America’s Education Bubble

Nov 9, 2015 Mohamed A. El-Erian

If not handled carefully, the pursuit of an important social goal can sometimes have serious economic and financial consequences. America’s effort to expand access to student loans – a fundamentally good initiative, aimed at enabling more people to pursue higher education – may turn out to be one such case.

SAN FRANCISCO – One of the fundamental purposes of government is to advance important public goods. But, if not handled carefully, the pursuit of significant social goals can have unfortunate economic and financial consequences, sometimes even leading to systemic disruptions that undermine more than just the goals themselves.

This happened a decade ago in the United States, with the effort to expand home ownership. It has been playing out more recently in China, following an initiative to broaden stock-market participation. And it could happen again in the US, this time as the result of an attempt to improve access to funding for higher education.

In the first case, the US government eagerly supported efforts to make mortgages more affordable and accessible, including the creation of all sorts of “exotic” lending vehicles. The approach worked, but a little too well. The surge in debt-enabled demand drove up real-estate prices, while banks’ greater willingness to lend led many people to purchase homes they couldn’t afford. The collapse of the subsequent bubble – a major contributor to the 2008 global financial crisis – nearly tipped the world economy into a multi-year depression.

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Mohamed A. El-Erian

Writing for PS since 2010
129 Commentaries

Mohamed A. El-Erian, Chief Economic Adviser at Allianz, the corporate parent of PIMCO where he served as CEO and co-Chief Investment Officer, was Chairman of US President Barack Obama’s Global Development Council. He is President Elect of Queens’ College (Cambridge University), senior adviser at Gramercy, and Part-time Practice Professor at the Wharton School at the University of Pennsylvania. He previously served as CEO of the Harvard Management Company and Deputy Director at the International Monetary Fund. He was named one of Foreign Policy’s Top 100 Global Thinkers four years running. He is the author, most recently, of The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse.

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0 Comments on this paragraph, 40 in all 40 Comments on this article

Ed Rector Jan 18, 2016

Mohamid sees "bubbles" and "long-term risks" everywhere he looks.
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Mark Feldman Nov 18, 2015

The American system of higher education is not simply a bubble; nor is it just a misallocation of resources. Its growth and the legitimate public need for education, along with a misguided public trust that the system provides that education, has put it in a position to attract the cream of the corrupt to its top positions.

David Riesman and Clark Kerr saw this a far back as 1980. (See my blog, www.inside-higher-ed.com for quotes and references.)

I don't have room to here to explain in detail what has happened (My blog is for that.), but I can give a brief outline.

Universities, sometimes with "national need" grants, "award" Ph.D.'s to people who they know should not even get a Master's degree. (See my blog for specific examples.)

Many of these people become "professors" at regional state colleges. There they are either incapable, or too insecure, to teach their students. (See my blog for appalling examples.)Many of these students are future K-12 teachers. Thus, k-12 suffers.

It then becomes advantageous for an individual to get a college (actually, high school) education, but, overall, this system is costly for the country - though very profitable for the colleges.

This is not just economically costly. It is politically and socially dramatically costly.
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Tom Shillock Nov 15, 2015

The idea that the macro economic benefits to a country of having N% people with college educations might be offset (or more than offset) by the dead weight cost of their debt is interesting.

This might be the case if A) there are insufficient jobs for the college graduates, or B) if the preponderance of jobs available do not require a college degree, either because employers do not require it or because it simply is unnecessary.

As Richard Freeman (Harvard) pointed out the global workforce more than doubled between 1990 and the early 2000s at the latest. Those workers were low cost, resulting in offshoring by firms in developed countries. This reduced demand for costlier workers in developed economies. Whether college graduates in America over the period would have experienced lower unemployment rates or higher compensation had GDP not fallen so far below potential is another interesting question. We know that graduates entering an economy in recession are paid less and take over a decade to reach parity with those who enter during 'normal' or boom times.

Most economists seem to believe that technology based economic growth requires more skills. But this is a profound misunderstanding. In terms of broad based employment technological development requires less skill because the skill and knowledge are built in to the products that implement those technologies. Were this not the case there would be little if any productivity increase from technology.

The economic value of college per se has little to do with skills other than social skills and perhaps a demonstration that those who graduate can follow orders and engage in quasi-literate conversation. As a mechanism for boosting economic growth higher education is largely a case of malinvestment.
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E Walker Nov 15, 2015

As is typical of economists, El-Erian ignores the role of fraud in explaining bubbles. Somehow the housing bubble in the US and the stock market bubble in China have nothing in common with the 1929 Crash, which as the Pecora Commission showed was caused by intentional fraud.
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Harriet Baber Nov 15, 2015

Government interference and the current ‘business model’ in higher education has jacked up costs. While the ratio of faculty to students has remained constant, the ratio of administrators to students/faculty has tripled. And they’re much more highly paid than faculty. Add to that the vast expansion of student services personnel and glitz—fancy eateries, climbing walls, etc.—we now have to sell ourselves to students. And the time, money and additional personnel who deal with accreditation and government paper.

Dismantle that system, per impossible, run universities like universities rather than consumer services, cut back on the expensive top-heavy, and get rid endless ‘assessment’ and you can have cheap and good higher education.
- Tom W Nov 15, 2015
  
  Yes Harriet, but it will be very difficult to remove the increased administrative burden. Most of this has been in response to student and societal demands. The specific needs and challenges of every identifiable group need to be met by an army of administrators. PR professionals and lawyers are needed to deal with rolling conflicts.
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m r Nov 13, 2015

The learned author may well consider that sudden/ dramatic jump in student debt only since the debt crises broke out in US may have nothing to do with "educating" but IS a clandastine procurement of the "drug"- debt that US society is so addicted to..
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Procyon Mukherjee Nov 12, 2015

The true disconnect is between where focus for educational degrees is headed and where the new jobs are getting created. If these diverge, at some point, Erian is right that we could have a bubble.
- Tom W Nov 15, 2015
  
  How many "advocates" can the economy support? It seems that our colleges are failing to produce well-rounded, thinking citizens with useful skills, instead opting to convince students that they just need to find something to be critical about and focus on it.
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Jose araujo Nov 10, 2015

Unfortunately I think most of this fundamentalist views that Government is Evil and Corporations are good, is just intellectual laziness, because have this persons stopped to think that most of what is bad about governments are influenced by corporations and interest groups?
- Joe Beckmann Nov 15, 2015
  
  Fortunately, El-Erian knows better than the "kant" of "market determination." The reason for the bubble is that for profit and entrepreneurial colleges found an unlimited funding source through irresponsible student debt management under Clinton-Bush-Obama managers. Watch the film "Ivory Tower" for the isolation of those entrepreneurs from their responsible curation of the workforce. Like the bubblers of 2001, they deceived themselves and policy makers that "Greed is Good." It ain't.
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- Jose araujo Nov 11, 2015
  
  Dan, so how do you compare things? You just use the cases that are favorable?
  
  I'm anything but Communist, I "hate" government and paying taxes, but we have to realize that markets don't solve everything and that some goods must be produced by governments.
  
  We must be very demanding of our governments and stop admitting the concession and monopoly policies most of them are doing under the free markets excuse.
  
  We pay taxes so we must have the services that go along with them. Health, Education, Security, Social Security.
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- dan baur Nov 10, 2015
  
  And stop comparing accross countries (Finland vs. U.S.) and accross generations (now vs. 1700). Comparisons are valid only when "everything else is the same" - that means everything else other than the measure f interest. Even then, you cannot be sure if it's coincidence or causal. Learn the basics first!
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- dan baur Nov 10, 2015
  
  Jose,
  Are the corporations responsible for communist/socialist failures all over the world? Do you even know the recent history?
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Jose araujo Nov 10, 2015

Do you know that someone with a BA earns almost 1 million dollars more then someone without education? http://www.usnews.com/education/best-colleges/articles/2011/08/05/how-higher-education-affects-lifetime-salary

So even in taxes alone, people who pursue higher education pay their education several times.
- Mr Econotarian Dec 1, 2015
  
  Students only pay back in taxes if they graduate. Only 55 percent of first-time US undergraduates who matriculated in the fall of 2008 finished a degree within six years.
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Ed Gunther Nov 10, 2015

And who anointed this author to define the fundamental purposes of government? Our founders had 3 fundamental purposes for our gov't. 1. Provide for the common defense. 2. Enforce contracts between individuals. 3. Protect citizens from crimes against themselves or their property. I will give him this: He is at least honest about the root cause of the toxic mortgage crisis - gov't. and it's attempts at social engineering. If I had to point to one major factor in the higher costs of higher education, it would be gov't. once again trying to systemically engineer in direct contradiction with something that actually is fundamental, the laws of supply & demand.
- Joe Beckmann Nov 15, 2015
  
  Don't kid yourself that four years at a for-profit college is equivalent to four years at Harvard. Again, it ain't.
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- Jose araujo Nov 10, 2015
  
  So your are the one who determines what the founding fathers wanted?
  
  Hey, the bible also didn't mention higher education and Universities, maybe we should go back to the middle ages.
  
  We can only be truly equal if we can access the same education.
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Stalking Horse Nov 10, 2015

One of the fundamental purposes of government is definitely not to advance important public goods. Government ruins everything it touches. I and most of my friends paid our way through private universities a generation ago before everybody got the bright idea to make it "more affordable". Of course it cost less, everyone involved knew we were talking about "real money". Similarly in housing the pain outweighed the gain.
"What policymakers must determine is how to invest in education in ways that maximize these benefits, without creating new risks." Please stop helping us! Just get out of the way and let people do as they wish without interference.
A locally run bank would never lend $100,000 of money for which it is responsible to and Art History major with no collateral.
If 60% of $1.2 in debt is held by households with net worth of less than $8,500, I can spare you the suspense, it's not going to be re-paid (by the borrowers). It will be re-paid by stealing it from tax-payers,(some of whom clean fish or pick apples for a living) inflating the currency even further. That is made possible by another vehicle designed to help us: The Federal Reserve Bank. They will make money out of thin air, and your dollars on deposit will be worth slightly less
- Jose araujo Nov 10, 2015
  
  So your idea of government is an entity that distributes concessions and monopolies and sets privileges to some chosen ones?
  
  A government makes you buy good from selected ones who extract profit protected by laws and regulations?
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- Michael Public Nov 10, 2015
  
  "One of the fundamental purposes of government is definitely not to advance important public goods. Government ruins everything it touches." Well said. Bravo.
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Aale Hanse Nov 9, 2015

This idea of financing educations is dubious and makes you wonder who is going to gain in the long run. Looking at the numbers of the unemployed, the under employed and those that work for a subsistence wage then they explode exponentially. A good education would be to explain to them why they are in such a predicament.
Giving people the chance to have an education can be seen as a good idea but what is the advantage of having that education which is and can become sub standard when the chance of employment diminishes all the time. Sure a bright student will be plucked out and incorporated within the system. What you will end up with is the unemployed, the under employed and those that work for a subsistence wage that take up your offer all lumbered with debt still in the same situation. What is to gain from that?
We have to ask ourselves what is the desired outcome of such a scheme to lumber people with debt after promising so much. Who will gain from such trickery? Those to gain the most will be universities and lecturers for sure along with financial intuitions and their cohorts the insurance companies. When you would think greed has hit a low level they come up with another way to drain the people of anything meaningful in life. To make matter worse they will use government regulation to control them.
Until world economics becomes neutral, this and other schemes to gain advantage will persist in some form or another. Other circumstances will play a part in all this like our environment but could just add to the arsenal.
Hopefully the people affected by this will wake up and see they are doomed from the start and take appropriate action.
- Joe Beckmann Nov 15, 2015
  
  A century ago higher education was free, and supported by its endowments or land grants (in the US). Seventy years ago it democratized, with veterans' grants for public and private college. Gradually educators realized they were selecting by class and race, and successfully lobbied to add loan funds to mitigate their bias. Under Clinton, Bush, and Obama those unregulated funds were gradually privatized, and the bubble ... got ... bigger. Now it's a problem, largely wrought by the greed of higher ed converging with the greed of private financing and public irresponsibility. It has nothing whatsoever to do with "markets" nor with education itself, nor even with workforce development. It's just...greed.
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Mike Green Nov 9, 2015

there's the forest, oh look trees. How do you write a piece like this and miss the most important factor? the student loan crisis has been, yes inflamed by the US policy of guaranteeing more and more debt. but the root cause has been the total disconnect between the schools and their customers. Higher education is one of two major economic sectors that operate with total disregard for the ability of the customer to buy their product. the other is health care. and like health care, we NEVER discuss WHY costs are so high, just endlessly play a shell game trying to shift the expense to someone else. The sacred aura around a top school diploma has been am excuse for pigs at the trough; look at any large school and tell me you see a cash flow problem. between the sports programs the business development, the tax free real estate investments and fat endowment balances argue to the contrary. never mind the expense spent for faculty and resources. What needs to happen is a major REDUCTION in student loan money. force a realistic market response to the insanity. right now we are like drug dealers getting our users in deeper and deeper with a little taste, using the perceived glory of the diploma to jack up families way beyond their ability to repay.
- Joe Beckmann Nov 15, 2015
  
  It's only in the past two decades that students were ever thought to be "customers" or "consumers." They were victimized by the greed of a few, then more, then most "educators" who oversell their administration while cutting their faculty into bits of adjunct part-timers.
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- m r Nov 11, 2015
  
  Thanks- a better analysis and understanding of the problem than the original article.
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Andrew Allison Nov 9, 2015

Perhaps more socially significant is the fact that unemployment for those without a high-school diploma is 50% greater than among those with one. It'a also noteworthy that there's NO employment benefit to attending college but not graduating. Doesn't this suggest that we should make it harder, rather than easier, to go to college?
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Michael Public Nov 9, 2015

I think the problem is not the financing, but the value provided. Programs are all too focused on working for an investment bank or Google. There is only limited amount of these sorts of positions and competition borders on extreme. There should be a greater focus on skills that are more broadly usable. Then the returns on these programs would be higher.
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dan baur Nov 9, 2015

To Jose araujo
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dan baur Nov 9, 2015

"Public education is better and cheaper then private education" - who told you this? Just because the costs are hidden, doesn't mean they don't exist. Are you aware of poor Indians paying for private education because the free state education is abysmal?
- Alex Leo Nov 10, 2015
  
  Are you joking? Finnish universities are better than US private universities?
  
  Jose, you must distinguish between a scientific approach and b/s approach. You have a theory, it happens to be wrong, but you try to support it by twisting the facts.
  
  I think you have gone to a bad public university.
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- Jose araujo Nov 9, 2015
  
  Finland vs. USA, or any European country vs. USA. For any anecdote you can come up, I can produce 1000x more.
  
  Bbut the proof on the pudding is that Education was a private endeavor before the Humanist revolution. So it took some centuries for humanity to realize that this kind of goods should be made by governments, and that's one of the reasons of the remarkable progress of humanity. We are talking education, but we could be talking about health, security, roads and a few other public goods.
  
  Public goods are better produced by governments, there are no reasons why they shouldn't. They don't follow under the perfect competition markets assumption, so this are goods that aren't efficiently compensated in markets, hence the need for them to be produced and sold by governments.
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Jerry hough Nov 9, 2015

Once again, there are many good ideas, but the young people taking them out, especially those in the bottom half of intelligence, they don't understand the costs in the long run. And remember if 60% go to college, some by definition are below average intelligence and have below quality high school education.

Higher education is way too expensive. I came to Duke to teach in 1974. I remember how many deans and the like we had. As long as they can just increase tuition because of student loans, they just increase administrative posts, money spent on graduate education, etc., etc.

We cannot just have "motherhood" ideas, but new ideas--like those found elsewhere. The German-Japanese special programs for upper high school and junior college do more for economic growth than loans for private on-line education that are general education.

The poor and middle income need to be told that a big loan will prevent them from making a down payment on a house, etc.
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Tamer Kirac Nov 9, 2015

Ei-Arian states it as it is, not as it should be. Education at public universities should be exactly as it states; public. That normally would mean, if not all, at mostly, public cost!

As a father of 3 young adults, now all professionals with degrees from public universities in State of Washington, they have been burdened with a total of $65,000 of school debt upon their graduation. Following graduation, in addition to their day-to-day living expenses, their school debt has made it extremely difficult for them to get by in their daily lives with the prevalent new-graduate pay scales.

Call it what you will, interpret it as you want; current and future generations of children of America should be considered to be its assets, all deserving educational opportunities at no cost, or an equivalent public payment, towards their education at schools, not public.
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Jose araujo Nov 9, 2015

In our society Education should be free.

Government is also much more efficient providing education that any private institution. Public education is better and cheaper then private education.

Student loans are just a way of Government of increase funding, and a way of Government funding private institutions, that have no reasons to exist.
- Jose araujo Nov 9, 2015
  
  @dan
  
  One thing that its good about PS is that there is no limit for the comments, so you could provide your views on the subject and increase the quality of this forum.
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- dan baur Nov 9, 2015
  
  The commenting section of project-syndicate sucks. Bill Gates should demand better.
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- Jose araujo Nov 9, 2015
  
  If we run our governments like corporations, then we will have the risk of having no country in 40 years (average life span of a fortune 500 company)
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Paul Daley Nov 9, 2015

There are good ideas here, particularly regarding endowments, but Mohammed oversells them. Educational loans are not likely to produce a bubble because the degrees they fund are hard to use as collateral to support new loans. So you don't get the chain reactions and explosive growth in lending that you can get with real estate or stocks. But they can burden incomes, which is Mohammed's main point.
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