Monday, May 13, 2013

College Bubble Bursts After Decades of Extravagance

Markets work. But sometimes they take time.  That's the uncomfortable lesson that proprietors of America's colleges and universities are learning.

For many years, market forces didn't seem to apply to them. There was a widespread societal consensus that a college education was a good economic investment.

Politicians gave lip service to the idea that everyone should go to college. No one should be stopped by a lack of money.

There was historic precedent. The G.I. Bill of Rights vastly expanded college populations and helped build prosperous post-World War II America. Putting even more through college would make us even more prosperous.

So Congress passed student loan and grant programs to make it easier for people to pay for college and university tuitions. That increased potential higher education revenues.

Surprise! Over the last three decades, tuitions rose faster than the economy grew.

For a long time, that didn't seem to be a problem. College still seemed like a good investment during the quarter century of low-inflation economic growth from 1982 to 2007. You could pay off those loans with earnings increased by your degree.

Meanwhile colleges and universities -- and not just the highly selective ones -- competed for students whose test scores would improve their ratings in the U.S. News College Guide by giving "scholarships" that actually were discounts on the tuition list price.

To attract these students, the educational institutions built fancy dormitories, gymnasiums and student centers. And they vastly increased the number of administrators, to the point where colleges and universities had more administrators than teachers.

Government helped to produce an ever-increasing demand for higher education. So higher education administrators saw no need to compete on price. Higher tuitions just gave your school more prestige.

Now the higher education bubble has burst. The Wall Street Journal reported this week that that the average "tuition discount rate" offered incoming freshmen last fall by private colleges and universities has reached an all-time high of 45 percent.

At the same time, their "sticker price" tuitions have increased by the smallest amount in the last dozen years. Tuitions for in-state students at public four-year colleges and universities also increased by the smallest amount during that period.

Applicants are negotiating bigger discounts than they used to. Market competition has kicked in.

What has happened is that in a recessionary and sluggish economy, potential customers have been figuring out that a college diploma may not be a good investment -- particularly if it entails six-figure college loan debt that cannot be discharged in bankruptcy.

The Millennial Generation that voted so heavily for Barack Obama -- 66 to 32 percent in 2008, 60 to 37 percent in 2012 -- has had a hard time finding jobs, even with diplomas in hand. Especially if their degrees are in gender studies or similar fields beloved of academics.

In even worse condition are those students who never get a degree, a disproportionate number of whom are blacks and Hispanics admitted under affirmative action programs who prove unable to keep up with the pace of instruction at schools where most students enter much better prepared.

We see in higher education something like what we saw in housing. Government programs aimed at increasing college education and homeownership, particularly among minorities, turn out to hurt many of the intended beneficiaries.

The intentions of the people who created these programs were good. The results -- well, not so much.

Home ownership is a good thing generally, but it's not good for everybody. The young and transient, for example, are often better off renting.

Higher education is a good thing generally too, but again not for everyone. People whose talents are more artisanal than academic are often better off getting a job or vocational training than seeking a degree that guarantees them student loan debt but not a job.

College and university administrators are not used to being disciplined by market forces. For years, they thought they were above all that.

Many got into the habit of producing a product that didn't serve their consumers' interests well. In a prosperous and growing economy, there seems to be no penalty for doing so.

In more straitened circumstances, they are discovering that, sooner or later, markets work. Their old business model is no longer working.

Colleges and universities have been doing a good job of meeting their administrators' needs. Now, in the new normal economy, they're scrambling to serve society's needs, as well.


Britain's universities should take a lesson from the USA

A British perspective

Britain and the US have chosen two very different models for funding universities – and it’s clear which is winning

If a bunch of sadistic academics were to construct a mass experiment into mankind’s ability to resist temptation, it would look a lot like Stanford University. First, plonk a campus in one of the world’s most agreeable climates and make it look more like a spa hotel than a place of study. Next, have students dress as if they have stepped off the beach, and make sure one lies just half an hour away. Then hang hammocks between trees on the way to lecture theatres to ensnare the weak-willed. Finally, funnel 1,800 teenagers a year into this den of distraction – and see if they can do any work.

Oddly, they do. Work of sufficient quality to make Stanford one of the best universities on the planet. While famous for computing (and begetting Silicon Valley), most of its departments are now ranked amongst the world’s top five. Nor is it full of geeks: its athletic record is such that, if Stanford were a country, it would have come sixth in the Olympics – ahead of Germany and Australia. Rather than being a Californian freak, it is just the latest example of an extraordinary trend: the way that American universities are making dazzling progress while most British ones are in a state of crisis.

When Teddy Roosevelt visited Stanford a century ago, he said he had not been prepared for the sheer beauty of the place. Neither had I when I spent last week there as a media fellow at the Hoover Institute, on one of the many programmes which have no equivalent here. But what strikes a British visitor most is the mix of students. Knowing Stanford’s reputation, I had imagined it to be full of preppy, roistering Americans with parents rich enough to afford the $40,000-a-year fees. Instead I found students from all kinds of backgrounds, just over a third of whom are white. A fifth are Asian and a sixth Hispanic. It is a social and ethnic melting pot.

What makes all this possible is that Stanford is a private university. To British ears, the very phrase suggests a selfish club for the rich. Yet it is Stanford’s independence that allows it to run its own controversial but effective policies to find bright pupils from poor backgrounds. Google is, famously, a product of Stanford. But so is Julian Castro, the 38-year-old Mayor of San Antonio and a rising star of the Democratic Party who was offered a place in spite of mediocre school grades. He happily supports its “affirmative action” policy because, as he puts it, “I’ve seen it work in my own life”.

Britain and America have chosen two very different models of universities, and it is clear which one is winning. The academic rankings (compiled by Shanghai Jiao Tong University) show 17 American ones in the top 20, with Britain represented only by Oxford and Cambridge.

It might not be a surprise that the American universities do so well academically, given their funding. What is more surprising is that they appear to do far better on social justice, not to mention sporting prowess and entrepreneurial zeal. Stanford has a needs-blind admissions policy, and will subsidise whoever can’t afford it. The majority of students receive a subsidy that covers most, if not all, of the fees.

In Britain, our universities are hurtling down the international league tables – a fact that is partly explained by the dire levels of funding. A study published yesterday suggested it was a minor miracle that Oxford and Cambridge have retained their status given how cash-strapped they are. In theory, British universities should be safe because they are assured stable funding from the state. But, as things turned out, the world’s governments are in a financial crisis – while global philanthropy is booming.

If Stanford was run by the state of California, it would likely be as broke as the state of California. As things stand, it raised a cool $1 billion last year, almost double Oxford and Cambridge put together. It has managed to create a virtuous circle: it picks students who tend to remain grateful for their education, so donate generously in later life – especially if they think it helps bright, less fortunate youngsters do well. The same is true for Harvard, Yale and many of the top American foundations. They have collectively come up with a formula linking independence, sound finance, academic excellence and social justice.

British universities are some of the worst-funded in Europe – a problem that will not be remedied by the new tuition fees. Charging £9,000 a year covers barely half the cost of putting an undergraduate through Oxbridge. Worse, the Government’s funding formula pushes the universities towards having papers published in academic journals, rather than forging links with the outside world.

Last week I met IBM managers enrolled for a short course in Stanford’s “d.School” of entrepreneurship and an Army colonel studying Libya before his deployment to US Africa Command in Stuttgart. Such links are all too scarce in British universities.

Even on the Times Higher Education Supplement’s rankings, just five of them make the top 50. Our academics are notoriously underpaid, which is more dangerous than ever in a global marketplace. Students who have been mis-sold higher education for decades are finally waking up to the scam.

The old sales pitch, that a degree will mean you earn £100,000 more over a lifetime than a classmate who starts work at 18, is a sum conjured up by mixing up doctors’ and lawyers’ degrees with the others. For a male history graduate, it’s £35 a year more, and for others (“creative arts” degrees) it’s £15,000 less over a lifetime.

It’s getting harder than ever for Britain to look down, intellectually, on America. Its universities are world-class, and expanding fast. Oxford and Cambridge may be far older, but neither can afford to be cocooned in an archaic world of dining at high tables and mispronouncing words like “Magdalen”. The global competition has never been fiercer, and they are facing a future of austerity while it’s boom time for their private rivals. The very fact that the world’s most respected university ranking system is run from Shanghai gives an idea of how quickly the competition is evolving.

It is Stanford’s independence that allows it to try out its social mobility formula, with a success rate that Britain’s engineers of equality could only dream about. If Stanford were government-run, its star-picking would be branded “positive discrimination” and banned under Californian state law. The University of Texas is being taken to the Supreme Court on precisely this point, and the defence documents include a submission from a Stanford psychologist, Greg Walton, who argues that true meritocracy means taking account of the stronger headwinds facing poorer students.

For all its drama, Britain’s tuition fees debacle has not secured the future of our universities. There still isn’t enough money and the new Office for Fair Access threatens new levels of political interference. Once, we may have been able to dismiss the American model of independent universities as hideously expensive, financially unstable or socially unfair. It is impossible to do so anymore. For the British universities who can afford it, independence will seem like an increasingly attractive option.


Learn From History

History is one of our greatest teachers.  It's just too bad so many of our young people think history started with the death of Princess Di or the birth of the iPhone.

I was painfully reminded of America’s historical illiteracy and the failure of our educational system last week while golfing with a few strangers in Burbank, Calif.

One of the young men in my foursome was about 30 and ran a restaurant in Los Angeles.

When I told him in passing that I was going to be flying to Normandy, France, the next morning to raise a flag at an American cemetery there, his awful education betrayed him.

“Why would there be an American cemetery at Normandy?” he asked.

I thought he was kidding me, but he wasn’t.  “Why?” I asked. “Did you ever see ‘Saving Private Ryan’?”


“Did you ever see ‘The Longest Day’?”


“Do you remember the Second World War?”

“I knew there was a war.”

“Do you know anything about D-Day?”

He looked at me like, “Huh?”

I was shocked – and blunt.

“You don’t know why there’d be an American cemetery at Normandy? You’re proof the education system of this country sucks.”

After my golf outing, I flew to Normandy for the weekend. I had the honor of raising the flag over the American cemetery at Normandy on Sunday and visiting the small town of Sainte-Mere-Eglise, which became the first French town liberated from the Germans in World War II.

U.S. airborne troops captured the tiny town before dawn on June 6, 1944, to prevent German troops from using roads to attack Americans landing at Utah and Omaha beaches.

(For those who know their World War II history only from the movies, the airdrop at Sainte-Mere-Eglise is shown in “The Longest Day” and features Red Buttons as paratrooper John Steele, who played dead after his parachute got hung up on the church steeple.)

It was great to visit little Sainte-Mere-Eglise and its 1,600 people. I met some of the few remaining 90-something soldiers who fought at Normandy and I talked to elderly French people who remember when hundreds of brave young Americans dropped from the sky to liberate their town.

But I was disappointed to learn that our government seems to have forgotten about marking the anniversary of D-Day.

In fact, the Obama administration is doing so little this year that the French government is pulling out of the annual event and the American honor guard is being forced to pay its own airfare to Normandy.

As for the 2014 anniversary, the last major 10-year celebration that will include surviving veterans of D-Day, it also is being neglected by the Obama administration.

President Clinton nominated someone to be in charge of the 1994 anniversary two years in advance. But as of this date, no one has been nominated to be in charge of the 70th anniversary of D-Day in 2014.

I’m sure President Obama will eventually find time between his never-ending campaigning and his serial golf outings to choose someone to oversee the 2014 D-Day anniversary events in Normandy.

But it was embarrassing for me to go the Airborne Museum in Sainte-Mere-Eglise and be asked why “my government” doesn’t care about the D-Day anniversaries.

The people of Sainte-Mere-Eglise love Americans because America saved them. They will never forget D-Day. They still have a dummy of an American paratrooper hanging from their church steeple.

What happened at D-Day wasn’t just a movie. It was history.

If we don’t talk about it, if we don’t teach it, if we don’t honor its anniversary, if we don’t tell guys like my young golf buddy why what happened there was so important, it might as well have never happened.


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