3 ms·

Visualizing the U.S. Higher Education Bubble

15 points by cwan 16y ago

kbob 16y ago
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 16y ago
  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 16y ago
    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).
sliverstorm 16y ago
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 16y ago
  >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.
kkowalczyk 16y ago
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.
btilly 16y ago
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 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.
ataggart 16y ago
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 16y ago
  Students loans have been securitized for quite a while: http://en.wikipedia.org/wiki/Asset-backed_security#Student_loans http://en.wikipedia.org/wiki/Asset-backed_security#Student_l...
billswift 16y ago
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?
vannevar 16y ago
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.

15 points by cwan 16y ago

kbob 16y ago

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 16y ago
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 16y ago
  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).

sliverstorm 16y ago

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 16y ago
>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.

kkowalczyk 16y ago

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.

btilly 16y ago

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 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.

ataggart 16y ago

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 16y ago
Students loans have been securitized for quite a while: http://en.wikipedia.org/wiki/Asset-backed_security#Student_loans http://en.wikipedia.org/wiki/Asset-backed_security#Student_l...

billswift 16y ago

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?

vannevar 16y ago

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.