Posted by: crudbasher | July 20, 2012

Are Universities Too Big To Fail?

(H/T sodahead.com)

I have been following a rather interesting train of thought this week about the so called Higher Education bubble and wanted to share my conclusions. When I consider problems like this I like to broaden my scope because I believe most disruptive change comes from outside the system. I mean, how could it be otherwise? If you are doing great (or think you are doing great) why would you radically change the way you do things? Individuals sometimes do make radical changes. I know a friend who quit her job without having another one lined up because she didn’t like her old one. Even so, organizations generally don’t do things like that. So what are the starting conditions of my thinking?

Starting Conditions

  1. Universities have been around for hundreds of years. Many schools (especially the Ivy League) feel confident that they will be around for hundreds of years more.
  2. Despite this confidence, many universities have no real cash reserves. They depend on a steady flow of new students each year.
  3. There have been no good alternatives to a on-campus, college education.
  4. Tuition for college has been increasing much faster than the Consumer Price Index. (I’ve heard between 4 to 9 times more)
  5. The government has been drastically increasing the amount of money available for student loans over the last 30 years.
  6. Student loan debt has recently passed credit card debt and is now in excess of $900 billion.
  7. The US university system is considered a national treasure by most people.

External Factors

  1. Information technology has been transforming information based industries such as the newspaper business.
  2. The nature of this change is A) Disaggregation of location based structures and B), A drastic enhancement in the reach of creative individuals.
  3. One side effect of that is it is possible for people to be much more productive. Therefore you need less people to do things.
  4. It has been conventional wisdom that if you get a college degree, then you will get a good job.
  5. Despite that, the job market is stagnant (and that’s generous).
  6. More than half of recent college grads are unemployed.
  7. The US national debt is about 16 trillion dollars. This makes the US the most broke country in the history of the world.

A bubble?

Several years ago, US housing prices skyrocketed. Low interest loans coupled with very lax loan vetting caused a supply shortage. Eventually, this bubble collapsed, vaporizing trillions of dollars of (borrowed) money, and creating the effects in the economy that we are still dealing with. Why did this bubble collapse? Well, partially it was because the economy ran out of people who wanted to buy a house. I think it collapsed mostly because people stopped believing it would go on.

The Good Years

The money has been flooding into colleges for a few decades now so what have schools been doing with it? Building up a fund for rainy days? Get serious. They have been investing in their facilities! In order to attract students you have to have good rankings in certain national reports. In order to get good rankings, among other things, you have to spend a certain amount on your infrastructure (teaching effectiveness isn’t usually measured). Therefore we have seen a building program unmatched at any other time in history by universities. Even community colleges are getting into the game.

The problem with this is that buildings are fixed costs. You can lay off staff and close programs but what do you do with a building on your campus? Not only that but the donors who helped sponsor the buildings are going to irritated if you close it. Nope, there is only one direction for universities to go. Each step they take down the growth path means they have to have more money coming in. Ironically, many of the new facilities don’t help expand the capacity of the school so many schools have to pay for the new buildings on the backs of the same number of students. Fortunately the government has been making more money available for loans so you can just jack up the tuition costs.

Doomsday

So here is my thinking. How likely is it that things will continue like they are? In 20 years will people be taking out several million dollars (at the current rate of increase) in loans to get a degree? If you consider that wages have been pretty flat for at least the last decade that doesn’t seem to be a good idea. I mean, you would never be able to pay off the loans. Even high school students can do that math. 🙂

As long as people feel that going to college provides the best return on investment, they will still go. I mean, it’s always been that way hasn’t it? Why would it change now?

What numbers of freshmen in the incoming class of fall 2012 drops by 20%? What if they decide to stay home and work for a year? Maybe a parent has been laid off and they need to help out? Maybe they find an online alternative that is much much cheaper and want to give it a shot?

Death Spiral

In the Department of Defense they have this common problem. When the cost to develop a new weapons system goes up (and it always does) it makes each one more expensive to purchase. This in turn raise the whole program costs. Congress then usually reduces the amount of systems to purchase to bring the total cost back down. This of course means the development costs are being spread over a smaller purchase, therefore the unit cost goes up again. Congress cuts again; costs go up again; repeat until canceled.

In out doomsday scenario for universities the amount of money available for loans has not decreased but if students don’t take out the loans it won’t get the schools. Many universities would be in deep trouble financially. Oh sure they can raise tuition rates again but that just makes the problem worse next year.

Economics then dictates that some schools would have to go out of business. This is what would happen, except for one important factor.

Government to the Rescue

When General Motors was in trouble a few years ago it should have gone bankrupt. It could have then reorganized and kept on going. Of course that isn’t what actually happened.

The government stepped in and basically bought a big interest in GM in order to loan them a lot of money. The sick part of the company was jettisoned and what was left was relaunched. The government still owns lots of GM but if it sold the stock now the taxpayers would lose billions. The government has been encouraging them to develop electric cars like the Volt. Turns out GM loses hundreds of thousands of dollars on each one. Still, why should they care? If they get into trouble, the government will just bail them out again right?

What happened here is that politicians stepped in. Why? Well lots of workers would have lost their jobs. Not only that, they were union workers. The unions are one of the biggest supporters of the Democrat party. Even many free market believing Republicans would have had a lot of reluctance in letting so many jobs vanish during that bad recession.

The result is there is now a policy in place in the government that if a business failing would make politicians look bad, that business is bailed out with taxpayer money.

Too Big To Fail?

So here is the big question. If there is a higher education bubble, and it pops, what happens then? If universities start going bust would the government just stand buy and do nothing? Keep in mind that most schools are unionized and the teachers unions give 99% of their funding to the Democrats. Would that party do nothing? Of course not.

So what would they do? How about passing a law forcing people to go to college? (that’s a joke) Seriously though, I think we would see what happened to GM happen to universities. The government would begin to invest (take over) universities. It would just be a little bit at first, but eventually somebody would come up with the great idea to just nationalize them. Then the government would pay them directly and everyone could go for free. No more student loans.

Conclusion

There are a lot of people in the country who would be ok with this. Personally I don’t think it would be a good idea for a lot of reasons. I don’t have any faith that the government could make it work. I think the university system would become a lot like the public school system with one size fits all, which I think is exactly the wrong approach to learning. We would see a vast increase in cost, plus a decrease in quality. College isn’t for everyone. A free market would see that there would be affordable college for everyone who wants it. People point to the medical system as an example of skyrocketing costs but not every part of the medical field is like that. If you look at plastic surgery or laser eye surgery (neither one is covered by government programs or insurance) the cost has remained affordable.

So that is my train of thought. I certain could be wrong so please let me know in the comments what you think!

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Responses

  1. It would be wonderful if education were free to all…but only if the structure of how they are run changes with less top heavy administrative costs. It should be through technology,and the professors who can come up with creative computer program designs to deliver the content. They could serve as facilitators on campus for students to check in with, or get additional help. In the future, I would see our public school buildings and our teachers run in a similar manner for the middle school grades on up through highschool.

  2. […] I have been following a rather interesting train of thought this week about the so called Higher Education bubble and wanted to share my conclusions. When I consider problems like this I like to br…  […]

  3. […] a month ago I wrote a post called Are Universities Too Big To Fail?. In it, I speculated about a scenario that would lead to universities being put into a position […]

  4. […] It’s a fascinating to look at how the people in power tend to protect the system above all else. Eventually though, it collapses. I think higher education in the US is at this point. It has sustained itself with massive decade long tuition hikes but this only works as long as you can get a job when you get out. This is no longer true to a certain extent so fewer people want to take the risk anymore. This trend is accelerated by social media and thus within a few years, something will have to happen. It’s important to understand that just because your school has been around for years doesn’t mean it won’t disappear in the future. Nothing is eternal folks. I have speculated what happens then in this post called Are Universities Too Big To Fail? […]

  5. […] See more: Are Universities Too Big To Fail? […]

  6. […] The author of the article goes on to list five reasons why this time it may actually be the end of the current higher education business model. We will see, probably sooner than later. For more on what may happen next see my post: Are Universities Too Big To Fail? […]


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