Phi Beta Cons

More Thoughts on the Higher-Ed Bubble

George, I also enjoyed Peter Wood’s essay on the higher-ed bubble. While most commentators talk about the bubble being sustained by the (for now) bulletproof cultural idea that more education equals more income, Peter hits on something else as well. The modern college combines the lure of a better career with the appeal of essentially a Disneyland lifestyle for four years (or more). This is how Peter describes our campuses:

No one denies that prices have skyrocketed, but it is possible to argue that the price increases reflect real increases in the quality of the service.  Those price increases, for example, reflect the transformation of campus living facilities. Spartan dorms on many campuses have been replaced with apartment-style accommodations.  Campus recreational facilities often set a standard far above high-end private fitness centers.  College faculties now typically include a few name-brand novelists or celebrity artists — who are paid premium salaries.  The “support services” on the typical college campus have grown from barebones to a whole galaxy of therapeutic and assistive alternatives.  The price of tuition reflects the typical college’s army of professionals who staff the women’s center; the writing center; the undergraduate research center; the internship program; all the racial, ethnic, and sexual orientation identity-group programs; the community service initiatives; the tutoring programs; the crisis intervention center(s); the hate-speech reporting system; and so on. 

Less studying, more amenities, good times with your peers — let’s face it: college can be fun. Very fun. In fact, one could argue that it currently presents the most attractive deal in American capitalism: secure your future and have a great time doing it. This factor, along with the power of custom (which Peter describes so well), means that the higher-ed bubble may expand even more before it pops.

It bears remembering, however, that demand for a product or a class of products doesn’t have to completely collapse before the economic structure collapses. Our two most recent bubble economies, the dot-com boom and the housing boom, bear this out. While the phenomenal tech-stock prices of the late 1990s seemed to collapse overnight, no one would argue that the fundamental demand for technological innovation vanished. The digital age rolled onward. Similarly, while the housing market is certainly in economic crisis, America is still a nation of homeowners, and the vast, vast majority of homeowners still make timely mortgage payments.

Most people can see college as an almost mandatory rite of passage that is also fun and career-boosting, but if even 10 percent of wavering college-age Americans change their mind — because they either discover better alternatives or simply can’t afford the spiraling costs — then the bubble may well burst. Bubble economies are built on spiraling demand. Can any given college withstand 10 percent enrollment decreases without layoffs or without painful cuts? And a 10 percent loss wouldn’t fall evenly. Universities like Yale would likely roll on. The world’s best universities always have a market for their educational product. But what of the legions of second-tier private schools that cost nearly as much as the nation’s best? Could they withstand a 15 percent or 20 percent loss?  

The world of the bursting bubble may not feature shuttered universities (though certainly some smaller private or public universities may fail); it is more likely to be a world of layoffs, of hiring freezes, of aging infrastructure, and of empty or half-full buildings. Bitter faculty, angry students, and besieged administrators would change the psychology of campus, making the situation feel much worse than it will be. It will also be a time of reform, where sacred cows may be slaughtered and where fat will be trimmed.  

Will all this happen? I don’t know. I tend to think so. I tend to think that prices cannot continue to outstrip inflation and wage growth without a substantial correction in demand. But perhaps if the economy comes back strong enough, soon enough, higher ed will postpone its day of reckoning.

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