NCPA - National Center for Policy Analysis

Is the Higher Education Bubble About to Burst?

July 22, 2011

When governments want to encourage what they believe is beneficial behavior, they subsidize it.  Sounds like good public policy, but there can be problems.  Behavior that is beneficial for most people may not be so for everybody.  And government subsidies can go too far, says Michael Barone, a

senior political analyst for the Washington Examiner.

  • Subsidies create incentives for what economists call rent-seeking behavior.
  • Providers of supposedly beneficial goods or services try to sop up as much of the subsidy money as they can by raising prices.
  • After all, their customers are paying with money supplied by the government -- bubble money, as it turns out. And sooner or later bubbles burst.

We are still suffering from the bursting of the housing bubble created by low interest rates, lowered mortgage standards and subsidies to Fannie Mae and Freddie Mac.  Now some people see signs that another bubble is bursting -- the higher education bubble.

  • Government has been subsidizing higher education with low-interest college loans, Pell Grants and cheap tuitions at state colleges and universities.
  • The predictable result is that higher-education costs have risen much faster than inflation, much faster than personal incomes, much faster than the economy over the past 40 years.

For what have institutions of higher learning accomplished with their vast increases in revenues?  The answer in all too many cases is administrative bloat.  Take the California State University system.

  • Between 1975 and 2008 the number of faculty rose by 3 percent, to 12,019 positions.
  • During those same years the number of administrators rose 221 percent, to 12,183.

Now consumers seem to be reading the cues in the marketplace.  An increasing number of students are spending their first two years after high school in low-cost community colleges and then transferring to four-year schools.

Politicians still give lip service to the notion that everyone should go to college and can profit from it.  And many college and university administrators may assume that the gravy train will go on forever.  But that's what Las Vegas real estate developers and home builders thought in 2006, says Barone.

Source: Michael Barone, "Will College Bubble Burst from Public Subsidies?" Washington Examiner, July 19, 2011.


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