Musings on the Education Bubble

I think the main impetus driving the development of the education bubble was the Cycle IV recession in the '70s.  This long-lasting recession, coupled with the cessation of things like the Vietnam War, the opening of China and its eventual conversion into de facto state capitalism, the increasing availability of computers in the late '70s into the '80s, the inflation-adjusted price of oil peaking in 1980, and even the various social movements that took place in the '60s and '70s, probably all played a role in it.

So you have a long-lasting recession driving companies to start automating and offshoring to save costs, which also raises their profits during the subsequent bull market by cutting down on overhead.  Generally, as Paul Krugman and his citations point out, the easiest jobs to automate are those involving a generally fixed, easily programmable routine (whether blue- or white-collar).  With the comparatively slow computers of the '80s, this generally meant things like assembly line work.  Offshoring, likewise, probably hit manufacturing the hardest because (1) the telecommunications infrastructure wasn't yet in place to enable cost-effective offshoring of any white-collar work, and (2) unlike construction, maintenance, and the like, you don't actually need to be on site for manufacturing—you can simply have the product made overseas and shipped to the U.S. (or wherever) when done.

Also, you have government (which, at least during this time, wasn't really affected much by the recession) growing, and a significant percentage of government jobs are skilled white-collar ones that are best done with a college degree.  And you also have the Japanese Bubble in full roar which of course is making some people fear America is "falling behind" educationally (you see this sentiment today as well, just with China).  And you have an increase in high-tech, which requires educated workers who know what they're doing.  And you also have Sallie Mae, and with a Cycle-degree bull raging—and especially afteer the fallout from "Black Monday" in 1987 subsided—what's a little more credit?

Essentially, then, you have the blue-collar manufacturing economy faltering, being automated, or shipped overseas, while at the same time skilled white-collar jobs are growing in number, even during these mild recessions.  You can see from that how the "everyone should go to college because it practically guarantees you a good job, and not going to college means you probably won't be able to get any job better than flipping burgers" mentality came about. 

On top of this, you also have the various social movements dedicated to stopping inequality (real or perceived) whose heyday was in the '60s and '70s.  If not enough members of X group go to college, they'll be stuck in the same positions they were shunted into by prior prejudices—how is this progress?

So, you have:

• ·         Fewer decent-paying but unskilled or semi-skilled blue-collar jobs that don't require a college degree and for which they made no pretense that one was required, which seem to be the most affected by recession 
• ·         More decent-paying skilled white-collar jobs that legitimately require a college degree, which seem to be the least affected (if at all) by recession
•          More people wanting, needing, and/or feeling it is their right to go to college / send their kids to college 
•          Greater ability of these people to afford college (owing to student loans, etc.)

This results, of course, in a higher demand for college admissions, which can either be met by raising tuition prices, by expansion of existing colleges / building of new colleges, or (because Sallie Mae will be there for you) both.  You end up with a higher supply of college students, which results in a higher supply of college graduates.

Now, let's pretend you're a company.  You're hiring for a certain position with three open slots and a hundred applicants.  In your hiring process, you obviously give weight to persons with a college degree (preferably in your field, but a degree in any field is better than no degree at all).  In ye olde dayes, you might have, say, 10 applicants with a degree (of which 4 are in your field), while the remaining 90 don't.  Since there are 3 open slots, if your degree is in the field in question you probably have about a 3/4 chance of being hired, assuming all four candidates are roughly equal.  If it's not in the field, don't despair—you may be a better candidate than the ones in the field because of experience, interview answers, or in general the other factors besides education that play a role in the hiring process.

But today, you have 70 applicants with a degree (of which 20 are in your field), and 30 without.  There are in fact now two open slots, because the third was consolidated or something to that effect.  Your chance of being hired is effectively 1/10 if all candidates are equal every other way.  The degree isn't a magic ticket like it used to be.

The trouble, of course, is that it's still more valuable to have a degree than to not have one.  Those 30 people with no college education at all—they're not getting hired, it's going to be two out of the top 70 (and probably, but not necessarily, out of the top 20).  In other words, the high supply of graduates leads to a lower marginal value of having the degree.  But there is still marginal value. 

Is it worth the cost?  Maybe.  Maybe not.  The point is, perception has now shifted towards the degree being a virtual necessity to have just about any job at all.  This of course, results in a higher demand for college admissions, higher tuition prices, higher student loan debt, a higher number of graduates, and a still-lower but non-negative marginal value of having the degree.  And I haven't even got into the role that professiorial tenure and collegiate athletics might have to play in this.

The billion-dollar question, of course:  What bursts the bubble?  Well, most likely a social mood shift, as (obviously) suggested by The Socionomist, as well as by the "Schumpeter" blog on The Economist, both of which suggest the early stages of this are already starting to happen.  The insulation created by the state support for public universities and the prestige factor (and thus higher demand) for private universities has likely dampened any immediate recessionary impact; the Primary-degree "recovery" has likely delayed the reaction further.