The Higher Education Bubble is Growing

A growing disconnect between the skyrocketing costs of getting a college education and the falling wage premiums for college graduates has set the stage for an economic bubble of sorts. But this bubble will not burst with the spectacular bang of a Wall Street crash. It will ooze across the years instead, its effects shackling millions.

The chart above shows the increase in the total nonrevolving consumer credit versus the consumer price index. The point of the chart is simple: college tuition has risen faster than inflation, revealing that the cost of a college degree has far outstripped its potential economic value (with the exception of certain degrees and brand schools) in the marketplace because the wage premiums of college degrees have fallen for most graduates.

A study by the Economic Policy Institute (and another one with findings to the same effect) reveals that wages of college graduates have been falling in the last decade: “The wage declines since 2000 stand in sharp contrast to the strong wage growth for these groups from 1995 to 2000.” But this study ignores the fact that as early as the 1990s, graduates from mediocre public colleges and universities were seeing such low wages, many of them were having to work menial jobs after graduation.

Why are wage premiums for college degrees falling for many graduates? The economy seems to be hollowing out, as proposed by David Autor: jobs are plentiful at the very high end of the spectrum and at the very bottom, with little left in the middle.

A graphic from the Wall Street Journal’s Only Advanced-Degree Holders See Wage Gains, shows this hollowing out that Autor theorizes at work: those with a high school diploma saw the smallest wage decline of all the groups, with the exception of those with Ph.D, J.D., MDs and M.B.As, who saw an increase in average earnings. In other words, if you have an MD, MBA or a PhD, you’re more likely to be doing well. But if you have some college, a college degree or even a master’s degree, you are more likely to see a wage decline—a decline bigger than those with only a high school education. 

It is important to note that, in all likelihood, graduates of only the most prestigious PhD., MBA, MD, or JD programs are likely to see the high premiums on those advanced degrees.

Globalization is an obvious culprit behind the hollowing out of the economy, working through insourcing, or the influx of a highly educated workforce. In health care, for instance, “Approximately 15 percent of all healthcare workers and 25 percent of all physicians in the United States were born and educated elsewhere. This means that 1.5 million healthcare jobs are “insourced,” occupied by foreign-born, foreign-trained workers brought into the United States on special visas earmarked for healthcare jobs.”

Why insourcing causes wages to fall is a matter of simple economics: an increase in the number of highly educated job seekers reduces the overall wage premium associated with higher education, all other factors being constant. But, a critic might say, a rise in the numbers of healthcare jobs could absorb the effect of insourcing. This would need to be a pretty big increase, however, in order to absorb all of the domestic talent and foreign talent combined. In the end, insourcing is catastrophic because it has a long term detrimental effect on the incentives for the education in this country. If we can import highly trained workers for those jobs that can’t be exported, then there will be no reason to support higher education in America, or much incentive to get a college degree.

The two factors of skyrocketing costs and general decline in wage premiums associated with degrees add up to a bubble, one at least 900 billion dollars big, according to a recent study by the Federal Reserve Bank of New York.

But this bubble, when it deflates, will have a very different effect than the deflation of the housing bubble did—for the most part, it will be a disaster hidden from the view of the mainstream press, lacking the kind of spectacular drama of the collapse of Wall Street banks in 2008.

The reason why this crash will not be televised has to do with the fact that student loans cannot be discharged in an ordinary bankruptcy. This feature of law will act to hide the enormity of the economic problem by making it a private matter of individual loan holders.

College graduates leaving school with degrees that are worth less than what they paid for them will carry a huge financial burden for the rest of their lives; they won’t be buying new cars or homes, not with tens of thousands of student loans on their backs. (Thought this demand effect could be masked if the insourced workers will be spending instead.) They will be, rather, living hand-to-mouth on menial job wages, or be forced to move back in with their parents.

The Pew Research Center reports that in 2009 16.7% or 51 million Americans lived in multigenerational households. “The sharpest growth was among adults ages 25 to 34, 8.7 million of whom lived in multigenerational households in 2009, compared with 7.4 million in 2007.” While boomerang kids may be returning home in droves thanks to the lackluster economy, the phenomenon began well before the downturn. The Boston Globe wrote as early as 2005 in the article “Believe It or Not, Moving Back Home Is Now In“: 65% of college graduates expect to return home.

Add to this the possible doubling of student loan interest rates coming July 1 this year and you can imagine the enormity of the looming problem.