Low College Enrollment Sign of Education Bubble

Another bad US economic indicator is becoming a focus for economic policy makers. Last month at the economic symposium at Jackson Hole, Janet Yellen said, “As a society, we should explore ways to raise productivity growth … improving our educational system and investing more in worker training.” Yellen is referring here to the production efficiency that occurs when incoming, better-educated college graduates enter the labor force, bring their new knowledge, and create better processes. This is commonly called the “productivity miracle” and has been a reliable economic phenomenon for 50 years.

Think of the productivity miracle like gaining better human technology. On the whole, better-educated people will create more effective ways of producing things. However, according to a Bloomberg article, productivity miracle levels are starting to flat line due to sluggish enrollment numbers.

In an a familiar tone that sounds like the “new normal” statements of recent policy makers, economists like Harvard’s Dale Jorgenson are predicting the average level of education for U.S. worker will no longer continue to rise in the.“Educational attainment will gradually disappear as a source of economic growth,” Jorgenson states.

Lawrence Katz, another Harvard economist, believes the lack of educational attainment is a major economic problem. “The quantity and quality of schooling are important issues for direct effects on productivity – more educated workers are more productive – and for indirect effects on the pace of innovation and adoption of new technologies.”

Katz estimates the economic impact of less-educated workers entering the labor force could result in a reduction in productivity by a quarter percentage point per year.

High Tuition Main Problem for Low Enrollment

Higher salaries drive the economics behind educational value. Students invest in education because it promises a better career with better pay. Their entry into the workplace brings a renewed vigor of ideas to replace aging and retired workers. That’s the theory, but what’s keeping enrollment numbers down?

Among the usual suspects are an aging population, rising tuition costs, and a health rate of hiring. Certainly, tuition is a major contributor to skewing the economic model of the productivity miracle.

It would seem that the productivity miracle has never worked for education in the US. As Peter Schiff points out in The Real Crash, the cost of education should be getting cheaper, not rising to the astronomic prices we see today.

From 1978 through 2008, the dollar lost a bit more than a third of its value. That means the cost of living slightly more than tripled. The cost of college increased about tenfold. Put another way, college costs have increased three times faster than the cost of living. That’s faster than health care”

Higher education doesn’t suffer from lack of market competition nor does it fail to embrace new technologies (i.e. online classes), which provide a lower barrier to entrance and less administration. Yet tuition is still higher than it should be. The term “higher” education could more appropriately refer to the price tag rather than some intellectual hierarchy.

However, over-priced education isn’t deterring many students and their parents from taking out subsidized and private loans.

The Educational Bubble

What we may be seeing with the stagnation of the productivity miracle is the beginning of the bursting of the educational bubble, propped up by an overly demanded, overly-priced service fueled by government subsidies, grants, and loans. Peter explains:

Supply is up, cost is down, and quality is down, so what’s driving the price [of education] up? The heart of the matter is bottomless demand. Parents and students are seemingly willing to pay any price for a college education. Subsidized student loans are the main reason behind this bottomless demand. When anyone can borrow cheaply, then nobody is price sensitive.”

However, the banks are also spurring additive borrowing, getting students and their parents into a level of debt that’s beginning to overshadow the hopes for higher wages. Therefore, fewer students are willing to tie themselves to a debt that’s likely to follow them for the majority of their career.

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