interesting economics question...

[Azazello1313]

...I found on some random blog today:

 

Let's assume that cheap-and-easy credit made the run-up in housing prices possible, at least in part. And, this run-up in value has been bad in the long run, because it turns out to be kind of bubbly. (Okay, really bubbly.) Now consider the price of a university education, where price increases have been running roughly double inflation. Is cheap credit to blame for the price inflation there? Does the availability of credit diminish the price sensitivity to any particular asset, because it defers the pain? And does it also diminish the relative value of a college degree? I'm thinking yes, but I want to know what other people think.

[detlef]

College may be over-priced, but you will not find a better selection of 24/7 hawt chicks with low self-esteem any where else.

 

For most of us, that's cheaper than hiring escorts over the same time period.

:pissed that I went to UC Berkeley:

 

ETA, this is actually a very interesting question and one that I look forward to seeing both those who have a good idea of what is going on and those who pretend to give a crack at answering.

Edited November 12, 2008 by detlef

[AtomicCEO]

I already think college is overpriced and less useful than it used to be.

 

Look at all the idiots who are graduating from college these days.

[westvirginia]

It'd be interesting to hear wiegie, but doesn't EZ-credit terms create inflation to a degree? Anything that gets idiots out of college and back into plumbing and landscaping I'm all for.

[AtomicCEO]

It'd be interesting to hear wiegie, but doesn't EZ-credit terms create inflation to a degree? Anything that gets idiots out of college and back into plumbing and landscaping I'm all for.

 

I pay idiots $75/hr to run wire. I wish more of the non-idiots got into the business.

[dmarc117]

easy money(credit) has inflated everything. from tv's to cars to college.

[westvirginia]

I'll take $75/hr to run wire.

 

Never cut the red one, right?

 

 

No kidding. Can I work like 60 hrs/week? I'd move to CO for that.

[wiegie]

Question: What is a bubble?

 

Answer: When the price of an asset exceeds its fundamental value (which is the present value of expected future income (and I suppose utility) streams of an asset).

 

I did a quick back of the envelope calculation of the difference in the current present values of future income of high-school graduates vs. college graduates (using median income of male workers in each category). I also assumed that the relevant discount rate is 10%, which is probably too high and biases my results against the benefits of a college education.

 

In the end, it works out that the present value of college graduates is about $100,000 higher than high-school graduates. Hence, it seems that there is no bubble in the price of college education.

[wiegie]

And to be honest, this comparison between college education and housing is pretty dumb.

[muck]

1) I agree with Atomic that college education is too expensive.

2) I agree with Weeg that college education is not too expensive.

 

How can I say both?

 

Because, (i) Weigies numbers are (probably) skewed due to the high incomes earned by doctors and attorneys who (by definition) must attend college and do well enough in order to get into graduate school ... and ... (ii) most people don't need a four-year degree to be either an entrepreneur or a middle manager or a salesperson.

 

Said another way, if you're going to pay the huge coin to get a degree from Princeton, it'll pay off for the rest of your life. Now, if everyone that doesn't really need to go to college for their eventual vocation who ends up graduating from a 3rd or 4th quartile college / university (i.e., a residential real estate agent, manager at Applebees, etc) ended up not attending college, then most all of those people would (probably) be better off financially than otherwise.

 

Personally, I'm unsure as to whether or not I'm going to encourage my kids to go to college. Probably will require a minimum of a 2yr degree, though, in something like accounting, computers, art or a foreign language. Simply said, college just isn't for everyone or every career path. Most parents think they've failed their kids if they don't pay for a college degree ... admissions / financial aid types know this and lord it over the parents. Personally, I think that's bad thinking.

[cre8tiff]

And to be honest, this comparison between college education and housing is pretty dumb.

 

Oooooh A brainy ---> !

[Azazello1313]

I think wiegie's calculation is also skewed by the fact that these days, just about anybody with any initiative and/or intellect goes to college. certainly a large percentage in any case. that doesn't necessarily mean that what they learned and paid $200K for is worth $200K. many times I am sure it is (the engineer who gets a 6 figure job out of school). many times, I am sure it isn't (the english major who ends up waiting tables).

 

it's hard to foresee there being any sort of education "bubble", where the price suddenly implodes and all of that. but there's certainly an interesting point (and relevant comparison to the housing market) in there about free and easy credit driving huge price increases far greater than inflation in recent decades. and the question that raises about whether the situation leads to economically efficient decisions about education.

[Jimmy Neutron]

I pay idiots $75/hr to run wire.

 

[Jackass]

1) I agree with Atomic that college education is too expensive.

2) I agree with Weeg that college education is not too expensive.

 

How can I say both?

 

Because, (i) Weigies numbers are (probably) skewed due to the high incomes earned by doctors and attorneys who (by definition) must attend college and do well enough in order to get into graduate school ... and ... (ii) most people don't need a four-year degree to be either an entrepreneur or a middle manager or a salesperson.

 

Said another way, if you're going to pay the huge coin to get a degree from Princeton, it'll pay off for the rest of your life. Now, if everyone that doesn't really need to go to college for their eventual vocation who ends up graduating from a 3rd or 4th quartile college / university (i.e., a residential real estate agent, manager at Applebees, etc) ended up not attending college, then most all of those people would (probably) be better off financially than otherwise.

 

Personally, I'm unsure as to whether or not I'm going to encourage my kids to go to college. Probably will require a minimum of a 2yr degree, though, in something like accounting, computers, art or a foreign language. Simply said, college just isn't for everyone or every career path. Most parents think they've failed their kids if they don't pay for a college degree ... admissions / financial aid types know this and lord it over the parents. Personally, I think that's bad thinking.

 

You make a good point here, but i'll argue weigie's #'s should be higher, if not much higher. i'm sure there have been studies on this, but if you make say an extra 5 grand even the first year out of college and then throughout your life, even assuming a small increase, if this is compounded over 40 working years, that's going to be a lot of coin.

 

Also, i don't see the correlation in the original post here. Prices of most things went up b/c of easy credit, including the cost of college. I don't think the doubling was due to easy credit - at least i don't see anyone presenting any evidence that that was the case.

[wiegie]

 

Because, (i) Weigies numbers are (probably) skewed due to the high incomes earned by doctors and attorneys who (by definition) must attend college and do well enough in order to get into graduate school ... and ... (ii) most people don't need a four-year degree to be either an entrepreneur or a middle manager or a salesperson.

I used median income (as opposed to average income) so as to not have my numbers skewed by high-earners.

[wiegie]

You make a good point here, but i'll argue weigie's #'s should be higher, if not much higher. i'm sure there have been studies on this, but if you make say an extra 5 grand even the first year out of college and then throughout your life, even assuming a small increase, if this is compounded over 40 working years, that's going to be a lot of coin.

The actual amount of dollars that a college graduate will earn over a high-school grad is much much higher than $100,000. However, in order to do a fair comparison, you have to use the present value of those earnings as I did with my calculations. (Also consider, as I did in my analysis, that people who don't go to college can (1) start earning money from a real job for four extra years right out of high-school AND (2) they won't have to incur the expenses of paying for college.)

 

However, I would also argue that there are "psychic" benefits of going to college that don't show up in the mere earnings numbers. Hence there are some non-pecuniary benefits of going to college that should be included when people are making their decision, but that I couldn't quantify for my analysis.

Edited November 13, 2008 by wiegie

[Azazello1313]

I used median income (as opposed to average income) so as to not have my numbers skewed by high-earners.

 

in order for that calculation to be relevant though, wouldn't both sets of people (college grads and non-grads) have to have equal IQs, equal ambition, and so on? I think that is very obviously not the case, which is why I don't think your back-of-the-envelope calculation by itself is very convincing at all.

[wiegie]

 

I think wiegie's calculation is also skewed by the fact that these days, just about anybody with any initiative and/or intellect goes to college. certainly a large percentage in any case. that doesn't necessarily mean that what they learned and paid $200K for is worth $200K.

Anybody who pays 200K for a college education has got more money than common sense. (You can go to a top-notch state school for less than 1/5 of that price.)

[Puddy]

However, I would also argue that there are "psychic" benefits of going to college that don't show up in the mere earnings numbers. Hence there are some non-pecuniary benefits of going to college that should be included when people are making their decision, but that I couldn't quantify for my analysis.

 

Mrs. Puddy for example decided to pursue a degree 4 years ago. She simply wanted to feel good about having a career and not just a job. If I did the math of the foregone earnings of the 5 years or so she is in school plus the total cost of school, I'm not sure the NPV would be positive in our case (I mean, I'm 40, I'm a man). To be honest it doesn't matter. She feels good about herself after working an honest job but not a professional her whole life.

Edited November 13, 2008 by Puddy

[wiegie]

in order for that calculation to be relevant though, wouldn't both sets of people (college grads and non-grads) have to have equal IQs, equal ambition, and so on? I think that is very obviously not the case, which is why I don't think your back-of-the-envelope calculation by itself is very convincing at all.

well, I tell you what, I am not going to perform a multivariate regression analysis for this thread

 

I think the numbers I provided are sufficient enough to show that college education is not in a bubble situation right now

[wiegie]

Mrs. Puddy for example decided to pursue a degree 4 years ago. She simply wanted to feel good about having a career and not just a job. If I did the math of the foregone earnings of the 5 years or so she is in school plus the total cost of school, I'm not sure the NPV would be positive in our case (I mean, I'm 40, I'm a man). To be honest it doesn't matter. She feels good about herself after working an honest job but not a professional her whole life.

My guess is she just wanted to go ogle handsome professors.

[Puddy]

My guess is she just wanted to go ogle handsome professors.

Don't make me link to your hotness rating.

[Azazello1313]

well, I tell you what, I am not going to perform a multivariate regression analysis for this thread

 

I think the numbers I provided are sufficient enough to show that college education is not in a bubble situation right now

 

well you're taking two sets of people and assuming the only meaningful difference between them is their level of education. I think it is obvious there are much more significant factors separating the pool of college grads as a whole from the pool of high school grads. intelligence, initiative, socio-economic background, quality of K-12 education -- I would imagine there is a very significant imbalance in every one of these areas between your two groups, and every one of them would skew the results to favor the earning value of college grads. so, frankly, I don't think the numbers you provided demonstrate squat.

 

I am a believer in education for the sake of education. knowledge is its own reward. what this question is making me think about is whether or not its wise as a society to be on this everyone-must-get-post-secondary-education-at-ever-escalating-prices kick. obviously you have a vested interest here which is making you a bit catty and not willing to take the question seriously. I guess I'd settle for just understanding why the cost of higher education seems certain to keep growing at double the rate of inflation, as it has for at least the last couple of decades. something about that seems funky.

[wiegie]

well you're taking two sets of people and assuming the only meaningful difference between them is their level of education. I think it is obvious there are much more significant factors separating the pool of college grads as a whole from the pool of high school grads. intelligence, initiative, socio-economic background, quality of K-12 education -- I would imagine there is a very significant imbalance in every one of these areas between your two groups, and every one of them would skew the results to favor the earning value of college grads. so, frankly, I don't think the numbers you provided demonstrate squat.

]These critiques are all valid. But as I said, I'm not running a multivariate regression analysis for the purpose of this thread. Feel free to do so if you want. I was just trying to give some really quick estimates for why a college education is likely not in a bubble situation.

 

I am a believer in education for the sake of education. knowledge is its own reward. what this question is making me think about is whether or not its wise as a society to be on this everyone-must-get-post-secondary-education-at-ever-escalating-prices kick. obviously you have a vested interest here which is making you a bit catty and not willing to take the question seriously. I guess I'd settle for just understanding why the cost of higher education seems certain to keep growing at double the rate of inflation, as it has for at least the last couple of decades. something about that seems funky.

supply and demand--the demand for college education is shiftling out and the supply of education is not shifting out proportionately. States per-student funding is also falling in real-terms and tuition is rising to fill that funding gap (at least that is what has been happening for Michigan's state schools).

 

As for me being catty and not taking the question seriously, are you f'ing kidding me? I went and looked up data and then took the time to compute the difference in present value of incomes between high-school grads and college grads just to give a rough estimate of what you would need to be looking at to see if it were a bubble and then you come in and bitch and moan that I'm not taking it seriously? Give me a break.

 

(And yes, I have a vested interest here in convincing members of the tailgate that they should all go to college so that I will get a raise. That is EXACTLY what I was thinking when I made my post. Good job catching me on that.)

Edited November 13, 2008 by wiegie

[Puddy]

MMEEEOOOOWWWW!!!