Saturday, May 30, 2009

Better Late than Never

In the Chronicle of Higher Education, Joseph Cronin and Howard Horton ask, "Will Higher Education Be the Next Bubble to Burst?" (Hat Tip: Dr. Paul Price). Readers of this blog may recall that we raised this question in a post on October 1st of last year, and later noted two subsequent Forbes articles on this question.


Anonymous said...

It sure is hard to figure out the value added by a big dollar college education but I kind of lump it into figuring out the value of a house... rent vs. owning can't be compared. Good teachers vs. no education (and/or bad teachers) just can't be compared. I don't care what the class is. I will pay for a good teacher. I will pay for my kids to be exposed to good teachers. I will likely pay through the nose.

Sivaram Velauthapillai said...

Anonymous: " I don't care what the class is. I will pay for a good teacher. I will pay for my kids to be exposed to good teachers. I will likely pay through the nose."

I don't mean to be rude and am not attacking you in any way and am not suggesting you shouldn't consider schooling for your kids...but what you said is precisely why we may be in a bubble.

Bubbles often, but not always, occur when people start doing irrational things. However, the irrational behaviour is generally backed by perceived rational benefits.

Residential real estate was a bubble mainly because people thought the prices were logical. This made sense if you projected little or no decline in home prices, which was how it was in the last 50 or so years (this is in nominal terms.) Sure, we had buyers who clearly couldn't afford their homes and were rolling the dice; but the banks, investors, and even insurers, whose raison d'etre is to price risk, didn't think it was that overvalued.

In this case, what you are doing seems rational to you, and to the average family. However, if you were a neutral observer--say you were a foreigner or had no kids or whatever--then the situation looks very irrational. Cost of education has gone up (in the last few decades) several factors more than household income, net worth, or similar measures. Even if you assume education costs were "under-priced" in the 70's (say govt was subsidizing to a greater extent), the rise in costs in the last few decades still seems way too high.

An individual family in America, one that tries their best to send their kids to school, acts in their best interest and may have some benefit. But, the system as a whole may be in a bubbly stage where no one is benefitting in aggregate.

It's easy for an observer to suggest there may be a bubble (doesn't mean they are necessarily right.) But the problem, as you point out, is that it is hard to figure out what is rational at the individual level. Just like how everyone would literally spend anything if they had a health problem, the vast majority of families, who value higher education, are likely to spend almost anything on their kids' schooling (related to that, citizens are likely to pressure governments to spend as much as they can subdizing schools or loans.)