- - Wednesday, July 25, 2012

By Glenn Harlan Reynolds
Encounter Books, $5.99, 56 pages

University of Tennessee law professor and blogger Glenn “Instapundit” Reynolds begins “The Higher Education Bubble” with a quote and an explanation. The quote is the late economist Herb Stein, father of Ben Stein, reminding us that “something that can’t go on forever, won’t.”

The explanation is a brief on how financial bubbles happen. A kind of asset is seen as very valuable, and so an increasing number of people spend resources to purchase it. As more people buy, the price goes up. Financial institutions see there’s money to be made in bankrolling said purchase, and they roll out cheap credit.

The process feeds on itself rather viciously. The price keeps going up, and people keep paying it, partly because so many others are taking on a lot of debt as well. It seems normal. As long as the class of asset keeps appreciating in value, the debt and, thus, the risk seem worth it.

But what happens when the value of the asset goes down? Unfortunately, a whole lot of people are left with something enormously expensive that’s worth a whole lot less than what they paid for it.

We saw this play out recently with the housing market. Mr. Reynolds (who, full disclosure, supplied a blurb for my first book, “In Defense of Hypocrisy”) and many other analysts see a similar reckoning for higher education. However, in this case, he warns that it might get an order of magnitude worse.

You can default on a home loan and take just a temporary hit to your credit; you can sell the house at a loss and pay off the difference over time, or you can hold onto the house and hope its value comes back up with time.

Thanks to Congress, college debt is not bankruptable. It will follow you to your grave. Moreover, the asset is not transferable. That degree in women’s studies that you took on $70,000 in debt to finance has no resale value, and its value to you is diminishing.

Your education’s value is diminishing in two ways: First and most obviously, the older you get, the less you can expect it to fetch you over a career in increased wages relative to people without a degree. Put another way, a degree earned at 25 is likely to make you much more money than a degree earned at 40 even if they cost you the same amount, which they surely will not, given the astounding rate of tuition increases.

Second, Mr. Reynolds argues, the difference between what the college-educated and the non-college-educated can expect to make is narrowing. Often, when you factor in wages lost for the time to get the degree and payments on the debt incurred, the gap disappears.

Mr. Reynolds sees a bleak future for the academy as people smarten up about what a degree really will get them. Enrollment at colleges will plummet. Congress eventually will follow the lead of straitened state legislatures and decline to pour quite so much money into higher education, which will squeeze schools further. Fights for the few tenured positions left will make “Mad Max: Beyond Thunderdome” seem tame.

OK, that last sentence was a bit of a calculated overstatement, but the rest of it — the core of Mr. Reynolds’ analysis — is on solid ground. Critics may question the extent of the problem or object to the tone of this short, punchy pamphlet. Indeed, there were times when this reviewer wished for more detailed looks at studies and reports or for some of Mr. Reynolds’ asides to be fleshed out into entire chapters.

But that is to wish for a pamphlet to be something other than a pamphlet. All the quibbles in the world won’t make the higher-education bubble any less likely to go boom.

Jeremy Lott is the founder of several Real Clear websites on religion, books and policy.

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