Instapundit blogger and law professor Glenn Reynolds has written quite a bit about the “higher education bubble” and released a book last year with that exact title. Following Glenn’s recent visit to the Atlanta Fed to discuss the higher education bubble, Jimmy P. blogged about it yesterday here.
The chart above is an updated version of one I have featured before on CD (it also appears in Glenn’s book), and which helps to visually understand the seriousness of the higher education bubble. The chart compares: a) college tuition and fees annually in current dollars from 1978 to 2012 based on data from the Department of Education for all institutions of higher education, b) the CPI for medical care, c) the median sales price for new homes, and d) the CPI for all items. All variables have been converted to an index series that equals 100 in the base year of 1978 to allow for a comparison of relative increases over time in the four variables.
In current dollars, average college tuition and fees have increased from $984 during the 1977-1978 school year to $10,111 for 2011-2012. That 10.28 time increase in nominal tuition over the last 34 years is reflected in an increase in the chart’s college tuition index from 100 in 1978 to 1,028 in the chart (see blue line). On an annual basis, college tuition has increased more than 7% per year, which is almost double the 3.8% rate of increase for consumer prices on average (see orange line in chart). In contrast, prices for medical care have increased by 5.8% per year since 1978, and the median price for new homes has increased by only 4.4% per year on average. That last comparison is key, because we had an unsustainable housing bubble followed by a painful and disruptive correction, caused by increases in home prices that were relatively inconsequential compared to the increases in college tuition.
Here’s an excerpt from the Atlanta Fed’s Macroblog about Glenn’s recent presentation there (with a link to a video):
What’s the endgame? Well, he [Glenn] expects that when the bubble bursts, there will be less “dumb money” to be gained, students will demand a higher return on investment, and schools will ultimately be forced to adapt. According to Reynolds, colleges have two different strategic choices: increase the value of the education for the current cost, or lower the cost of providing the current level of value. And he expects the most common response will be the latter, likely involving technology such as MOOCs (massive open online courses) and other innovations in teaching methods.
When any bubble bursts, there are some casualties. In this case, it may be that some colleges do not survive once market discipline has been unleashed. Given the statistics above, you might think that it would be the small liberal arts colleges that will suffer the most, but in this video, shot during the visit to Atlanta, Reynolds argues that these colleges may actually gain from the coming shakeout.
Reynolds indicated that there is change in the air, but it’s coming slowly. The bubble may not have burst, but he sees it deflating. He noted, “A lot of people hope it will pass. They’ll muddle through without dramatic changes. And frankly I hope they’re right. But I don’t think they are.”