Visualizing the U.S. Higher Education Bubble
Is there really a bubble in U.S. higher education?
Today, one way or another, we're going to find out! First, let's define just what a bubble is:
An economic bubble exists whenever the price of an asset that may be freely exchanged in a well-established market first soars then plummets over a sustained period of time at rates that are decoupled from the rate of growth of the income that might be realized from either owning or holding the asset.
Here, we'll consider the asset to be one year of college education at a four-year institution, whose price is given by the cost of tuition and any required fees for attendance.
The income that might otherwise be realized from either owning or holding the asset then actually turns out to be income itself! After all, the mostly likely alternative for an individual who might otherwise be in college is for them to be working instead. For our purposes, we'll use U.S. median household income to represent this income that might otherwise be earned in our analysis.
We find that there is indeed a building bubble in U.S. higher education, which we see is clearly represented by three separate periods in which the growth of tuition decoupled from the growth of U.S. median income.
These periods of tuition inflation largely coincide with periods of recession or slow job growth in the United States, from 1990 to 1993, 2000 to 2004 and from 2007 to the present. That these distinct phases of tuition inflation have occurred during recessionary periods, while tuition costs have steadily paced household income in healthier economic conditions, suggests that U.S. higher learning institutions have been the beneficiaries of a remarkable amount of insulation from economic circumstances during these periods.
But the key observation we take away from the chart is the evidence given by a dog that didn't bark.
Here's what we mean by that - prior to the recession that began on December 2007, the largest single recession in the U.S. in the post-World War 2 era was that which ran from July 1981 through November 1982, and in terms of unemployment rates, it still outclasses the December 2007 recession.
But unlike the other recessions that ran from July 1990 to March 1991 and again from March 2001 to November 2001, the nominal average price of tuition remained closely coupled with nominal median household income.
What that evidence means is that the cost of tuition can remain coupled to median income even during significant changes in economic circumstances, such as a severe recession, and has done so in the past.
That bubble has a very real price for today's college students. If the close coupling between median income and average college tuition that existed between 1976 and 1990 were still in effect today, the average annual cost of college tuition at a four-year institution would be over $5,000 less than 2008's average level of $12,075.
Likewise, we find that tuition would be over $3,000 less if the linear trend that existed from 1994 through 2000 were still in effect today.
Elsewhere in the Blogosphere
Mark Perry finds there may well be a bubble in college textbook prices too!
Image Credit: Izismile.