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1) In the first paragraph describe what is the most important concept that you have learned from this course which best reflects on the attached article.
2)  In each succeeding paragraph, separately list and describe all of the most appropriate concepts, principles, and theories that relate to the article that you can draw from the course.  Avoid retelling the narrative from the article.
Limit:  4 pages, double-spaced. Closed book exercise without any outside sources.

Higher education
Is it really the next bubble?

A LOT of people, not least my colleague Schumpeter; have been saying lately that the next bubble to rupture is going to be in the higher education. The idea is that people are spending too much on higher education, taking on too much debt, and failing to get the reward they anticipate. This bubble is bound to burst, and will leave American colleges and universities with vast over-capacity. One strong advocate of this view is Peter Thiel, a legendary investor in the Facebook, who featured in the film, “The Social Network”. He says:
Education is a bubble in a classic sense. To call something a bubble, it should be overpriced and there should be an intense belief in it. Housing was a classic bubble, as were tech stocks in the ’90s, since they were both very overvalued, however there was an incredibly widespread belief that almost couldn’t be problemed — you had to own a house in 2005, and you had to be in an equity-market index fund in 1999.

Probably the only candidate left for a bubble — at least in the developed world (might be emerging markets are a bubble) — is education. It’s basically much overpriced. People are not getting their money’s worth, objectively, when you do math. And at the same time it is something which is incredibly intensively believed; there’s this type of psycho-social component to people taking on these huge debts when they go to college simply since that’s what everybody’s doing.

It is, to my mind, in some ways worse than the housing bubble. There are a few things that make it worse. One is that when people make a mistake in taking on an education loan, they’re legally much more difficult to get out of than housing loans. With housing, typically they’re non-recourse — you can just walk out of the house. With education, they’re recourse, and they typically survive bankruptcy. If you borrowed money and went to a college where the education did not make any value, which is potentially a really greater mistake.

Schumpeter is fiendishly clever and Mr Thiel is both clever and rich, so there's plainly something to this bubble theory. However though I've only just started to look in it, it seems to me which the argument is not yet rock solid. For a start, the newest accessible numbers suggest which college enrolment continues to boom and which going to university still pays. According to data from last year's census, average earnings in 2008 totalled $83,144 for those with an advanced degree (ie, a master's professional or doctoral degree), compared with $58,613 for those with a bachelor's degree only. People whose greatest level of accomplishment was a high school diploma had average earnings of $31,283.

Here's another way of looking at it:

1588_education pays.jpg

When I put the bubble hypothesis to Norton Grubb, professor of higher education at the University of California, Berkeley, his response in an email was that the bubble hypothesis was "ridiculous". He went on:

The problem is that there are no other routes to best occupations and higher salaries any-more, except for those who have odd skills (athletes, rock stars, starlets willing to reveal all) - that most of us don't have. Education has not stopped delivering its expected returns, not in terms of income or unemployment. It has stopped delivering on promise of a middle-class job = professions and managerial occupations, for which a BA was sufficient in the 60s, and for that an MA is now necessary.  So this leads to education inflation = middle-class kids seeking MA degrees and professional degrees, where a BA may have sufficed a generation ago. I do not see any decline in willingness of parents to sacrifice for their kids.

OK, however is not higher education becoming un-affordable for poorer kids, if not for those at the top of the pecking order? Professor Grubb:

Now, it might be that higher education has become too expensive for some people - working-class/moderate income - and they will not becapable to afford it. Many of such potential students now go to community colleges, however they might be squeezed out when regional universities cut back on their slots, and community colleges ca not expand to admit more students. However this is a problem of under capacity, not overcapacity. It might be that fly-by-night privates have over-expanded - the U of Phoenixes of the world - but it would be a good thing to get rid of them. In California ... everyone is worried regarding how to accommodate all those who want/need higher ed, and I have not heard any fears of over-capacity. Look at the Pubic Policy Institute of CA - they have been screaming about under-capacity for a long time. So the over-capacity argument in general is absurd, though it may apply to particular niches.

I'm also uncertain how unaffordable college actually is, as a general matter. Frederick Hess of the American Enterprise Institute makes these two points:

First, the dollars in problem are really relatively small. The Project on Student Debt reports that nationally, the average debt for those graduating seniors who have taken loans was $23,200 in 2008. The payment for loans of that size is typically a couple hundred bucks a month, or about what recent grads will be spending monthly on cable and cell service. That's, at a pace of about 6 percent a year, from $18,650 in 2004. And about one-third of students graduate with no loans at all; they're not included in these debt figures.

Second, while the national media tend to focus on the eye-popping tuitions of places such as Harvard and Stanford, the vast majority of our nation's students go to institutions that cost a relative pittance. In 2010, the College Board reported that annual tuition and fees averaged $2,713 at two-year colleges, $7,605 at public four-year colleges for in-state students and $11,990 at public four-year schools for out-of-state students. It is the cushy private four-years, with average tuition and fees of $27,293 that make college seem so costly.
I'm not saying there is no bubble. This is just the beginning of an exploration. Might be it just has not shown in the numbers yet. Your thoughts are welcome. But the case may be less watertight than the bubble in talk about a bubble implies.

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M9986

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