Wednesday, April 13, 2011

once again: there can't be a higher education bubble

Conservatives hate the university, for reasons of elementary anti-intellectualism and because they hate any enterprise that doesn't kiss their ass. (I'm serious; anti-conservative bias, in the conservative mind, now means the absence of pro-conservative bias.) Meanwhile, everybody loves contrarianism, and many people are resentful that, having graduated from competitive colleges, they've been unable to get employed in the kind of jobs they want, so there's a lot of anti-university animus out there. Enter Peter Thiel, and his argument that we have an asset bubble with higher education. (As breathlessly, credulously reported by TechCrunch writer Sarah Lacy.)

Now, Thiel's a certified Randian nutcase, and you'll find that the regard for this opinion stems from the anti-academicism I discussed above. But it's important to say that you don't have to have any particular orientation towards the university at all to point out that Thiel's argument is bogus. It's bogus not just because we aren't in a higher education bubble, but because you can't have a higher education bubble. You can't have an asset bubble, in any conventional meaning of the term, when you're dealing with an asset that can't be transferred. Here's what I said in a comment written some time ago:
The housing bubble was a bubble because people were able to borrow against the market value of their homes. The fluctuation in the home's value is actually of little concern to an owner who intends to hold the asset. It is of great importance to the owner who is either planning on selling the home soon, or who is borrowing against the value of the home. Neither of these situations apply to college students. 
You can't have a classic asset bubble when the asset in question is non-transferable. The students are expecting to earn more based on the possession of the degree, and this can turn out to not be the case-- but let's be clear: the value-added of a college degree has never been higher. Generally, talk of college students not getting the value for their degree is limited to anecdote. On the level of data, the financial incentive for attending college has never been higher. To wit.

Anyway, I digress. While a college degree may or may not confer a financial advantage equal to the price of attendance, that is irrelevant to the formation of a classic asset bubble. You can't speculate on the value-added of a college degree. The degree is non-transferable; you can't take a bet by buying someone elses or reduce risk by moving yours away. And while there is some limited action in derivatives revolving around student loans, it is nothing compared to the endless derivatives, hedges, and collateralized debt that went into housing. Because, again, when an asset is non-transferable there's limited opportunity to speculate.
Really, both education and housing suffer from being defined as investments rather than tangible goods. A house's value can fluctuate wildly without cause for concern if the owner's primary interest is in living in it. (Refinancing your mortgage, after all, amounts to a bet by the bank on the future value of your home.) Meanwhile, higher education is treated as though it is only a financial instrument, rather than having the actual value of having been educated. Of course, education isn't going to look worth it, when you separate it from its actual value! It's like buying a chair, refusing to value the ability to sit in it, and calling it a bad investment if the chair doesn't rise in value. The question isn't purely of value but of utility.
Again, consider the housing bubble. Had it simply been a matter of individuals transferring houses at unrealistic prices, and then having those prices be adjusted to a more reasonable level, the financial risk to the greater economy would have been contained. Individuals might have recklessly based their personal finances on their ability to renegotiate their mortgages with the banks, presuming the value of their homes would never rise. (Note that even this limited risk taking is impossible with a college degree; go to a bank and see if you can get a loan risked against the rising value of your degree.) That would have caused financial distress for the individuals borrowing against the values of their homes, but it would have been contained. What made the danger so great was that so many other people had essentially made the same bet, securitizing and trading pooled mortgage risk with the assumption that home values would only continue to rise. Not only is there no equivalent investment vehicle with the value of a college degree, it's difficult to imagine how any such investment could work. Again, when you can't transfer an asset, the ability to speculate on that asset is very limited.

Also very important: stock and publicly traded asset bubbles have been especially pernicious because they have come to represent such a huge part of our economy and growth. The subprime mortgage crisis was an existential threat to our economy because such a huge portion of our economy was based on its continued existence. Meanwhile, what the value of a college education is meant to contribute to, increasing worker wages, is now, I'm sorry to say, a very small part of our economy. Nobody's making bets on the value of worker compensation rising. Why would they? Real wages have stagnated for decades.

Why does a presumably bright person like Sarah Lacy report Thiel's alarmist talk so uncritically, and why do so many smart people buy into it? Because it's provocative and loud, and because it speaks to the fundamental anxiety of many of the people who live on the Internet. Which is why Thiel's argument is bound to be linked to and passed around all over the place, whereas arguments like mine will largely go unheard.


sheenyglass said...

I don't get the impression that Thiel believes that the economy will be taken down by the crash of the education bubble. What his criticism amounts to is essentially that the cost of educations has risen so high as to negate the economic benefits of a college degree. And my back of the envelope calculations (assuming the average salary figures I've seen of roughly $1000/wk for a bachelors and 650/wk for high school only), indicate that he's probably wrong, but not by that much once you factor in compound interest on $200k in loans. ($2.3 million over 43 yrs of work vs. $1.5 million over 47 yrs of work plus not paying $500k over 25 years in loan payments)

Which is, of course, not an argument for avoiding college but an argument for reducing the cost of college. By, for example, offering more grants and low interest loans along with increased funding for state schools.

His secondary point, that college degrees, especially those from elite schools, are valuable because of their rarity is also correct, on that front Thiel ignores the utility of college as, you rightly argue as well as the basic point of supply and demand in which rarity increases the value of everything. Even if there is no economic benefit, individuals and society as a whole benefits from a more highly educated citizenry.

paul h. said...

You realize that Thiel was using "bubble" in like a metaphorical/analogical way, right? And it's just obviously, trivially true that college degrees are (1) more expensive and (2) less economically 'useful' than they once were, though of course Thiel/Lacy overstate the case and miss some key points, etc.

paul h. said...

lol just realized that I need to clarify that last clause; yes, it's still economically intelligent to get a college degree, but just not AS life-changing as it used to be (college is the new high school, etc.); and the massive loans which are often necessary make it far more difficult for many

Freddie said...

Then why use the manipulative term of bubble at all? I mean, I know why-- to be sensationalistic.

Brian M said...

I think one problem, though, is the insistence that professions "need" ever more increasingly expensive college and university training. Much professional or tradecraft might be better provided through internships, appreticeships, or even electronic learning than insisting every person...including adults...spend tens of thousands of dollars on every more arcane and expensive university degrees?

Phil K. said...

Which is why Thiel's argument is bound to be linked to and passed around all over the place, whereas arguments like mine will largely go unheard.

Yes, that's reason Thiel's argument is compelling while yours remains obscure.

Freddie said...

Thanks Phil! I knew we'd agree on something, sooner or later.

anotherpanacea said...

"Bubble" doesn't have to be a metaphor, here. The assets we're overinvested in are absolutely transferable, sometimes in just the way you mean. The Dutch didn't need derivatives to go crazy on tulips, after all. Lots of institutions and individuals are investing, now, in education with the intention of transferring that asset later in the form of labor or services. Every time a new PhD is minted, there's the expectation that she'll be able to transfer that asset in the classroom by using her skills to educate new students. Every time a new student selects a major, there's the sometimes mistaken expectation that that education will lead to a job. For many, it doesn't: look at the employment rates for black college graduates.

The problem with your statistic is that it ignores the bimodal distribution. There was a bubble in legal education that is currently deflating. A law degree is still, on aggregate, a ticket to a well-paid job, even if a lot of people end up with unpayable debts.

The same thing goes for institutions. Every time a school builds a new dormitory or student center, there's an asset that must be used at a certain rate of return or else face foreclosure. Schools do fail, and it wouldn't be surprising if a half-dozen liberal arts colleges that have been teetering on the edge of budgetary oblivion suddenly lose their footing in the next decade. Do you remember Tarkio College? Me neither.

What's more, there absolutely *is* a bubble in for-profit education, one that has been blown by lax enforcement of accreditation standards. Let's hope it pops. What's going to happen to the commercial real estate market when all those University of Phoenix office buildings get dumped on the market?