Wednesday, June 19, 2013

Colleges May Be the Next Burst Bubble

by Martin Hutchinson

When a service's costs exceed its benefits, yet its price continues to increase faster than inflation, there can be only one outcome

A recent study by the website shows it can take decades in some professions to pay off college debt. Conversely, the leaker Edward Snowden, according to reports, didn’t graduate from high school and yet was holding down a six-figure job in one of the most bureaucratized of sectors. Those and other signals strongly suggest that while the cost of a four-year college degree inexorably increases in real terms, the return to students on that investment is declining, and that only abundant subsidized finance from the Federal government is keeping the system going. As a banker-journalist of forty years' experience, I can tell you: higher education looks like a bubble about to burst.

Countless studies have shown there to be around a 50% salary premium for obtaining a 4-year bachelor's degree, compared with high-school graduates. On that comparison rests the entire economics of the gigantic college education industry. Even a cost over $100,000 in tuition for a 4-year degree can be justified by the prospect of a 50% salary increase for one's entire career, although the taxman's substantial slice of it lessens the economic benefit.

However the comparison is a false one, for the simple reason that the college graduates and the high-school graduates have different levels of ability. Given the strong social pressures toward college, particularly in high schools themselves, there is a heavy tendency for the student with the ability to get into college to do so. Once in college, even if the student finds the work uninteresting and the expenses heavy, there is a strong tendency to graduate, because the student who does not graduate has supposedly shown to employers that he lacks the "discipline" that college requires. Only students who can wangle themselves interesting job offers without graduating are likely to drop out without facing a substantial job-market penalty.

However if the innate abilities of the college graduate and the high school graduate are different, then much of the salary difference between the two groups can be explained by the difference in their innate abilities, and not by the value of the college degree itself. Thus half or more of the 50% college graduate premium may in reality be due to differential ability, reducing the true value of the college degree to 25% or even less. When that correction is made, the economic incentive to pay for a four-year college is greatly reduced.

The other question is to what extent the requirement of some jobs for college degrees is artificial. Clearly, in some professions such as medicine and the law, professional bodies themselves impose a requirement for a medical degree or (in the case of the law) a law school post-graduate education – even graduation in the state bar exam is no longer enough, in most cases.

In other jobs, the requirement for a degree seems purely a matter of bureaucracy. For example degree-learning is little used in the major banks and consultancies, yet few rise in those professions without a college degree. The federal government also is over-impressed by academic attainment, with many employees holding higher degrees, albeit generally from third and fourth tier colleges, without any great need for the skills those colleges have supposedly imparted. Finally, while schoolteachers may be thought to need some modest qualification in education skills, those qualifications are not available without the prerequisite of a college degree, the skills of which are often never used in the teacher's career.

The requirement for degrees in large bureaucracies that do not use the skills learned can be equated to the requirement in the British Army before 1870 for the purchase of commissions. In both cases, there was no implied requirement for skill in the tasks undertaken by the bureaucracy, but simply a desire that the incoming bureaucrat or officer be "one of us" who had paid his/her dues to enter the organization concerned.

Commission purchase was derided by Victorian reformers as keeping the Army unprofessional and dominated by the aristocracy. In reality it had certain logistical advantages; for one thing if promotion had been only by seniority, by the time of the Crimean War, after forty years of peace, all the colonels would have been 70 – as it was too many of them were. It also provided an automatic pension scheme since an officer wishing to retire simply sold his commission and used the proceeds as a pension.

Note the financial similarity between commission purchase and 4-year college. An infantry captain in 1837 earned 192 pounds annually, while his commission cost 1,800 pounds, or 9.4 years' purchase. At the top of the scale, a cavalry lieutenant-colonel earned 600 pounds, while his commission cost 6,175 pounds or 10.3 years' purchase. At the bottom of the scale, an infantry ensign's commission cost only 4.7 years' purchase, presumably reflecting the lesser demand for such a low-paid post.

From's figures, a teacher's degree costs $53,000 or 1.3 years' salary, a dental degree costs $139,000, or 0.9 years' salary (but bear in mind that dentists must pay for liability insurance, a cost unknown to a 19th century cavalry colonel) and at the plebian end of the scale a journalist's degree (presumably the B.A., not the J-school) costs $53,000 or 1.4 years' salary. Of the three qualifications, only the dentist's can be argued to be truly necessary.

The Millennials will rejoice to learn that their degrees cost less than the purchase of even a lowly Ensign's commission – but they should reflect that those degrees, growing costlier by the year, have no monetary value after they have been obtained, and thus cannot be used as a pension. What's more whereas the 19th Century military officer could and did switch careers in mid-life, financing the switch through the sale of his commission, no such opportunity is available to the modern recipient of a liberal arts degree.

There is of course a more precise equivalent to a nineteenth century Army commission: a New York City taxi medallion, which today costs around $700,000, which in 1837 would have got you a Major's commission in a good cavalry regiment.

Skeptics will argue that the college education provides knowledge that is useful in the student's further career or (in the Ivy League) allows the student to mix with an intellectual elite. But in a year in which Harvard College invites Oprah Winfrey as commencement speaker, surely the embodiment (however successful) of lowest-common-denominator culture, it can hardly be claimed that the college adds any intellectual polish that cannot be acquired over the Internet.

If professions wish to maintain exclusivity by demanding their new entrants endure four years of an expensive college process that provides them with little or no additional capability for the job, they should acknowledge the fact openly. Instead of requiring a 4-year college degree, they should rely only on a simple aptitude test, together with a license. Then the number of licenses issued could be restricted according to the current supply/demand for that profession's output.

The licenses would then trade like New York City taxi medallions, with supply/demand for the profession's services determining the price of the license. In bull markets, licenses to practice on Wall Street would become very costly indeed (as did New York Stock Exchange seats when that institution's membership was restricted – they peaked at $625,000 in 1929.) In bear markets, they would be much cheaper – NYSE seat values bottomed at $17,000 in 1942, later than one would have expected. Similarly journalism licenses would soar during election years and major wars in which the U.S. was engaged.

It might be objected that a license system would require a substantial up-front investment, thereby denying the professions to those without private means. But that's also true today with 4-year college degrees. Finance for the professional licenses would be easily available, since unlike a 4-year degree they would have a cash value and be saleable if the licensee wanted to switch careers. Most important, they would save the student 4 years in college, replacing it with the much shorter period required for a prep course for the professional aptitude test.

We're probably never going to a system whereby professional licenses replace college. But the thought-experiment indicates the true value of a college degree is much less than is usually claimed. When a service's costs exceed its benefits, and yet its price continues to increase faster than inflation there can be only one outcome: a massive market correction, with widespread bankruptcies and industry capacity slashed by a large fraction. For the colleges of America, this fate lies ahead.


Poor white children are the worst achievers at school, says British school inspectorate

Why?  Because you can mark them as "Fail".  You can't do that with minorities

Poor white children in rural areas and coastal towns have been revealed as the the biggest under-performers in British schools.

A report from Ofsted, set to be released later this week, outlines how the worst-performing pupils are now found in coastal towns and villages in the east and south-east of England.

It is a dramatic shift from twenty years ago, when inner city pupils in large cities like London and Birmingham and ethnic minorities were the least likely to succeed academically.

Now these children achieve exam results above the national average, while pupils in towns such as Hastings in East Sussex and Great Yarmouth in Norfolk are floundering at school.

The findings were laid out by Ofsted's chief inspector of schools Sir Michael Wilshaw.

He said: 'Many of these disadvantaged children live in areas that might be considered affluent but nonetheless are performing poorly.

'We need new policies and approaches to deal with underachievement in these areas.'

The report, Access and Achievement, shows that poor British white pupils are the lowest performing ethnic group and since 2007 their qualification attainment has improved by just 13 per cent. By comparison, Bangladeshi pupils of a similar background have jumped by 22 per cent.

Sir Michael, a former headteacher, told the Sunday Times: 'Where those youngsters aren't getting jobs, then they will be attracted to organisations like the English Defence League, and we need to worry about that as a society.'

Although the gulf in achievement between the richest and poorest pupils in cities is closing, it remains 'stubbornly wide' elsewhere.

The report, the first into the academic gap between rich and poor in a decade, also states that children from affluent families are nearly twice as likely to leave school with five good GCSEs than those from underprivileged backgrounds.

Sir Michael announced measures to tackle the disparity, such as more closely monitoring schools and encouraging successful schools to support those nearby that are struggling.

Earlier this week Sir Michael said children should be placed in sets from the age of 11 because state schools are failing to help the most gifted reach their potential.

Mixed ability classes in particular are responsible for stunting their development because they are pitched at average pupils, he said.

‘Too many non-selective schools are failing to nurture scholastic excellence. While the best of these schools provide excellent opportunities, many of our most able students receive mediocre provision,' he added.

‘Put simply, they are not doing well enough because their secondary schools fail to challenge and support them sufficiently from the beginning.'


The British Labour Party has raised the white flag on free schools. It's just going to re-brand them 'parent-led academies'

I sympathise with Stephen Twigg, the shadow education secretary. From the moment he was appointed, he made it clear that he doesn't oppose free schools. I suspect that his attitude towards them in private is the same as Andrew Adonis's and, like his close colleague, he believes Labour should take credit for them. As Adonis has often pointed out, free schools are just a subset of the sponsored academies introduced by Labour.

But Twigg cannot simply embrace the policy without alienating the teaching unions and large sections his own party. Ed Miliband dismissed free schools as "the opposite of the thing we need" and Ed Balls, Labour's last education secretary, described the policy as the most socially divisive in 60 years. So Twigg needs to sugar the pill if he's to persuade the party to swallow the policy.

His strategy in the past has been to support free schools, but only on certain conditions. In 2011, for instance, he said Labour wouldn't oppose free schools provided that they raised standards, narrowed the attainment gap between rich and poor and didn't have a negative impact on neighbouring schools. In his big speech today, Twigg has made essentially the same point, only with a different set of conditions. This time, he's saying that Labour will support free schools provided they don't create surplus places or employ non-qualified teachers. Oh, and it's going to re-brand them "parent academies".

If this is a "U-turn", it's not a policy shift on Twigg's part. Rather, the new development is that the Blairite Twigg has finally persuaded his largely Brownite party to accept his position on free schools. He's done his best to create the impression that a great gulf exists between this policy and that of the Conservatives, but the truth is that the majority of free schools are already in areas where there's a basic need for more school places, thanks in part to the last government's open-door immigration policy. In principle, the Department for Education will still approve a free school application if the proposer group can show that there's a genuine demand for places, but the number of proposals being approved in areas where there's already a surplus of places is getting smaller and smaller. Of the proposals for mainstream free schools approved last month, over 90 per cent were in areas where there's a shortage of places.

What about non-qualified teachers? Twigg has always been opposed to free schools employing teachers without the union-approved credentials, but that's not just a freedom enjoyed by schools like the one I co-founded. Independent schools and academies have the same latitude. Is Labour going to force them to sack non-qualified teachers as well? It looks as though Twigg wants this to be the main dividing line between the two parties when it comes to education policy in the run-up to the next election and Labour's internal polling suggests that, on this issue, the public is on its side. But I find it difficult to take seriously because I can't see how a Labour government could enforce such a policy. The autonomy of free schools and academies when it comes to things like employing staff is guaranteed in their funding agreements and it's hard for an Education Secretary to override those agreements, as Ed Balls discovered when he unsuccessfully tried to force academies to teach the National Curriculum in 2007. A new Labour government could pass legislation making it illegal for schools to employ non-qualified staff, but any school that sacked a teacher as a result of this law could almost certainly be challenged in the European Court of Human Rights.

My reading of this element in Stephen Twigg's speech is that it's a sop to the teaching unions – and the left of his own party – designed to neuter their opposition to Labour's support for free schools and will be quietly dropped if the party wins the next election. For that reason, defenders of Michael Gove's education reforms shouldn't be drawn into a debate on this point. Instead, they should welcome the shadow education secretary's success in persuading his party to drop its opposition to free schools and taunt Ed Miliband, Ed Balls and the leaders of the teaching unions about this at every opportunity: "So you're opposed to free schools, but in favour of parent-led academies. Can you tell me what the difference is, please?"

In the public debate about free schools, both internally and externally, the enemies of promise have been trounced.


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