

Visualizing the U.S. Higher Education Bubble - cwan
http://seekingalpha.com/article/224333-visualizing-the-u-s-higher-education-bubble

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kkowalczyk
I'm not at all convinced by the "higher education bubble" articles.

There's a difference between a bubble and lack of price elasticity.

The stock bubble was different, because there are periods where stock prices
are driven well beyond their inherent value by humans acting emotionally. Then
the prices crash and get closer to their inherent value.

The same irrational behavior happened with housing bubble where speculative
behavior driven by cheap (and irrationally given) credit drove house prices up
to a level where there was no one left to bid up and speculators were left
with unpaid credit and houses whose value plummeted, hence the crash.

Bubbles are tricky to predict before the crash happens. Just showing that a
price of something goes up faster than income is not enough.

When oil prices hit the stratosphere not that long ago no-one called it an
"oil bubble".

The fact that Apple computers consistently cost more than an average PC
doesn't constitute an "Apple bubble".

Prices are still governed by supply and demand and there's another
explanations for quickly rising prices of higher education: there was money
left on the table and universities caught on to that fact and are rising the
prices until they find a price that people are not willing to pay. Even then I
don't expect a crash, as in dramatic reduction, just a small correction to the
acceptable level.

I can imagine some structural changes that would lead to lowering cost of
higher education.

1\. Supply side increases i.e. more universities, leading to more competition
for students and lower prices as a result.

2\. Demand side decrease e.g. a mass change of people's opinion of the value
of higher ed leading to massive drop in number of people applying to college
and going to work instead. Or a mysterious virus decimating college-eligible
population.

I don't see neither of those scenarios playing out on a scale big enough to
change the fundamental supply/demand dynamic.

The problem with the "higher ed bubble" articles that I've seen so far is that
they focus on one variable (cost of higher education raising faster than
income) and making simplistic analogies to bubbles of the past.

They don't consider that those past bubbles had systematic changes that were
the root causes of said bubbles and they don't provide data to show a
systematic change that leads to unrealistically inflated prices of higher ed
and how that systematic change is not sustainable in the long run.

High prices are symptoms, not causes, of bubbles. However, just because you
cough, doesn't mean you have a flu and being gray doesn't automatically make
you an elephant.

I don't see society as a whole suddenly deciding that higher education is not
worthwhile or a sudden surge in number of available options or any other
scenario that would alter supply/demand curve.

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ataggart
I'm not a fan of the provided definition of "bubble" as it's a purely
statistical definition, free of any causal factors. You know there's a bubble
when you see it pop; the boom is inflated by the misallocation capital which
sows the seeds of its eventual bust. The best one can hope for it to look for
things which cause systemic misallocation of capital within a market.

Without claiming there's a bubble, I do find it interesting that factors
leading to the misallocation of resources in the housing sector -- near-zero
interest rates, government-subsidized/guaranteed loans, an "everyone should be
able to own a home" political mindset, etc. -- very closely parallels the
current situation in higher education. The only thing missing is the ability
to securitize college loans, leverage them to the hilt, insure them, and then
wait for the eventual government bail-out when the music stops.

~~~
jbarham
Students loans have been securitized for quite a while:
[http://en.wikipedia.org/wiki/Asset-
backed_security#Student_l...](http://en.wikipedia.org/wiki/Asset-
backed_security#Student_loans)

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btilly
I'm not convinced that there is a bubble. A few weeks ago I was in a
discussion with yummyfajitas about the cost of college education. The list of
possibilities that I gave at <http://news.ycombinator.com/item?id=1615842>
seems to me to offer food for thought about why costs may have been rising.

Well, thinking about it, there is a bubble. For-profit institutions like the
University of Phoenix have been caught engaging in behavior that simply cannot
be sustainable long term. There will be backlash. But I doubt that, say,
Harvard has much to worry about.

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vannevar
The author ignores one of the key requirements for a bubble, in the definition
he provided: that the asset in question 'may be freely exchanged'. A year of
college (or a diploma, for that matter) cannot be freely exhanged, and
consequently there can be no bubble. There is no market for an education as an
asset.

There is a market for education as a service, and it can be argued that while
demand is high for the service now (leading to higher prices), that demand
will drop in the future. But there won't be any secondary effects like the
housing bust, where people depended directly on the value of the asset. Not
sure why people are promoting this fallacious 'education bubble' meme as some
kind of scare tactic, but there must be an angle for them somehow, I see a lot
of it.

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billswift
An "education bubble" has been discussed on quite a few sites in the last year
- the problem is that if it bursts, what will that mean? No one that I have
seen has presented any ideas about what a "bursting" education "bubble" will
look like in real world terms. So, if it can't burst, is it really a bubble?
Or is it just excessive price increases, that may keep rising or that may stop
without any collapse?

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kbob
The graph is deceptive, I think. The X axis is household income, which has not
been linear with time, and likely declined during some of the recessions
noted. It makes no sense (to me) to use that as the independent variable.

~~~
houseabsolute
In addition to that flaw, the prices are nominal. Even if the real price were
staying exactly the same, you'd still expect to see an positive slope on this
line because of inflation. What a worthless visualization.

~~~
Anon84
Household income (in principle) should also increase with inflation, so the
positive slope should always be there. The significant part of the graph (if
there is one) is that the slope is not 1 (which would mean that tuition and
income are growing at the same pace) with periods where tuition grows
significantly faster than income.

There's also the added complication of comparing an average with a median.
Averages are much more sensitive to outliers than medians (when Bill Gates
enters a bar, the average income increases significantly, but the median
remains the same).

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sliverstorm
Ok, enough already. We need to move on to the next step.

Assuming you're right, and we are in a higher education bubble-

\- What are going to be the consequences?

\- How do we fix things?

\- In an effort to avoid the bubble, what actions should an individual take?

If you won't be helpful about it, as far as I'm convinced you're just another
doomsayer.

~~~
ataggart
>How do we fix things?

Simple, stop doing the things that result in misallocating capital into the
higher education market, the boom half of the boom-bust cycle. For example,
ending government guaranteed college loans would instantly make private
lenders more wary of handing tens of thousands of dollars over to an Art
History major with a 2.0 GPA. Of course this would result in fewer people
going to college, a necessary feature of mitigating a bubble.

Simple things are not always easy.

Large swaths of our society think everyone must go to college to succeed in
life. Apparently the media and political elites who foment and abet this
notion don't know how much a plumber makes, especially when your water heater
breaks on a Sunday morning.

