When the prices of securities or other assets rise so sharply and at such a sustained rate that they exceed valuations justified by fundamentals, making a sudden collapse likely – at which point the bubble “bursts”.
I think it’s possible that the first part of this definition might be happening in higher education — though I’d wager that what’s actually happening is that universities are engaging in greater price discrimination and trying to capture some of the wage premium effects from higher education that have built up over the past three decades.It’s the second part of that definition where things don’t match up. Unless and until there is a sudden and dramatic shift in the valuation of a college degree, this is simply not like a bubble. From a knowledge perspective, there are far too many professions in the economy where degrees are still considered a necessary condition. From a sociological perspective, there are also far too many people who got to where they are in their careers because of the social capital built up at universities.
The big difference between the Mead position that bubble is a useful term to describe the higher ed industry today and the Drezner one that it sucks seems to spring from a difference in focus. Obviously, any discussion of a ‘bubble’ in higher ed is metaphorical; it transfers a term developed originally for assets like stocks and Dutch tulip bulbs into a discussion of higher ed. Dan thinks that the people who use the b-word for higher ed are saying that diplomas are the tulip bulbs here: a BA is the overvalued asset whose price is about to collapse.There’s no Académie Française when it comes to the blogosphere, so we can’t answer for how other people are using the bubble metaphor in their writing on higher ed. However, at Via Meadia, we don’t think about this primarily as a ‘value of degree’ issue. Although these days you can hire a lot of people with degrees at very low wages, and some degrees have been hit harder than others, we don’t think diplomas in general are the tulip bulbs whose value is about to collapse.Our society is going to continue to value and reward certain skills very highly, and certificates that credibly attest to the possession of certain skills are going to hold value. When Via Meadia talks about the bubble in higher ed we don’t mean that people will soon be using degrees from Harvard as wallpaper because they are so common and cheap.The bubble is something else: high demand for education has combined with an inefficient guild structure (guilds were once the dominant form of economic organization in everything from carpentry to textile weaving; today only a handful survive, mostly in the learned professions) and government price subsidies to create an unsustainable method of service delivery. It is this delivery system, not the diplomas themselves, that impresses many serious people as being caught up in something analogous to a bubble. People with college degrees are going to continue to earn more than people who don’t have them (though this will vary by degree), but they will be less and less willing to accept the high prices and slow methods by which the guild system delivers those degrees.The higher ed system that we know today is built around assumptions about a continued willingness of the public to pay ever-inflating prices for educational credentials, prices that continue to rise faster than the general level of inflation, making education continually more expensive with respect to other goods. Until quite recently, most academic administrators assumed that this would just go on and that the public would pay escalating prices either directly through tuition, over time through loans, or indirectly through government support. Based on those assumptions, the higher ed system has developed in an unsustainable way and a lot of that excess capacity in outdated production methods is headed for the ash heap of history on a pretty fast train.The higher ed bubble analogy refers not to the original financial market meaning of a bubble, but to the secondary and very long established extension of that financial metaphor into the industrial sector where bubble is habitually used to refer to overcapacity and asset prices, rather than to asset prices alone. A bubble develops in the steel market, for example, when erroneous beliefs about the future price of steel lead to over investment in steel plants. A relatively minor decline in the price of steel can then lead to dramatic changes in the steel industry as the formerly hidden overcapacity becomes evident.The point of the higher ed bubble analogy isn’t to compare Harvard diplomas to tulip bulbs or shares in the South Sea company; it is to compare higher ed to overbuilt or poorly structured industries that are cruising for a bruising. It is saying that higher ed is like the automobile industry that has developed too much capacity and the wrong kinds of capacity.The use of the word bubble to describe certain industrial and commodity market developments isn’t just the hijacking of a metaphor. These real economy fluctuations are often connected to financial bubbles; a bubble in the steel market that leads to over investment in the steel industry is generally going to involve inflated prices for stock in these companies and the debt that they issue. The recent housing bubble was a classic example of a bubble with both real world and financial market significance and consequences; there was excess capacity in the housing construction industry, the prices of houses were inflated in many markets, and financial assets based on the value of those homes (mortgages and mortgage backed securities, stock in construction companies, bonds of towns whose economic prospects rested on a continuing boom in suburban development, etc.). Financial market boom and bust cycles generally work themselves out pretty quickly; commodity boom and bust cycles take a little longer; industry cycles are usually longer still. Nevertheless they all share some common dynamics, and in our judgment enough of those are found in the situation of higher ed today that the use of the metaphor doesn’t require a 911 call to the language police.The big difference between the bubble metaphor as classically used and the bubble metaphor as applied to higher ed is simple: higher ed is a (mostly) non-profit industry. While colleges and universities issue debt (and with ratings agencies downgrading some higher ed institutions there is a small financial bubble in these securities that appears to be losing air), the higher ed bubble is less about profits and stocks than it is about capacity. We have built too much inefficient capacity in higher ed, and the bursting of the bubble won’t be manifested in a falling value of Yale stocks and bonds or of diplomas, but in a constricted hiring market, the closure of some institutions and painful contractions at others. It is also manifested in an excessive growth of student debt, much of which will not be repaid.Just as some cities were more vulnerable in the housing bubble, so some departments and some programs are more vulnerable in higher ed. Just as some of the consequences of the housing bubble were felt quickly while others will work themselves out over an extended period of time, so some consequences of the higher ed bubble are already being felt while others will be with us into the future. Just as well managed, efficient construction companies were able to ride out the bust while highly leveraged and inefficient companies went under, so some higher ed institutions will manage the transition reasonably well while others will undergo great stress and even collapse. And just as people continue to need houses no matter what is happening in the housing market, so the business of earning and awarding diplomas will go on — even if methods change.Look away from the difference between non-profit and for-profit industries, and higher ed looks to be in something very much like the early corrective phase of a classic boom and bust cycle. Overcapacity and over investment in some branches of higher ed is already leading to pressure to shift students out of the humanities and liberal arts and is likely to spread to law programs, where costs continue rising despite signs that enrollment may have already peaked.The contraction in demand for many educational services (at the prices now demanded) is being fueled by a growing reluctance among students and parents to take on more debt. There is a lot of evidence that students are downshifting; taking two years at community college before moving onto four year institutions and generally thinking harder about the relationship between the price of a given credential and its worth on the job market. The contraction would likely be much faster and more brutal if lenders bore more risk in student loans; government guarantees and the difficulty of reducing student loan obligations through bankruptcy make student loans more widely available than they would be if lenders bore more risk when and if students were unable to repay. But a bubble whose bursting is eased to a slow and gentle, sighing leak by government policy is still a bubble.The early signs of a bubble bursting are often seen in markets that are the most vulnerable before they spread to the others. In the housing bubble not all markets were equally affected, and the most bubbly states and cities got hammered while other markets didn’t suffer nearly as much. We’re now seeing the same warning signs in higher ed.One way to get a sense of the problem is to look at mainline Protestant seminaries. Historically, these schools provided professional training for those seeking full time employment as pastors, education specialists and others in church work. They are professional schools producing professional degrees: masters and doctoral degrees in divinity work more or less like the degrees that open the door to college teaching, medicine and the law. The Master of Divinity is often a terminal degree leading to ministry; a doctorate of divinity is sometimes used by ministers but can also be a credential for seminary teaching. Their faculties are tenured, they are reviewed by accreditation boards—and their students normally finance their high fees by taking out large student loans.Many if not perhaps most of them are engaged in a grim struggle to survive; some have already closed and more closings are ahead.Over the past few decades, the mainline Protestant churches have been losing members, fast. In 1959 the Episcopal Church counted 3.4 million members, today the membership is under 2 million. Similarly, the Methodist Church has dropped from nearly 11 million in the 1960s to under 8 million today. All across the mainline, we’ve seen the same trend, and with the shrinkage of the church has come a drop in openings for seminary graduates. Many of these seminaries are now in crisis as mismatch has developed between capacity that was built on the assumption that the demand for qualified mainline Protestant pastors would continue to rise and the reality that the demand is falling and will likely fall farther.The secondary consequence of this is a massive financial squeeze for students. The cost of getting a master’s or doctoral degree in divinity is very high, but the income from the jobs for which the degree prepares them is not high enough to repay the necessary loans — and the diminishing size and therefore budgets of many congregations press salaries down farther and mean that more graduates are taking on part time or temporary jobs (the ministerial equivalent of adjuncts).Making things even worse is the changing nature of the student population. Loans that make sense for the traditional divinity student (a 20-something recent grad of an undergraduate program) don’t make sense for the 40- or 50-something career changer who is often drawn to ministry these days. Amortizing a loan over a forty year career is a very different prospect from paying one off in ten to twenty.In an excellent 2009 article titled Why Methodist Seminaries Are Becoming Irrelevant and Dying Dr. Riley Case explained how the decline of the church has decimated the mainline seminary system, forcing the church to effectively create a bailout fund to keep its declining seminaries running:
United Methodism’s seminaries (and indeed, seminaries of all traditions) are also facing budgeting problems. While some seminaries are well endowed, the endowments are themselves suffering as the result of falling stock markets. In this climate it is time to ask the tough (actually it shouldn’t be such a tough question since the answer would seem obvious) question: does The United Methodist Church have too many seminaries?Forty years ago, at the time of the Methodist-EUB merger, the newly formed United Methodist Church declared that the combined fourteen seminaries of the new denomination were too many and not well located to be effective. The General Conference mandated (or at least strongly recommended) at least two mergers. One merger did take place: Evangelical Seminary merged with Garrett Biblical Institute to form Garrett Evangelical Theological Seminary. The other logical merger, United (former EUB) in Dayton, and METHESCO, in Delaware, Ohio, never took place.Because there were too many seminaries chasing too few students, the seminaries made urgent pleas for help. The church responded by establishing the Ministerial Education Fund in 1972, a “bail-out” fund before the term “bail-out” was widely used. The fund would subsidize US seminaries (but do nothing for overseas seminaries where the help was really needed) to the tune of $15 million a year. This means that over the 40-year period since 1970 the church has poured $600 million into the seminaries.
Denominational bureaucracies are keeping unsustainable seminaries open simply to avoid laying off staff, yet as membership shrinks, those denominational budgets themselves are being slashed. A lot of people are going to lose their jobs before this is done. Institutions will close and those that survive will restructure — radically, with much more cooperation among a smaller group of surviving institutions.Law schools appear to be facing some of these pressures now, and while lawyers still expect higher incomes than the clergy and so more young people seek legal education and are willing to pay for it, law schools won’t benefit from the safety net that denominations provided seminaries as enrollment drops. New statistics released by the Law School Admissions Council report that law school applications dropped by 24.6 percent in the last year alone, while the ABA Journal estimates that the total number of law school applicants has been cut in half between 2004 and 2013, despite an increase in the number of schools. Many of these schools will be forced into closure unless something drastic is done to boost enrollment.In addition to a decline in the number of law schools, we are likely to see new ways of becoming a lawyer that involve much less time in graduate school. UK lawyers get much of their training as undergrads, and few would say that the British legal system works much worse than ours does.Some Ph.D programs may be particularly vulnerable to bubble dynamics. In many fields, doctoral degrees are primarily seen as credentials for getting jobs inside the university rather than in the wider world. A very large percentage of the graduates of Ph.D programs go on to teach in other undergraduate and graduate programs. Fields with this internally focused structure are extremely vulnerable to changes in the higher ed system. If demand for doctorates in a given field diminishes, this will lead to a contraction in the number of graduate teaching slots in the field, reducing demand for new doctoral candidates even farther, diminishing the attractiveness of the field to undergraduates and leading to the closure of more graduate departments and a further decline in jobs. As the economic balance in the field shifts away from jobs aimed at research and preparing graduate students to jobs teaching undergrads in cost-conscious institutions, the research university model will come under great pressure at growing numbers of institutions.As the number of university graduate programs in, say, medieval literature declines, the number of PhDs needed to staff those positions will decline as well, leading to a further reduction in departments, repeat ad nauseum. (We select this field because we hold it in very high esteem here at Via Meadia; we don’t want to confuse a discussion over the fate of academia with a discussion about the value of particular subjects or approaches.)So the elements are in place for two different but equally real sets of changes. The first set are the long-term and structural transformations that will see many institutions close and more change beyond recognition in the next half-century. But there will also be very quick, short-term changes that could hammer a number of departments and disciplines extremely quickly.Beyond that, the likelihood is that at the undergraduate level prices have gotten out of whack. Harvard and Yale and a handful of other institutions are excellent buys at almost any price because of their reputations and the doors they open; but schools that lack either prestige or a demonstrated ability to teach specialized skills are vulnerable to rapid changes in consumer behavior. Strategies like taking two years in community college before facing the ferocious and largely unjustifiable costs of many four-year institutions, and downshifting from obscure private schools to cheaper public ones to minimize debt will proliferate. Expensive private colleges without a strong brand or a large endowment are particularly poorly placed in this environment and could face existential challenges very, very soon.Unrealistic prices and unrealistic expectations about how those prices will hold up; unrealistic investments predicated on unrealistic growth and revenue expectations; expensive structural inefficiencies developing over a long period of favorable market conditions exposing many firms to devastating losses if conditions change: these classic indicators of bubble dynamics all characterize American higher ed today. Government, like the denominational bodies underwriting mainline Protestant seminaries long past their sell-by dates, can fend off the forces of change for a while, but we are heading into a period of fiscal constraint as entitlement programs primarily aimed at older, better organized voters suck up resources otherwise available for education.As a metaphor for this mess, “bubble” isn’t so bad.Via Meadia thinks the bubble is only one of a number of stories in the field of higher ed, and we aren’t happy either about people losing their jobs or about the threat these changes pose to serious scholarly work. But the reality is that big changes are coming faster than many people think, just as was the case in journalism over the last fifteen years, and we don’t think we are doing the academy any favor by ignoring or downplaying them. Superstar professors like Daniel Drezner will likely do very well as the academy changes, and Prof. Drezner will, we hope, be one of the people who helps lead the transition to something new.But come what may, the cost of education cannot indefinitely keep growing faster than the general rate of inflation, and institutional models and organizational structures based on these revenue projections will come down to earth with a thud.Image courtesy of Shutterstock.com.