George Leef

George Leef, Contributor

I write on the damage big government does, especially to education.

10/23/2013 @ 9:31AM |6,989 views

A Tale Of Two Bubbles -- Housing And College


Almost every American knows that we went through a destructive housing bubble. The bubble inflated from about 2002 until 2007, when it burst.

A large percentage of those Americans also know that government policy had something to do with that bubble, although you do encounter some who insist that it was entirely due to capitalistic greed. (Similarly, there used to be people who insisted that the poor harvests in the Soviet Union were due to bad weather and “wreckers.” Many defenders of big government think they must shield it from every criticism lest the masses lose faith in it.)

The housing bubble was an artifact of government policy and so is another bubble that is still inflating – the college bubble.  Let me draw the parallels between them.

Just as the federal government’s super-low interest rate policy made the cost of buying a home artificially low, thereby drawing in many Americans who wouldn’t otherwise have taken the plunge into mortgage debt and the costs of home ownership, so has it lured many Americans into college with grants and cheap loans. When government policies make it less expensive to buy something, more people will buy it. If those policies continue long enough, you get a bubble.

If it hadn’t been for federal grants and loans, many young Americans would have pursued some path after high school other than enrolling in college. But politicians felt that increasing the number of college-educated people would be a good thing and the student aid policies they fashioned worked — in just the same way that federal housing policies “worked” to get lots of Americans to buy houses who should never have done so.

Easy money got both bubbles going, but it took more than that alone.

If you’re old enough to remember the old days in housing, you’ll recall that would-be borrowers had to put 20 percent of the price of the house down, and they also had to show a history of employment at compensation sufficient to pay the principle and interest. That was the market’s way of allocating limited capital to those most likely to make good use of it.

In that system, home ownership was not treated as some sort of a public boon, much less an entitlement, but instead as something that people had to strive for if they wanted it. That striving reinforced the economically virtuous behaviors of working, saving, paying your bills on time, and minimizing your debt.

Now think back to the old days in higher education, going back 50 years to put us just prior to the onset of federal intervention during LBJ’s Great Society. Back then, a college degree was not thought to be necessary for an individual to succeed in life, and few careers were closed off to people who didn’t have one. With the small exception of GI Bill college assistance for military veterans, the federal government had nothing to do with higher education. Politicians didn’t push college, either by trying to make it more affordable or by claiming that having more college graduates would be a big national economic benefit.

In those days, the relatively few Americans who thought that going to college made sense – that is, who estimated that the benefits they’d reap in human capital would exceed the costs (which were quite low, even at the best-known schools) – mostly saved for the expenses. Students whose families couldn’t afford the tuition and other costs often found help from scholarship organizations. Also, earnings from summer and part-time work defrayed a substantial amount of the cost.

Notice that, as with the old housing market, people had to look to their own efforts (and voluntary financial assistance, which could not be taken for granted) if they wanted a college education. Again, the system rewarded the virtues of striving: work, saving, foresight.

And striving was crucial in another respect. In the old days, college admission standards were more rigorous. Although there were a small number of open admission schools, students who weren’t willing to settle for them knew that they needed to excel in their high school work. Merely coasting through with the minimum of effort would have bad consequences, so those who wanted a shot at college worked pretty hard.

Moreover, those students who did go to college were more motivated to put forth strong efforts there because they and their families had made considerable financial sacrifices to make it possible.

Summing up, the old college and housing systems worked very efficiently because they rewarded sensible, virtuous behavior. Then, unfortunately, the government stepped in and wrecked those systems. Both home ownership and college attendance were turned into virtual entitlements that called for no striving.  Old standards that minimized the number of bad mortgages and the number of college students who were wasting their time and money were undermined by politics.

In housing, the old lending standards were swept away by federal pressure to maximize the number of people who took out mortgages, the idea being that increasing home ownership somehow meant that the nation was becoming more fair. Easy money, easy mortgages, and lots of talk about what a great investment housing was led to a huge overexpansion of that industry.

In higher education, politics similarly created a bubble. Old admission and academic standards have given way to a “college is for everyone” mentality: government subsidizes almost anyone who wants to give college a try, and almost everyone does because of the constantly broadcast idea that getting a degree is a “great investment.” Even weak and disengaged high school students are told by their guidance counselors to go to college because they’ll never get a good job otherwise. And political leaders declare that the nation needs ever more college grads so we can compete with other countries that are supposedly ahead of us.

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  • Derik Wrightson Derik Wrightson 5 months ago

    Fantastic take on the issue with the educational system, without being too one sided as Forbes typically is. Good work!

  • George Leef George Leef, Contributor 5 months ago

    I know people all across the political spectrum who lament that higher education has become a mass product that delivers little useful learning to students at enormous and constantly rising cost.

  • Tommy A Tommy A 5 months ago

    Simple supply and demand. The demand for college degrees has gone up, and so have prices. Formal education isn’t bad, but I’ve learned it isn’t everything, though.


  • tckilg01 tckilg01 5 months ago

    I disagree with the content of this article. The author implies that by making college accessible to more people the federal government is to blame for the poor decisions made by the public, which simply isn’t true. The author suggests that fifty years ago the path to college was paved with hard work, mental aptitude, and smart financial decisions; I find that unrealistic. Although I am sure no one would look to “Animal House” as a scientific resource, it’s social commentary caricatures a variety of stereotypes of college students that I am sure took some time to develop (and it celebrates it’s 35th anniversary this year). Surely no one expects me to believe that Otter and Bluto paid for tuition with money they saved from their paper route and that all of the guys in Omega Theta Pi (the wealthy antagonistic fraternity) made it to college by their own industry rather than daddy’s dime. The fact of the matter is that entrance to college has never been purely based on merit; then and now nepotism and access to vast financial resources has always played a massive role. The federal government simply opened up vast financial resources to the public. Some members of the public used these resources to pursue educations that led to jobs in engineering, technology, science and medicine when they otherwise would have not been able due to financial restraints and these people have likely had little difficulty making their student loan payments. For anyone to suggest that these intelligent, industrious people could ever have saved enough to pay for their education with part-time summer jobs is laughably ridiculous.
    Other members of the public, on the other hand, have chosen to pursue degrees that are far less marketable. They spend their government-appropriated funds earning degrees that are unlikely to be worth the time, money and effort that they put into them, and then wind up upside-down in student loan debt. This is not a new phenomenon either; this has existed for generations. The problem is that when an 18-year-old signs up to go to college with little or no guidance they have no idea what they are committing to or what the consequences of their decisions will be, especially if they are the first member of their family to go to college. This ignorance and naivete makes them prime targets to be exploited by those with an economic interest in college students: everyone from landlords, credit card companies and restaurants benefits from more students being in school but none more so than the schools themselves. Colleges and universities are in a competitive business so admitting new students that are backed by the federal government just makes sense. And when anyone can get the money that is need to meet the cost of attendance there is no incentive to minimize that cost, hence the trend to increase tuition by up to 10% each year. That is not the doing of the federal government; that is on the administrative level of the schools themselves. This point is emphasized now by the proliferation of online degrees that you can earn in everything from phlebotomy to bartending. It’s insane.
    In summary, what the federal government has done is offered the opportunity to earn an education to people that would otherwise have no realistic chance to do so. Some people take advantage of this opportunity to pursue a rewarding and lucrative career; other people are clueless and go forth blindly because they think that is their best shot at the American Dream. Still others are standing by to take full advantage of those that don’t know better. However, that is not the fault of our government.

    For fun, guess how many “vice-presidents” you think would be needed to run the department at your alma mater from which you graduated, then look up how many are on the payroll (their salaries are public record). Compare tuition today to when you graduated. Finally, see how many people will earn your degree this year. The numbers are telling.

  • George Leef George Leef, Contributor 5 months ago

    I’m afraid that you are caught up in the mistaken conventional wisdom about college that I took issue with in a previous post.

    I am quite aware that in the past some students merely goofed off in college and that today some study hard and add a lot to their stock of knowledge and skills. The truth, nevertheless, is that government intervention has greatly tipped the scales — away from hard work by students who are well equipped for higher education and toward merely coasting through by students who are academically weak and disengaged.

    Just as government meddling led to a huge increase in marginal home buyers who would have been better off had they continued to rent, so has government meddling led to a huge increase in the numbers of college students who learn little at high expense.

  • Ravi S. Iyer Ravi S. Iyer 3 months ago

    Thank you for this very thought-provoking article. I think it is vital that students and parents know the truth about academia today. I live in India and I think some of the issues you raise for the US educational system apply to the Indian educational system too. In my opinion, the Indian educational system in general (there are notable exceptions), suffers from low teaching standards, grade inflation and credential inflation. The net result is that society has a lot of concern about the knowledge and skills that graduates and post-graduates passing out of most Indian educational institutions have.

    I think the solution lies in making students earn their university degrees by hard work and proving that they have acquired requisite knowledge. External learning assessment exams both in general areas and domain specific areas as a measure of student learning outcome may be very useful in ensuring that the students do so and that their teachers focus on students achieving appropriate learning outcomes.