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The Circle Bastiat

The higher education bubble has popped

Traditionally, Americans have firmly believed in two core investments: college and home ownership. Then the housing bubble popped. Is education next?

By Doug FrenchGuest blogger / August 10, 2011

Kennesaw, Ga.'s Kent Webb, left, dad of freshman Rebecca Webb, right, and Ellen McCann, center, from Red Bank, N.J., the mother of freshman student Sydney Houston, center-right, assemble a bed in a dorm room as University of Georgia freshmen move in on Tuesday, Aug. 9, 2011 in Athens, Ga. Investing in college is no longer a sure bet for a good job, writes guest blogger Douglas French.

David Tulis / Athens Banner-Herald / AP / File

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A college degree once looked to be the path to prosperity. In an article for TechCrunch, Sarah Lacy writes, "Like the housing bubble, the education bubble is about security and insurance against the future. Both whisper a seductive promise into the ears of worried Americans: Do this and you will be safe."

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But the jobs that made higher education pay off during the inflationary boom, kicked into high gear by Nixon waving goodbye to the last shreds of a gold standard, came primarily from government and finance.

In 1990, 6.4 million people worked for federal, state, and local governments. By 2010, that number had grown almost 6 times — to 38.3 million — with many of these jobs being white-collar.

In 1990, the financial sector was less than 7.5 percent of the S&P 500. By 2006, this sector had grown to 22.3 percent of the S&P, and that year the financial sector constituted 45 percent of the index's earnings.

"Prices and wage rates boom," writes Mises.

Everybody feels happy and is convinced that now finally mankind has overcome forever the gloomy state of scarcity and reached everlasting prosperity.

In fact, all this amazing wealth is fragile, a castle built on sands of illusion. It cannot last. There is no means to substitute banknotes and deposits for nonexistent capital goods.

Times have changed.

Last week, HSBC Holding Plc announced plans to eliminate 30,000 jobs worldwide by the end of 2013. The job cuts will affect "support staff where we believe we have created an unnecessary bureaucracy in this firm over a number of years," HSBC chief executive officer Stuart Gulliver said.

Goldman Sachs plans to cut 1,000 positions. Bank of America is laying off 1,500 employees and closing 600 retail branches.

At the same time that banks are trimming their fat, according to a Labor Department report released earlier this month, from May 2010 to May 2011 local governments shed 267,000 jobs and state governments 24,000. Local government employment in May, at 14.165 million jobs, was the lowest since July 2006.

An increase in the amount of real savings, which induces a fall in the interest rate and a lengthening of the production schedule, increases an economy's productive capacity, creating genuine growth brought about by the investment in higher-order goods such as factories and other production assets.

Conversely, easy, cheap credit fools entrepreneurs into believing that society's collective time preference has fallen, enticing them into investing in higher-order goods, such as land, factories, and the like — when in fact the collective time preference hasn't changed, and the demand for higher-order goods is merely a mirage. The result is booms and busts rather than genuine growth.