? What did it cost in the present to generate this $50,000
profit? I did a little investigating. Here
is what the 2009 report said.
net public return from an investment in tertiary education for a
male student exceeds, on average across OECD countries, USD 50,000.
This is almost twice the amount of the investment made by the public
side, and as such, provides a strong incentive to expand higher
education in most countries through either public or private financing
Here is what
the 2010 report said.
average across countries, the net public return to an investment
in tertiary education is USD 86 000 for males, when accounting for
the main costs and benefits of this level of education. This is
almost three times the amount of public investment in tertiary education,
and as such, provides a strong incentive for governments to expand
higher education (p. 135).
In just one year, the net return to the public increased by 72%.
I can think of no other investment in a bureaucratic structure that
has been operating for 900 years that experienced such a one-year
On the other
hand, a skeptical reader could conclude that the statistics are
off-the-wall nuts. They are fake. They have no correlation with
the 2009 article in The Chronicle, we read that OECD report's
author concludes that this is "the right choice." He continued:
virtually every country, the public benefits of higher education
outweigh the costs. The traditional wisdom was that higher education
benefits individuals most, but this was the first time we looked
at public costs and public benefits in conjunction.
But there is
a problem with all this. The supposed $50,000 return is spread over
the working years of the men who graduate. Most of the enrollees
do not graduate. And most of the American attendees are not men.
Over 55% are women.
This sort of
reporting is accepted at face value by the vast majority of voters.
They do not regard this as self-serving public relations from the
beneficiaries of $300 billion a year in taxes.
are millions of college drop-outs. These people absorb all of that
tax money, but then quit before they graduate. They get no benefit
personally from the time and money they invested. They have lost
several years of forfeited income, but their time and money and
the taxpayers' money counts for nothing. Yet almost two-thirds
of students who enroll fail to graduate.
American rate of 36.5 percent is below the OECD average of 39 percent,
and the United States has rapidly lost ground against other countries.
In 1995, the United States ranked first in completion rates; today
it occupies the 14th spot.
tells you is that a number of other countries have been much more
successful in expanding their higher-education systems," said
Mr. Schleicher. "The United States has fallen so far behind in
higher-education completion, and private costs have become so
high, that some people are suggesting that tuition has become
a barrier to extending participation."
Tuition is a barrier. In other words, prices reduce the quantity
demanded. Will wonders never cease?
There is no
question that voters support this system. They have supported it
ever since the Civil War. The Morrill Act of 1862 set up the land
grant college system. It was followed by the Morrill Act of 1890.
It subsidized the establishment of tax-funded agricultural colleges.
The system of tax support kept growing. It went exponential after
World War II.
Then came Federal
research grants. This system of Federal funding undermined the old
hierarchy in higher education. It undermined community. Conservative
scholar Robert Nisbet wrote about it a generation ago: The
Degradation of the Academic Dogma (1971).
This is no
bubble. This is the outcome of a systematic program of propaganda.
It promotes the salvation of mankind through formal education. It
offers the hope of access to jobs that are restricted to college
graduates. Parents think that the ticket to success is higher education.
They do not care about the content of education. They never have.
They think they are buying success through hoop-jumping. So do their
It is not working
any more. The Ph.D. glut that began in 1969 soon spread to the M.A.
degree. Now the B.A. in most liberal arts is no longer working to
It didn't in
1971, either. So, a situation that hits in every recession has hit
again. Graduates are saddled with $20,000 in student debt on average,
and they have moved home. They can't find jobs. The jobs available
they could have taken after high school.
Will this stop?
No. Each student thinks, "It will not happen to me." Each student
thinks, "I will graduate and get a high-paying job." These people
are graduates of Lake Wobegon High School: they are all above average.
is involved, people rarely change. College education is part of
a religion: salvation (healing) by formal education.
believe in tax-funded K-12 education. It gets worse. The budgets
increase. The test scores fall. Yet voters just refuse to give up.
They think one more reform will do the trick. It won't.
same faith is transferred to college. Nothing changes for the better.
Year after year, decade after decade, student performance falls
and costs rise. This is what state funding always does. There is
no negative feedback system that says: "Stop!"
To speak of
college as a bubble is silly. A bubble does not pop until months
or years after the funding ceases. There is no indication that the
funding for college education will cease.
is a rebellion against tax-funding of all education, beginning with
kindergarten, college costs will rise and performance will fall.
The horror stories will continue.
We get what
we pay for. We especially get what we pay for with our tax money.
What you see is what you get: a self-policed monopoly, a self-serving
bureaucracy, and entrenched resistance to change imposed by representatives
of the people who are funding the system. "Academic freedom" has
always meant the same thing, from Prussian universities in 1820
until today: tax-subsidized intellectual kidnapping of children.
We do not get
bubbles. We get quagmires.
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible.
2011 Gary North
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