College Costs: The Bubble About to Pop

Ran in to a pair of articles describing the ever-increasing costs of college as a type of bubble. It shares many of the same characteristics in terms of psychology on the part of those paying bubble prices, the use of debt, the inevitable buyers' remorse and subsequent shakeout, and so on.

Article from earlier this summer: Higher education's bubble is about to burst

College has gotten a lot more expensive. A recent Money magazine report notes: "After adjusting for financial aid, the amount families pay for college has skyrocketed 439 percent since 1982. ... Normal supply and demand can't begin to explain cost increases of this magnitude."

Consumers would balk, except for two things.

First -- as with the housing bubble -- cheap and readily available credit has let people borrow to finance education. They're willing to do so because of (1) consumer ignorance, as students (and, often, their parents) don't fully grasp just how harsh the impact of student loan payments will be after graduation; and (2) a belief that, whatever the cost, a college education is a necessary ticket to future prosperity.

Bubbles burst when there are no longer enough excessively optimistic and ignorant folks to fuel them. And there are signs that this is beginning to happen already.

Same author, recent article: Further thoughts on the higher education bubble

Well, advice number one - good for pretty much all bubbles, in fact - is this:  Don’t go into debt. In bubbles, people borrow heavily because they expect the value of what they’re borrowing against to increase. In a booming market, it makes sense to buy a house you can’t quite afford, because it will increase in value enough to make the debt seem trivial, or at least manageable - so long as the market continues to boom.

But there’s a catch. Once the boom is over, of course, all that debt is still there, but the return thereon is much diminished. And since the boom is based on expectations, things can go south with amazing speed, once those expectations start to shift.

Right now, people are still borrowing heavily to pay the steadily increasing tuitions levied by higher education. But that borrowing is based on the expectation that students will earn enough to pay off their loans with a portion of the extra income their educations generate. Once people doubt that, the bubble will burst.

So my advice to students faced with choosing colleges (and graduate schools, and law schools) this coming year is simple: Don’t go to colleges or schools that will require you to borrow a lot of money to attend. There’s a good chance you’ll find yourself deep in debt to no purpose. And maybe you should rethink college entirely.

And here's a nice chart showing college costs versus housing and CPI courtesy of Mark Perry:

People simply wouldn't pay what they pay for college if they actually had to save and earn the money. It's all about enabling bubbles with debt.

No New Jobs in Silicon Valley

Had a brief conversation with my brother-in-law last week about the jobs created by a successful product such as Apple's iPad, etc. I was of the opinion that the actual job creation was on the order of 1000 in the U.S.A. with the vast majority being created in China (all those Apple products are made by Foxconn in China).

Read this article today by Andy Grove, co-founder of Intel, which talked about the changes in Silicon Valley and the tiny number of jobs actually created by the technology industry. Some quotes:

Today, manufacturing employment in the U.S. computer industry is about 166,000 -- lower than it was before the first personal computer, the MITS Altair 2800, was assembled in 1975. Meanwhile, a very effective computer-manufacturing industry has emerged in Asia, employing about 1.5 million workers -- factory employees, engineers and managers.

The largest of these companies is Hon Hai Precision Industry Co., also known as Foxconn. The company has grown at an astounding rate, first in Taiwan and later in China. Its revenue last year was $62 billion, larger than Apple Inc., Microsoft Corp., Dell Inc. or Intel. Foxconn employs more than 800,000 people, more than the combined worldwide head count of Apple, Dell, Microsoft, Hewlett-Packard Co., Intel and Sony Corp.

... and ...

The job-machine breakdown isn’t just in computers. Consider alternative energy, an emerging industry where there is plenty of innovation. Photovoltaics, for example, are a U.S. invention. Their use in home-energy applications was also pioneered by the U.S.

Last year, I decided to do my bit for energy conservation and set out to equip my house with solar power. My wife and I talked with four local solar firms. As part of our due diligence, I checked where they get their photovoltaic panels -- the key part of the system. All the panels they use come from China. A Silicon Valley company sells equipment used to manufacture photo-active films. They ship close to 10 times more machines to China than to manufacturers in the U.S., and this gap is growing. Not surprisingly, U.S. employment in the making of photovoltaic films and panels is perhaps 10,000 -- just a few percent of estimated worldwide employment.

He advocates tariffs and other "trade-war" type policies to incent companies to do more than just hire marketing people here in the U.S. and sell things designed and built overseas.

I have a hard time disagreeing with him despite my free-market leanings.

Extra! Extra! U.S. Taxpayers Bail Out Greece... And EU Banks!

When a too-big-to-fail bank (or country) fails, the powers-that-be look around for someone with money they can tap to bail them out. The EU folks looked and looked locally for someone to bail out Greece, but eventually ended up where all other good bailouts end up: In the U.S. taxpayers pockets. From PragCap:

Most Americans probably haven’t connected the dots yet, but you’re going to be signing an enormous check over to Greece over this weekend.  That’s right, as the largest contributor to the IMF the United States taxpayer is on the hook for the Greek bailout.  The numbers aren’t set in stone quite yet, but the latest rumors are for a $160B bailout over three years.  Of course, the most despicable part of this whole thing is not just the fact that the U.S. is helping to bail out Greece, but that this bailout is actually another bank bailout!  That’s right.  This isn’t really about the people of Greece.  They are going to be forced into years of austerity and painful economic times regardless of the situtation.  What this is really about is the $189B in Greek debt that the European banks have on their books.  No one wants them to take a 70% haircut on the debt.  So, connecting the dots here for you – Americans are once again bailing out banks – this time via the IMF.

They are hiding it by having the "IMF" bail them out, but that's just a smokescreen. We are the largest contributor to the IMF and will end up losing a lot of $$$ to help Greece pay for a bunch of programs and public workers that have zero benefit for us and to make whole the banks that loaned them money (unwisely).  Nice.

Got gold?

The sound of inevitability: Deficits lead to higher tax rates

Interesting chart from dshort.com comparing the size and timing of deficits in the U.S. and the inevitable result: large changes in tax rates to try to stop the bleeding:

This makes TONS of sense, especially when you combine it with the government's non-stop pushing of tax-deferred accounts for retirement. People will sure feel stupid when they find themselves paying 40-50% tax rates (fed) plus some serious state taxes on 401K and IRA monies they set aside at a time when tax rates were 20-30%.

Don't feel smug if you have your money in Roth IRAs, either. I predict a means-based test for whether or not these withdrawals are truly tax-free. It's not paranoia if they're really out to get you.

Combatting the high costs of college with... Loans?!?

One of the amazing things about college costs is that they go up, year after year, faster than inflation. I suspect this is due primarily to the ever-increasing ratio of administrators to teachers, and the pension and healthcare costs associated with all these non-student-facing folks, but that's neither here nor there. The fact is that college is becoming so expensive people cannot possibly save for it or work their way through it.

So, how does the government help? Pressure schools to reduce costs (like they do with some industries)? Encourage non-traditional education or alternatives to 4-year schools? Naw... They offer to loan students money. Lots and lots of it. Take a look at this chart:

Careful, that's not a ten-year chart, that's a two-year chart.

See this blog entry for some good information on this topic.

Colleges can keep raising prices, despite the recession, because the government keeps lending students more money to pay them.
According to a report cited by Anne Marie Chaker in the Wall Street Journal on Thursday, the government will lend students $75.1 billion to pay for college this year, up a spectacular 25 percent compared with last year.
But the extra credit isn’t benefiting students. It’s just inflating the price of their education, burying them under a bigger pile of debt despite stagnant wage growth and poorer employment prospects.

And remember, student loans are not discharged in a bankruptcy. Indentured servants had it better...