Sunday, May 20, 2012

Bubbles, malinvestment, and higher education

Artificially low interest rates wreak havoc again

Many commentators are asking whether the next big bubble to burst will be the debt associated with the rising cost of higher education. College costs have strongly outpaced the inflation rate, and the debt students are racking up is crippling. So what is driving this process and what consequences does it have for students? I have some thoughts below, informed by Austrian economics.

Rather than a bubble, it’s probably more accurate to call it a “mini-boom” of an Austrian variety. One factor fueling the rising cost of higher ed–and it’s not the only one–is government provision of student loans at artificially low interest rates; this encourages borrowing, especially for the long term. As a result, too many people spend too much time in college, and more people attend college than should. One can think of this as malinvestment in human capital caused by distorted interest-rate signals.

Another way to look at this is that the low rates lead people to invest in the general human capital (knowledge and skills) associated with higher education rather than the more specific human capital that comes from workforce experience and on-the-job training. No matter how much of a “knowledge economy” we have, we still need cars repaired, septic systems fixed, and meals cooked at restaurants.

Thus just as inflation induces people to invest too much in longer term production processes at the expense of consumer goods, so subsidizing of college induces people to invest too much in the longer term production process and higher order human capital associated with higher education. This distorted structure of human capital is ultimately not sustainable if it doesn’t match the pattern of skills demanded in the market. When graduates can’t find jobs that enable them to pay off their debts, boom will go bust. It is, as we say of inflation-generated booms, unsustainable.

Driving Up the Price

The other complicating factor here is that, like in inflationary booms, subsidizing an activity drives up its price. Just as inflation leads borrowers to bid up the prices of the inputs needed in the early stages of long-term production processes (think of the rising cost of materials during the housing boom), so does artificially cheap borrowing for higher education enable students to spend more on college than they would otherwise. That increased demand pushes up tuitions. With more students able to afford college, schools have upped the ante by providing more and better amenities to attract them, which requires higher tuition and fees to cover those costs. Government mandates have also added to the administrative bloat at many institutions, further raising costs and tuition.

Forgiving student loans seems a tempting option for dealing with the boom.  Like homeowners during the housing boom, students with a lot of debt have been victimized, both by the artificially low interest rates and the constant drumbeat of “everyone has to go to college.” The problem with forgiving this debt is that it creates serious moral-hazard problems–if the federal government wipes out this debt, why should anyone believe that future debt won’t be treated the same way? Whatever is true of the current borrowers, good policy should be made based on long-term institutional incentives not (just) short-term considerations.

The Way Out

The real way out of the higher education bubble is twofold. First, stop subsidizing the demand side through artificially low rates of interest on government loans. We need to find out how much both young people and potential employers really value the human capital acquired through higher education. That will only happen with market-driven loans and interest rates.

Second, we need to unleash real competition on the supply side by ending the government mandates and opening up higher education to new institutions, curricula, and pedagogies. There’s a place for a good old-fashioned liberal arts education, but it is not for everyone. Greater competition will drive down costs and give students choices that better match what they think they need. Getting government out is the only sure way to stop the boom before the coming bust gets any worse.


New Scottish school curriculum teaches students Britain is an ‘arch-imperialist villain’

History lessons north of the border are to be revamped in a bid to downplay the British Empire and promote Scottish Nationalism.

In an assault on the SNP’s new Curriculum for Excellence (CfE), senior history teachers said Government ‘tinkering’ would lead to a further slide in standards.

They claimed youngsters preparing to study for their Highers will be told that Britain is an ‘arch-imperialist villain’ and the history of the Empire will be reduced solely to lessons about slavery.

Children will be taught about the Great War purely from the perspective of the Scots who took part – while Scottish history will focus predominantly on a ‘Braveheart’ portrayal of great battles.

Last night, the Scottish Association of Teachers of History (SATH), which is due to meet in Aberdeen today to discuss the changes, warned of the ‘dangerous consequences’ of the SNP’s shake-up.

Nick Seaton, of the Campaign for Real Education, said: ‘The SNP is trying to rewrite the history books to create propaganda and that is utterly unacceptable.’

Scottish Tory education spokesman  Elizabeth Smith said: ‘To hear concerns about any attempt to undermine balance and objectivity in history is very worrying indeed. This is not the first time fears like these have been raised about curriculum developments under the SNP. The  Scottish Conservatives deplore any moves to include political bias in the teaching of any subject.’

SATH president Neil McLennan said: ‘After a prolonged period of tinkering with vague proposals and low-level discussion on skills which have basically been taught in classrooms for decades, the Scottish Qualifications Authority has released the first glimpse of content for history exams. What is proposed will shock many.’

Concern focuses mainly on the new National 5 history course. Such courses pave the way to Highers, but SATH claimed the redesigned subject will be biased towards a parochial view of history, where key topics will be taught solely from a narrow Scottish perspective.

Mr McLennan said: ‘In 2014, students will be remembering Bannockburn, but may be poorly informed of the other major anniversary that year [the 100th anniversary of the start of the Great War.]’

He said the ‘flash of tartan and cries of “Freedom” will attract students to some of the Scottish units in National 5’.  But he added: ‘The British history units pale into dry, boring insignificance against this populist history. Indeed, many units portray Britain as the consistent arch-imperialist villain of the piece.’

Mr McLennan said the make-up of the Great War courses will focus mainly on the role of Scots.

Last night, TV historian Bettany Hughes said: ‘Politicians are always itching to get involved, for obvious reasons, but really we should let history do the talking – without interference.  ‘It is very dangerous to cherry-pick moments in history.  We should be teaching the Empire in context – that’s the most important thing.’

A Scottish Government spokesman said: ‘The teaching of significant historical events will continue to have its proper place in history lessons in Scottish schools.

‘Ministers recently met Neil McLennan and agreement was reached that further collaboration with Education Scotland and the Scottish Qualifications Authority is required to support the implementation of history in CfE.’


British High School  grading system faces biggest overhaul in 25 years

Rising numbers of pupils face failing their GCSE exams under the biggest shake up of the qualifications system in 25 years, it emerged today.

Ofqual, the exams watchdog, is considering cutting the number of grades and stripping vocational subjects of their GCSE status to stop the flagship qualification being “devalued”, it was revealed.

In a major report, it outlined plans to review the existing grading structure following claims it is too broad and fails to meet the needs of universities and employers.

The move could lead to the current eight-point scale – awarding pupils a mark from A* to G – being cut to just six.

The change would abolish F and G grades to bring the qualifications into line with A-levels, inevitably leading to a rise in the number of pupils failing altogether.

In a further development, Ofqual is also considering reducing the number of subjects from the current maximum of more than 70.

It may result in many non-academic disciplines such as catering and motor vehicle studies being scrapped, it emerged.

Ofqual said that the current range of subjects “devalues the GCSE brand”.

The proposed changes are among more than a dozen major reforms to the examinations system outlined in the watchdog’s 2012 to 2015 corporate plan.

It comes just weeks after Glenys Stacey, the head of Ofqual, said that the standard of A-levels and GCSEs had been undermined by more than a decade of “persistent grade inflation”.

The watchdog is also:

 *  Reviewing Sats tests in English and maths for 11-year-olds to make them comparable with exams sat by pupils in other countries;

 *  Considering the abolition of bite-sized modules in A-levels in favour of terminal end-of-course exams;

 *  Formally consulting on proposals to allow universities to set A-level exams and syllabuses;

 *  Reviewing the cost all qualifications after it emerged that schools spent £330m on exams last year – more than double the cost in just eight years.

But some of the most radical changes are being made to GCSEs which have been dogged by claims of falling standards for years.

Almost a quarter of GCSE papers taken in England, Wales and Northern Ireland were graded A* or A last year – around three times as many as when the exams were first introduced in the late 80s. Some 99 per cent of papers were given at least a G in 2011.

Ofqual proposed reviewing “the way in which GCSE results are reported so they best meet their intended purposes”, saying: “The grading structure stretches from A* to G and it is time to look now at whether this is how it should be.”

The report added: “Most people think GCSEs cover just academic subjects, but this is not the case at present. GCSEs are now available in over 70 subjects… We think that this range of GCSE subjects devalues the GCSE brand and we intend to develop brand guidelines for GCSEs.”

But critics claimed that the changes would do little to restore public confidence in the system.

Chris McGovern, a former headmaster and chairman of the Campaign for Real Education, said: “We would support any change to the grading system because most universities and employers pretty much ignore anything lower than an A anyway. But removing the F and G grades is not going to wipe out 20 years of rampant grade inflation.”

Dylan Wiliam, emeritus professor of educational assessment at the Institute of Education, London, said GCSEs were becoming “increasingly irrelevant” in an education system that encourages most pupils to stay on until 18.

“If kids have got to stay on, why do we need these expensive examinations?” he said. “Schools spend more on examining kids than they do on books and paper.”

A spokesman for the Department for Education said: “We want all exams in England to stand comparison with, and be as rigorous as, those in the best-performing education jurisdictions.”


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