December 22, 2012

WALTER RUSSELL MEAD: Yes, there really is a Higher Education Bubble.

The big difference between the bubble metaphor as classically used and the bubble metaphor as applied to higher ed is simple: higher ed is a (mostly) non-profit industry. While colleges and universities issue debt (and with ratings agencies downgrading some higher ed institutions there is a small financial bubble in these securities that appears to be losing air), the higher ed bubble is less about profits and stocks than it is about capacity. We have built too much inefficient capacity in higher ed, and the bursting of the bubble won’t be manifested in a falling value of Yale stocks and bonds or of diplomas, but in a constricted hiring market, the closure of some institutions and painful contractions at others. It is also manifested in an excessive growth of student debt, much of which will not be repaid.

Just as some cities were more vulnerable in the housing bubble, so some departments and some programs are more vulnerable in higher ed. Just as some of the consequences of the housing bubble were felt quickly while others will work themselves out over an extended period of time, so some consequences of the higher ed bubble are already being felt while others will be with us into the future. Just as well managed, efficient construction companies were able to ride out the bust while highly leveraged and inefficient companies went under, so some higher ed institutions will manage the transition reasonably well while others will undergo great stress and even collapse. And just as people continue to need houses no matter what is happening in the housing market, so the business of earning and awarding diplomas will go on — even if methods change.

Look away from the difference between non-profit and for-profit industries, and higher ed looks to be in something very much like the early corrective phase of a classic boom and bust cycle. Overcapacity and over investment in some branches of higher ed is already leading to pressure to shift students out of the humanities and liberal arts and is likely to spread to law programs, where costs continue rising despite signs that enrollment may have already peaked. . . . Unrealistic prices and unrealistic expectations about how those prices will hold up; unrealistic investments predicated on unrealistic growth and revenue expectations; expensive structural inefficiencies developing over a long period of favorable market conditions exposing many firms to devastating losses if conditions change: these classic indicators of bubble dynamics all characterize American higher ed today.

Read the whole thing, which is in response to this post by Daniel Drezner that I had missed because it’s behind a paywall. But hey, Mead has responded, probably better than I would have, so I’m calling it a win!