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Is Higher Education the next doomed bubble?

This article speculates that the next economic bubble to burst in the United States is that of higher education. The author asserts that over the past 35 years or so, the consumer price index has been around 3.8% per year, while the cost of a college education has risen by approximately 7.5% per year. Obviously, this is a huge price increase for the cost of something that has become a social norm and expected endeavor of a young adult- the experience of a college education. According to Jacoby, these soaring costs and subsequent student debt is forcing individuals and families to default or to spend their entire lives paying off the costs of education. Commenting on these rising costs, however, the author notes that Americans have been “assured that a college degree was an excellent investment, a gateway to prosperity tomorrow that justified the sticker shock today.”
After analyzing various bubbles, it is obvious that most begin with a rapid increase in the price of a certain good- whether it be tulips, homes, or in this case, education. In addition to substantial price shocks, bubbles are also often accompanied by some sort of speculation. In this case, the author claims that students and families in the United States are beginning to speculate whether investing in higher education is actually a good idea- whether taking on so much debt will pay off in the long run. He believes that more Americans are going to begin to think that college is a poor investment, causing a “burst” in the market for higher education.
I disagree with this author. While I agree that costs have risen substantially, making it more difficult for the average American to receive a higher education, I do not believe that the majority of Americans will begin to shy away from this education. For example, in times of recession, enrollment rates in graduate schools soar, showing the commitment to higher education and continued belief that it is a sound investment. Even if private rates of return have decreased for individuals with a higher education, these rates of return remain positive. I simply do not see a time in the future where Americans, on the whole, view a college education as an experience where the costs exceed the benefits.


  1. A bubble in a generic sense is an unsustainable situation, for example investment in housing premised on price increases faster than growth, which implies at some point housing would be over 100% of GDP. That may involve price changes, or it may not. So the current rate of increase in the cost of education may outstrip what the market can bear, but that need not imply a subsequent collapse, rather merely that the share of the population purchasing higher education could fall a bit, putting pressure on prices and (re)equilibrating the market.
    Second, why the price increase? Is it that supply expands more slowly than demand, so that (temporarily) schools can exert market power? Or is it that education is a labor-intensive service and that the wages of the high-end laborers who might choose college teaching are rising in relative terms? If so, then the price of such services (including medicine) must also rise in relative terms. That’s only one story.
    Third, are people buying too much education? Now in a recession the opportunity cost of grad school falls, you don’t have to give up a well-paying job. But community colleges don’t necessarily see enrollments rise [this was an Econ 398/399 project a year or two back]. That’s not the “too much” story. Rather we have a status game that produces a signal, firms can use it as a filter in the job matching process. Historically education required unusual ambition and/or skill and/or family heritage [status tends to be inherited, but that’s not the issue here]. So firms could use the presence of education. As the number of people obtaining secondary education and now post-secondary education rises, that signal becomes less valuable. Does an undergraduate education add as much value as four years’ work experience? For many sorts of careers, the answer is probably “no”. But to not have a piece of paper precludes you from getting that first job.
    I’ve watched that happen in manufacturing, where it’s no longer possible to rise into a high-end job without a college degree. Yet not too long ago the CEOs of a number of major firms had come up through the ranks, with at most a high school degree. Now these same firms demand at that someone have a master’s degree – one was quite explicit that any master’s degree was sufficient, it didn’t have to be an MBA. It merely was a signal of greater dedication to a career, particularly when earned while working: you were willing to sacrifice time (including with family) to get ahead. What firm wouldn’t want such employees? Is education then socially wasteful? Well, it can improve that “match” in the labor mark and so enhance productivity even when it adds no actual skills. But we have no doubt that high school adds skills, math and reading and a knowledge base. It’s less clear what college education does.

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