Education Inflation

Inflation is what happens to the dollar when the government prints more money, thus increasing the money supply and decreasing its market value. This steals from people who already have money by causing the dollars they have saved to drop in value. The value drop is measured against goods, services, and foreign currency. Inflation means that the dollar can buy less. Inflation causes poor investment choices, because the ability of an individual to calculate accurately is disturbed, since he doesn’t know what the value of his money will be in the future. Unfortunately, inflation is also what happens to college education.

In 1972, Senator Claiborne Pell championed the program under which federal grants were to be given to students so that they could go to college. It was noticed, at the time, that people with college educations made much more money, on average, than people without college educations. It was concluded, apparently, that this would work for everyone – that if everyone went to college, everyone would make more money. Nobody bothered to wonder where all this extra money would come from. The answer, as I will explain below, is that it didn’t. What happened instead was a surplus of college education that led to a decrease in its value.

Money for the Pell grants, on the other hand, comes from the taxpayers. This article makes the somewhat perplexing statement that the Pell program is “in deficit.” The program costs $13 billion a year and has no source of income. Of course it is in deficit. The program spends money but makes none – that’s the very definition of deficit. These are grants, not loans – they never get paid back. So the taxpayers of today will pay for some of the Pell Grants, and through debt and inflation the State will tax the future for the rest. But that’s nothing new.

The Pell Grants, as intended, increase the supply of college educations. This, in turn, decreases their value – thus stealing from people who already have educations, because their educations now have a lower market value, and causing bad investment choices, when people for whom going to college is not the best option do so anyway. These effects seem to be unintended.

How bad can this problem be? Well, the Village Voice just ran a series of articles called Generation Debt. These articles detail several human-interest stories about the effects of college debt and education inflation. They don’t call it that, of course – they draw no conclusion as to why a college education is not, in many cases, worth its price. What they tell us is that college graduates have over $20,000 worth of debt on average and have difficulty finding a job that will allow them to pay off those debts. In other words, college education (for these people) costs a lot and gives little monetary return.

Why does this happen? What are the inflationary factors? What market forces caused this good-hearted government program to go so horribly wrong? Well, they call them “supply and demand,” and they are inescapable.

The theory behind Pell grants (and other scholarships on state and local levels) is that more college education means less poverty – people who are educated will make more money. The trouble is that this money has to come from somewhere. There has to be a demand for college education.

Picture yourself as an employer. You want to hire one employee, and you want a college graduate. If there are five graduates applying for the position, you’d hire one of them, and pay him a mutually agreeable salary based on market value. If, on the other hand, there are five hundred graduates applying, what would you do? Well, the answer is that you would still hire one of them – but you would pay them a lower salary. Sending the additional 495 people to college didn’t create new jobs, it just cost a lot of taxpayer money. And since there was more competition (supply of labor) the salary (market price) goes down.

Flooding the market with supply in the absence of demand creates a surplus, which drives down prices – in this case, salaries. And we might ask, what is the value of education? How can it be measured? For those who sought to go to college in order to make more money, the value is in the salary. And so for them, the value of education has been decreased. For those that have actually paid for it, they have paid for something whose value is decreasing over time due to government action. In many cases they have also landed themselves in debt. Either way, this is a prime example of an investment turned sour by State intervention.

There is still a correlation between college education and higher salary. After all, all other things being equal, an employer would rather hire a college graduate than a non-college graduate. College graduates, presumably having gone to college to enhance their money-making opportunities, will apply for the higher-paying jobs, and they’ll get them. What this means is that more higher-paid jobs will be occupied by college graduates, thus making it more difficult for non-graduates to get well-paid jobs. Thus, government subsidizing of college education helps out people who choose to go to college at the expense of people who don’t – thus encouraging even more people to go to college, even if they can’t afford it. And at an average of $20,000 debt by graduation, it seems like a lot of students can’t afford it.

All of this would make sense if college really was right for everyone. But the free market, when left to its own devices, tells us, via prices (both education prices and labor prices, i.e., salaries), how many college graduates are needed, and in what fields. State interference causes distortions – from the education inflation caused by the Pell grants to the boom-and-bust economies caused by the State’s monetary and fiscal policies. How many students graduated from college with computer science or Internet technology related degrees in the late 90’s only to find the Internet bubble burst?

Since at least the mid-seventies, there has been a shortage of service technicians for automobiles, boats, and other motorized equipment. These industries are taking steps to deal with the problem while out-of-work college graduates contemplate going to graduate school so they can land a job.

Someone with a college education might not want to fix cars for a living, but for the poor, “disadvantaged” people that the government is trying to help by sending them to college, perhaps vocational school or apprenticeship would be a better option. Unfortunately, the incorrect valuation of college education over the alternatives (caused by State-induced inflation) keeps people out of these fields. High School career counselors tell their students that they have to go to college – because the more graduates from a High School that go on to college, the better the High School looks and the more funding they will get. Never mind that many public colleges, like the City University of New York schools, have to institute remedial reading and math courses for their incoming students. Why? Because they have come from public schools that are ineffective at imparting education.

The public education movement has decreased the quality of education consistently while also increasing its price. Education continues to eat up more of our tax dollars while producing students who have actually learned ever less and less. Test scores are “recentered” so that an SAT score now means much less than it did 10, 20, or 30 years ago. Enterprising politicians capitalize on the problems in public education to get into office, and stay there, but once there, they simply throw money at the problem and it continues to get worse. Debates rage over social promotion, the No Child Left Behind Act, private school vouchers, zoning laws, and all sorts of side issues that always fail to get to the point: public education is an expensive, poor-quality product because the State, and not the free market, is providing it.

Given the egregiously poor state of public schools, I think it’s important to ask if we really want colleges to be the same way. After all, if colleges were paid for entirely by the State, they’d be public schools too, subject to the same impossible scenario: calculation without a price system. Both the state of the public school system now and the current inflation and malinvestment trends in higher education point to this scenario. The Pell program and its supporters are moving us toward a system where every student will have to go to a State-sponsored school for an additional four years, and every taxpayer will have to foot the bill.

As specialization and division of labor become more pronounced due to rapid technological advances, general education will become even less useful in preparing people for the job market. And yet at the same time as these trends are going on, people are wasting more and more productive years obtaining just that. High School diplomas are becoming less and less valuable not only as the number of job applicants with college degrees increases but also as the number of jobs that High School graduates, who are for all purposes unskilled workers, are qualified for decreases. The more money the State puts into college education, the more college grads will become like High School grads – unprepared for the specialized job market, and at a disadvantage to people with higher levels of education.

As the demand for college continues to inflate, due to these factors, more colleges pop up, and existing colleges admit larger classes. These factors interfere with the ability of employers to discern between one college student and the next. A degree from Columbia or NYU is appreciably better than a degree from SUNY Purchase. But is a degree from SUNY Purchase better or worse than a degree from SUNY Albany or SUNY Binghamton or SUNY New Paltz or SUNY Rochester? What does an employer do when he has 35 bright young liberal arts majors from Bard, Sarah Lawrence, and Vassar lined up at his door?

In most cases, one college degree serves as well as any other. But colleges make their money based on their reputations. The reason why Harvard and Yale can charge more money is that their product is better. A Harvard or Yale education is a virtual guarantee of a choice job in a competitive field. But a degree from a college that no one outside of your state has ever heard of is just a rubber stamp. That’s why college grads can’t make enough money to pay off their student loans. That’s why more and more students need to go to grad school to get jobs that college education would have been sufficient for years ago.

Additionally, State money and the system of public colleges in competition with private ones causes adverse effects on actual education. This article details how, in Missouri, efforts to improve public education bullied even private universities into compromising their educational standards. Greater numbers of students, coming from public schools, causes the level of education of the average entering college student to drop, requiring that the college divert resources to bringing these students up to speed. The constant decline of public education standards thus pulls down private college standards. This effect is only enhanced by the State paying for people who don’t belong in college to go there.

The answer to this problem is clear. The first step is to pull all government, which is to say, taxpayer, money out of college funding. Auction off all state colleges and Universities – state governments are not accountable enough to run them properly. Colleges weren’t founded to be job-training programs, they were founded so that people with money and leisure time could find out about the world. A college education should be seen as a luxury, not a right or necessity. Because of the relatively free economic conditions in America, we have become one of the wealthiest nations on earth, and more and more of our citizens can afford such luxuries – but it is still a mistake to construe that ability to afford luxuries as a universal right to them.

I would advocate a full return to a totally private education system. The free market naturally acts to correct shortages and surpluses, such as the surplus of college degrees and the shortage of service technicians. Instead of going to public schools, people could either go to private schools or become an apprentice. Companies that needed qualified employees could train them in exchange for their services. More vocational schools could arise to meet demand in particular vocations, rather than all demand being met by general education. Everyone would be more wealthy and prosperous since they wouldn’t have to pay taxes to support education anymore. And education would be a valuable commodity, not a rubber stamp of State approval.

January 12, 2005