Scoop: American Colleges, The Next Burst Bubble In Offing

By Sarah Williams / New York

When a service's costs exceed its benefits, yet its price continues to increase faster than inflation, there can be only one outcome. A recent study by the website Bankrate.com shows it can take decades in some professions to pay off college debt. Conversely, the leaker Edward Snowden, according to reports, didn’t graduate from high school and yet was holding down a six-figure job in one of the most bureaucratized of sectors. 

Those and other signals strongly suggest that while the cost of a four-year college degree inexorably increases in real terms, the return to students on that investment is declining, and that only abundant subsidized finance from the Federal government is keeping the system going. As a banker-journalist of 40 years' experience, I can tell you: higher education looks like a bubble about to burst. 

Countless studies have shown there to be around a 50% salary premium for obtaining a four-year bachelor's degree, compared with high-school graduates. On that comparison rests the entire economics of the gigantic college education industry.
Even a cost over US$100,000 in tuition for a four-year degree can be justified by the prospect of a 50% salary increase for one's entire career, although the taxman's substantial slice of it lessens the economic benefit. 

However the comparison is a false one, for the simple reason that the college graduates and the high-school graduates have different levels of ability. Given the strong social pressures toward college, particularly in high schools themselves, there is a heavy tendency for the student with the ability to get into college to do so. 

Once in college, even if the student finds the work uninteresting and the expenses heavy, there is a strong tendency to graduate, because the student who does not graduate has supposedly shown to employers that he lacks the "discipline" that college requires. Only students who can wangle themselves interesting job offers without graduating are likely to drop out without facing a substantial job-market penalty. 

However, if the innate abilities of the college graduate and the high school graduate are different, then much of the salary difference between the two groups can be explained by the difference in their innate abilities, and not by the value of the college degree itself. Thus half or more of the 50% college graduate premium may in reality be due to differential ability, reducing the true value of the college degree to 25% or even less. When that correction is made, the economic incentive to pay for a four-year college is greatly reduced. 

The other question is to what extent the requirement of some jobs for college degrees is artificial. Clearly, in some professions such as medicine and the law, professional bodies themselves impose a requirement for a medical degree or (in the case of the law) a law school post-graduate education - even graduation in the state bar exam is no longer enough, in most cases. 

In other jobs, the requirement for a degree seems purely a matter of bureaucracy. For example degree-learning is little used in the major banks and consultancies, yet few rise in those professions without a college degree. The federal government also is over-impressed by academic attainment, with many employees holding higher degrees, albeit generally from third- and fourth-tier colleges, without any great need for the skills those colleges have supposedly imparted. Finally, while schoolteachers may be thought to need some modest qualification in education skills, those qualifications are not available without the prerequisite of a college degree, the skills of which are often never used in the teacher's career. 

The requirement for degrees in large bureaucracies that do not use the skills learned can be equated to the requirement in the British Army before 1870 for the purchase of commissions. In both cases, there was no implied requirement for skill in the tasks undertaken by the bureaucracy, but simply a desire that the incoming bureaucrat or officer be "one of us" who had paid his/her dues to enter the organization concerned. 

Commission purchase was derided by Victorian reformers as keeping the army unprofessional and dominated by the aristocracy. In reality it had certain logistical advantages; for one thing if promotion had been only by seniority, by the time of the Crimean War, after 40 years of peace, all the colonels would have been 70 - as it was, too many of them were. It also provided an automatic pension scheme since an officer wishing to retire simply sold his commission and used the proceeds as a pension.

Note the financial similarity between commission purchase and four-year college. An infantry captain in 1837 earned 192 pounds sterling annually, while his commission cost 1,800 pounds, or 9.4 years' purchase. At the top of the scale, a cavalry lieutenant-colonel earned 600 pounds, while his commission cost 6,175 pounds or 10.3 years' purchase. At the bottom of the scale, an infantry ensign's commission cost only 4.7 years' purchase, presumably reflecting the lesser demand for such a low-paid post.

From Bankrate.com's figures, a teacher's degree costs $53,000 or 1.3 years' salary, a dental degree costs $139,000, or 0.9 years' salary (but bear in mind that dentists must pay for liability insurance, a cost unknown to a 19th century cavalry colonel) and at the plebian end of the scale a journalist's degree (presumably the BA, not the J-school) costs $53,000 or 1.4 years' salary. Of the three qualifications, only the dentist's can be argued to be truly necessary. 

The Millennials will rejoice to learn that their degrees cost less than the purchase of even a lowly ensign's commission - but they should reflect that those degrees, growing costlier by the year, have no monetary value after they have been obtained, and thus cannot be used as a pension. What's more whereas the 19th century military officer could and did switch careers in mid-life, financing the switch through the sale of his commission, no such opportunity is available to the modern recipient of a liberal arts degree. 

There is of course a more precise equivalent to a 19th century army commission: a New York City taxi medallion today costs around $700,000; in 1837 that would have got you a major's commission in a good cavalry regiment. 

Skeptics will argue that the college education provides knowledge that is useful in the student's further career or (in the Ivy League) allows the student to mix with an intellectual elite. But in a year in which Harvard College invites Oprah Winfrey as commencement speaker, surely the embodiment (however successful) of lowest-common-denominator culture, it can hardly be claimed that the college adds any intellectual polish that cannot be acquired over the Internet. 

If professions wish to maintain exclusivity by demanding their new entrants endure four years of an expensive college process that provides them with little or no additional capability for the job, they should acknowledge the fact openly. Instead of requiring a four-year college degree, they should rely only on a simple aptitude test, together with a license. Then the number of licenses issued could be restricted according to the current supply/demand for that profession's output. 

The licenses would then trade like New York City taxi medallions, with supply/demand for the profession's services determining the price of the license. In bull markets, licenses to practice on Wall Street would become very costly indeed (as did New York Stock Exchange seats when that institution's membership was restricted - they peaked at $625,000 in 1929.) In bear markets, they would be much cheaper - NYSE seat values bottomed at $17,000 in 1942, later than one would have expected. Similarly journalism licenses would soar during election years and major wars in which the US was engaged. 

It might be objected that a license system would require a substantial up-front investment, thereby denying the professions to those without private means. But that's also true today with four-year college degrees. Finance for the professional licenses would be easily available, since unlike a four-year degree they would have a cash value and be saleable if the licensee wanted to switch careers. Most important, they would save the student four years in college, replacing it with the much shorter period required for a prep course for the professional aptitude test. 

We're probably never going to a system whereby professional licenses replace college. But the thought-experiment indicates the true value of a college degree is much less than is usually claimed. When a service's costs exceed its benefits, and yet its price continues to increase faster than inflation there can be only one outcome: a massive market correction, with widespread bankruptcies and industry capacity slashed by a large fraction. For the colleges of America, this fate lies ahead.