Saturday, December 18, 2010

Yammering about the Higher Education Bubble

Forbes has an article by Jerry Bowyer, who was a founder of the Allegheny Institute on the supposed higher education bubble.  He parallels (and actually quotes) Carnegie Mellon economist Richard Vedder arguing that the return on a college education is not, at this point, positive.  In essence he creates a novel concept called the price earnings ratio for higher education.  The argument is novel, albeit flawed.  He suggests that the cost of attending an institution of higher education for six years (the average time to degree for many public institutions) never actually gets recouped for most students based on the higher projected income that one could expect from an average college degree.

For years the College Board has published data suggesting that the net return to an individual over a lifetime for a college degree is about a million dollars.  (Or in theory, based on a 40 year job expectancy about $25,000 per year.)  The College Board data is accurate but like Vedder and Bowyer's data is a gross miscalculation.  Vedder argues that many people who go to college end up being "under employed." Some indeed are under-employed.  But the average, even if it is beginning to shrink is still higher.  The bubble believers project incomes will grow in a linear fashion over a person's work life.  That is probably not correct - as people seem to go through phases where their initial incomes are not as high as they once were but their long term incomes may actually accelerate as the new college graduates gain experience.  Census data (as presented above) seems to confirm the College Board conclusions.

But the Bubble advocates have lots of flaws in their assumptions.  First, an average degree (either for the bubble theorists or for the College Board) may not exist.  A graduating nurse can expect a beginning salary that is considerably higher than the average wage in America. But one who graduates in ethnic studies may not receive a higher salary.   But even this data is flawed.  A philosophy major may not receive much with a BA but they are more likely to be successful in law school.   So what you take in college can have a huge influence on what you receive in salary.

Second, salary and lifetime earnings are not the same.  Most employment data suggests that a college graduate spends a lot less time in unemployment lines (although the current recession seems to have somewhat contradicted that data) than the average high school graduate.  

Third, A BA may be a gateway to higher earnings.  While there is some reason to suggest that the earnings differential is not as great as it once was for a BA - the differential for advanced degrees seems to be holding.  As they become more common that differential may lessen.  The reality of the last 20 years has been that the value of a high school diploma has diminished in both nominal and real terms.

Fourth, there may be very good non-economic reasons for pursuing a college degree.  

Finally, there are the issues of the appropriate price for higher education and the appropriate distribution of costs.  Paying for college requires a perspective on time (what proportion of funding for higher education should come from savings, current income or leveraging future income through loans) and and also on who should bear the cost.  If the individual is the main beneficiary then they might bear a larger share of the total cost than if the major beneficiary of an educated population is society.  Traditionally, public institutions have been financed by direct contributions from government offered regardless of financial need.  While there can be an argument for continuation of at least a part of that largesse - the low rates of decades ago seem increasingly untenable.   At the same time, when prices were low savings and current income were assumed to be enough to cover education costs.  As prices have risen more and more students are borrowing against expected future earnings.   That makes the purchase of higher education a lot more like buying a house or retirement (a long term capital expenditure) and that may involve some differing assumptions about the current pricing structure.

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