This created opportunities for developers and real estate entrepreneurs to build the housing and infrastructure demanded by this change and for skilled

What would it mean for the “Higher Education Bubble” to burst?

It would look a tiny bit like the real estate crash, if the real estate crash had ended with 25-50% of Americans happily living in tents and mobile homes and a few others in gigantic medieval castles.  It would look more like one of the classic examples of disruptive innovation you learn about in business school.  Traditional 4-year colleges are passenger railroads in 1900; 111 years later, the train still has its uses but most of us take cars or planes to get where we need to go.

Look, the higher education “market” will never get as overheated as the stock bubble or the real estate bubble, because there’s very little opportunity for large-scale speculation and the assets aren’t easily transferable.  There’s no real analog for noise trading, credit default swaps, exotic options, etc. – I’m not creative enough to engineer a derivative bet that employers will value a Middlebury degree 40% more in 2025, nor is there a good way for me to sell my own bachelor’s to the highest bidder at a market-clearing price.  Also, to borrow a point from a nice James Surowiecki essay on this topic (…), there is at least one good, non-bubble reason why the price of education has gone up: it’s been very hard to increase productivity relative to other sectors because colleges still need to pay roughly the same number of professors, and they need to pay them in 2011 dollars.  This phenomenon of increasing salaries despite flat productivity in a given sector, which also affects health care, is known as Baumol’s cost disease.
The bubbly aspects of higher education that do exist are fourfold:

  • Long lag-time on expansion of supply: To the extent that universities are expanding capacity in response to rising demand/prices, it takes a while, so capacity may come online just as demand starts to fall.  Higher ed has longer lags but much less aggressive investment than the obvious analog – insane quantities of speculative real estate construction from 2003-2007 that became available for sale just as prices started to crash.  The non-profit nature of most universities actually helps to temper this one.
  • “Emperor’s new clothes” mutual belief in asset value: Capable students want degrees because employers value them.  Employers value degrees because capable students tend to get them.  Even if 4 years of liberal arts education teaches you real job skills about as well as invisible pantaloons cover your ass, there’s a reinforcing feedback loop based on signaling/credentials.  I tend to believe that there is some actual (though overrated) value to higher education, so the analogy here is closer to the real estate market – excepting some outright fraud, skyrocketing prices were linked to actual assets with positive value (unlike the expected cash flows of  Even so, feedback loops can flip; high-prestige employers start to hire people without degrees, capable 18-year-olds decide it’s worth the risk to skip college, more employers give it a try, and so on.
  • Unnatural market intervention to inflate demand: Thiel and others have harped on the similarity between the government’s guarantees/subsidies of student loans and of mortgage loans.  Of course, G.W. Bush put a pinprick in this one by making it impossible to escape student loans by declaring bankruptcy, but while this has screwed a lot of people over it doesn’t seem to enter into many 18-year-old’s decisions (hint: a teenager has a pretty high discount rate).
  • I can’t actually think of a fourth bullet, but I learned in strategy consulting (another bubble that just won’t pop) that bullets always come in fours, even if it means cutting something important or adding something pointless.

So here’s how the “bubble” might, well, not exactly pop, but gradually deflate like a birthday balloon with a substandard knot:

  • The next Gates or Zuckerberg  skips the hassle of dropping out and doesn’t bother showing up for freshman year at Harvard.  Startups, then more established companies, get the bright idea to recruit straight out of high school, with the added bonus that they pick up star developers before they kill half their brain cells with four years of binge drinking.  Most kids still go to college, but pretty soon the Times runs a completely unresearched Sunday Styles piece: “No official statistics show just how many top students are eschewing education for employment, but the trend is staggering.”  [Note: in this version of the future, the NYT paywall was dismantled in June 2011, so people actually read the article.]  It’s still on the margin, but Tiger Mothers of high-school seniors start to drop the J-bomb: “Oh, your son is going to Harvard?  What a NICE way to spend four years.  Timmy just got a JOB at Quora.”
  • The middle and lower classes start to notice that “4-year college education” is no more necessary a piece of the American Dream than owning a home.  Parents encourage their kids to start working or get practical degrees.  In response to demand, innovators create substitutes.  2-year engineering programs start to spring up.  Other programs to train first-grade teachers without a standard college degree; you don’t have to take calculus or ancient history to graduate but you do have to spend 500 hours in a classroom.  Kids who want to write esoteric topology papers go straight into research programs and don’t bother fulfilling liberal arts requirements.  Etc. etc.
  • Many of these new programs are happening on the campuses of what were formerly lower-tier liberal arts schools.  Some are at new institutions.  Some are online.  4-year tuition starts to drop.
  • Sallie Mae finally fails, but gets no bailout.  Half the predatory student loan companies go under.  The 4-year schools that haven’t adapted don’t make it.  Tufts closes its doors, then re-opens under new management as The Medford Institute for Advanced Plumbing Studies.  [Note: In the future, human waste is no joke.]
  • It would be gradual, but eventually the practice and culture of higher ed would stagger toward a new equilibrium.  And yes, this is a fifth bullet point.