The Soon-to-Burst Education Bubble

In early June, Glenn H. Reynolds, professor of law at the University of Tennessee and the Instapundit, wrote that the education bubble would burst soon.  He pointed out that Money magazine reported that "After adjusting for financial aid, the amount that families pay for college has skyrocketed 439 percent since 1982... Normal supply and demand can't begin to explain cost increases of this magnitude."

Reynolds notes that:

• Just as with the housing bubble, "cheap and readily available credit has let people borrow to finance education."
• The consumer ignorance of students and parents denies how tough it will be to repay the loans.  [ I'll attest to this, especially when the same government that makes the loans easy to get causes a massive recession that harms the parent's small business.]
• There is "a belief that, whatever the cost, a college education is a necessary ticket to future prosperity."
• Bubbles burst when ignorance and excessive optimism can no longer sustain them.
• Student loan demand is decreasing and students are more willing already to go to less expensive colleges.

Reynolds says that colleges can provide a student prosperity in three ways:

1. It may make them more economically productive by providing a skill of economic value in the marketplace.
2. It provides a credential employers want for which they will not be accused of discrimination as they would if they required IQ tests and the degree suggests an ability to follow instructions and to show up.
3. The degree may assist in forming a social network that may provide jobs and opportunities.

Reynolds adds that only the first path to student prosperity does much for society as a whole.  The others are only about who enjoys the distribution of wealth.  His own deadly evaluation of colleges is that they are better at providing for 2. and 3. than for 1.  He also says they offer the college experience, which is rich in the party experience!  He does not think the colleges will do a good job of reforming themselves.  He expects that after the bubble bursts, educations will more likely be obtained on-line as Anya Kamenetz has suggested in her book DIY U.

Michael Barone has picked up on this Reynolds prediction of the education bubble burst in the Sunday Washington Examiner of 5 September 2010 in an report entitled "Higher education bubble poised to burst."  He notes that the National Center for Education Statistics has found that most college graduates are insufficiently proficient in verbal and quantitative literacy.  Philip Babcock and Mindy Marks of the University of California found that the average time a college student studies now is 14 hours a week compared to 24 hours in 1961.

Frankly, I do not believe a student belongs in college if they are not studying 36 hours a week.  This number of 14 hours of study a week makes it very clear that the average college student has no business being in college, given the expense.  A college is a very expensive playground and people 18 through 21 years old have no business spending four years playing.  This is childish and irresponsible.

The American Council of Alumni and Trustees (ACTA) surveyed 714 colleges and came to the obvious conclusion that "by and large, higher education has abandoned a coherent content-rich general education curriculum."  Jay Leno on his many visits to college campuses has long made that very clear!!!  Well, ACTA notes that college students are not taught the basics of literature, history, math, or science.  Most colleges do not require economics, American history and government, or a foreign language.  You can examine the requirements of these colleges here.

It is being noted that college administrations are hugely bloated, just as governments are.  Meanwhile, their endowments have generally taken a beating with the recent collapse of the stock market and other investments.  State governments are cutting back on the tax monies passed on to colleges.  State-funded colleges have generally had to raise tuition and fee costs.  For-profit colleges are beginning to siphon students away with offers of economically valued training.  These are signs of the impending collapse.

Barone and Glenn Reynolds agree with me that college is not for many or even most of those going to college.  Barone notes that in 1910, about 2% of Americans graduated from college.  The number of graduates in 1910 was 39,755, which is fewer than are to be found on many single college campuses today.

He observes that:

Government's student loan subsidies have enabled institutions to grow faster over the last three decades than the economy on whose productivity they ultimately depend.  ...  The people running America's colleges and universities have long thought they were exempt from the laws of supply and demand and unaffected by the business cycle.  Turns out that's wrong.

Of course governments can do wonders to obscure the law of supply and demand, but in the end, even they cannot silence its demands. This seems to be a recurring theme in my own writings on many a subject here.  In the aftermath of the college education bubble bursting, one wonders if the remaining colleges might take economics more seriously and actually try to understand how the private sector produces the goods and services which support government and colleges.  In the long run, the colleges have done more to harm the business of America than to help it.  The colleges will one day find that they were actually poisoning themselves, albeit with a slow poison.

Importing Japan's 1990s Miseries

Those who have not learned from history are doomed to relive the past, especially if they believe in some mythology about the past which imprints all the wrong lessons upon their minds.

One of the great examples of a mythology leading men astray is that of the Great Depression in which the demi-god Franklin D. Roosevelt gave Americans the confidence they lacked to rebuild the economy with his fireside chats and his determined pragmatic experimentation with social welfare programs. In fact, FDR greatly prolonged a recession and turned it into a deep depression and then when the economy began to improve, turned it into a second depression. The back to back depressions became the Great Depression and were not brought to an end until after the war, though wartime activity in some respects made it seem as though the depression ended when war production got well underway. FDR had an uncanny knack for creating maximal investment uncertainty and this kept private investors on the sidelines until after the war. The story is well told in The Forgotten Man: A New History of the Great Depression by Amity Shlaes and in Jim Powell's FDR's Folly: How Roosevelt and His New Deal Prolonged the Great Depression.

There is a more recent case of history from which we could learn. In the entire decade of the 1990s, Japan suffered an economic meltdown due to a boom in stock prices and real estate prices brought on by a flood of easy money supplied by the Japanese government in the 1980s through 1990. Benjamin Powell has written an excellent commentary on this called Avoid Japan's Mistakes in the 8 March 2009 Washington Times. Powell points out that the Nikkei stock market index fell about 70% and real-estate prices fell by 80%. This was a significantly more severe downturn than our present travails are.

Between 1992 and 1995, the Japanese had six stimulus bills providing an average yearly stimulus equal to 3% of the Japanese GDP. In 1998, the Japanese stimulus programs were 8.5% of the GDP. Even this huge stimulus had little effect upon Japan's plight. Our present $787 billion stimulus bill is 6% of the American GDP. By the mid-1990s, Japan had a very low central bank interest rate like ours now. Japan turned to big bank bailouts and to nationalization of the banks in 1998 and 1999, only to make matters still worse. Japan also provided huge sums of government funds for construction projects to no effect.

The real-estate booms in both Japan and the U.S. caused too much money, too many capital goods, and too many people to enter the construction industry. Powell says, "Bank bailouts and fiscal stimulus bills don't work because they strive to maintain the status quo. But the status quo is the problem and exactly what needs to be corrected. ..... "Stimulus" bills that emphasize public works and infrastructure merely prop up the over-expanded construction industries."

Returning to my own viewpoint: This is true, but it is also the case that the financial industry itself was on a bubble and had too many people in it. The masses of people refinancing mortgages and dealing in the financial derivatives markets were excessive and now need to be pared back substantially. The market will take care of this and also of the bankruptcy of General Motors and perhaps Chrysler as well, if only the government will get out of the way. The huge sums of bailout monies are saddling our children and grandchildren with pointless debt. The derivatives financial institutions, many real estate firms, GM, some banks, and some construction companies are way beyond saving. Let them fail and let wiser heads take over their physical assets and hire and manage the people who used to work for these loser companies. There is surely no point in wasting more money on foolish bailout schemes.

Not only is the money being wasted, but the very uncertain and surprising ways in which the government is spending it is causing private investors to take their money out of the market and wait on the sidelines. Every time Obama sneers at the "investor class" he makes them more uneasy and more passive. Obama has frozen the energy of the most dynamic and creative economic forces. The ineffectiveness of the whole effort is causing people who had signed on as part of Obama's economic team to back away from government jobs in the Treasury Department so they will not be stained by association with such a losing effort. The banks and financial institutions who took the Federal money nearly forced upon them, marked themselves as losers. GM and Chrysler also put on targets as losers when they took bailout money. Interestingly, so did the United Auto Workers Union. The image of what they did to the American automotive companies in the competition with the Japanese, Korean, and European auto makers, may be enough to defeat the union card check bill killing secret ballots to decide the issue of union representation.

The concerted efforts of the Obama - Pelosi - Reid Axis Powers to do all of the following in a massive and rapid push designed to cripple the private sector and to build the socialist government-dominated society of their choice:

• the takeover of medical services with tighter controls and rationing of medical services by means of the newly created computer record system
• the move to control medical insurance
• the elimination of a doctor's right to refuse all Medicare funding, thereby making him completely subservient to the government
  
• the threat to force increased unionization upon small businesses
• the creation of massive government debt with crippling future interest payments
  
• the coming high inflation
• the meddling with the management of banking and other financial institutions, including forcing them to continue making risky, yet low interest rate loans
  
• the transfer of money from the private sector to the ever-obstructive and meddling government sector
• the promised higher taxes on investment profits
• the vendetta against the "investor class"
  
• the higher income and Social Security taxes on higher income families
• the ban against drilling for oil in the Gulf of Mexico and still more restrictions against drilling for oil and gas on the excessively extensive Federal lands
• the killing of funds to relocate spent nuclear fuel rods to Yucca Mountain thereby killing nuclear power in the near future
• the promised Federally orchestrated bankruptcy of the coal-fired electric power plants, which produce 50% of all U.S. electricity
• the punishing taxes or fees to be leveled on the oil and gas industries
• the restrictions of energy use and the greatly increased costs of energy use to fall on every American
• the huge stock market losses which will make many Baby Boomers more dependent upon government for retirement and health care
• the funding of more civil service organizations to remove workers from productive work in the private sector and make them cheap labor for the politicians
• the flooding of still more money into universities where most professors will use it to advocate more socialism in America and an ever-diminished role for the individual while college education costs continue to skyrocket
  
• masses of more government-chosen winners, who will be rewarded at the expense of hardworking and responsible taxpayers
• increased restrictions on trade with other countries
• increased submission to the so-called international law of the dictator and socialist government-dominated United Nations
• increased expenses for business mandated by governments as a way to keep bribes to voters off Federal and state expense accounts
  

All of which ought to cause a massive and sustained Second Great Depression. The Obama Axis Powers will be happy to use the continuing crisis as a means to push for still more government power as a means to solve the problems they have themselves caused. Of course, they will continue to blame everything on George Bush and perhaps Rush Limbaugh. Meanwhile, bewildered Americans will more and more frequently read Ayn Rand's Atlas Shrugged in order to really understand the root of all the evil which has overtaken them. Will the sign of the dollar and decals asking "Who is John Galt?" become commonplace on Depression era cars?

If you have any hope of thinking for yourself, choosing your own values, and managing your own life in accordance with those values, you are under a massive and brutal attack. It is way past time for every American who has any understanding of his right to life, liberty, property, and the pursuit of happiness to stand sure in his insistence upon preserving this essence of his individual life. Without it, there is no joy in living. We must stand united and individually in rebellion against this statist takeover of our lives.

This is much, much worse than anything King George III ever conceived of. In comparison to Obama, the king was a hero of freedom. Let us hope Americans can recover some measure of the concern they once had for individual freedoms before they lose everything.

Growth Management Laws Created Housing Bubble

For some time, I have been pointing out that the rapid increases in home costs are limited to some areas of the country and that these rapid increases have been largely determined by local governments, or in some cases by state governments. Even the Federal government has contributed in some areas out west where the Federal government owns a large fraction of the land. Where growth management planning by governments is not practiced or has been very newly implemented, the cost of housing has simply increased at about the inflation rate. Home sales are still brisk in areas without such growth management and people have little need to resort to subprime home mortgages in such places. The story is catastrophically different in California, Oregon, Washington, Arizona, Florida, Hawaii, Maryland, New Jersey, Rhode Island, and Vermont, where the states have mandated growth management laws. The Denver and Minneapolis-St. Paul areas have also been hit due to local government restrictions. Randal O'Toole, a senior fellow at the Cato Institute, has written an excellent article on this called Big Burdens from Growth Management.

He points out that a four-bedroom, two-and-a-half bath home in San Jose, CA costs $1,100,000, while the same home costs $550,000 in Seattle, WA and only $250,000 in Raleigh, NC. San Jose has practiced growth management since 1970, Seattle since 1985, and Raleigh has the wisdom not to interfere. Housing costs in urban areas depend heavily upon how long growth management policies have been followed. O'Toole points out that several fast-growing states such as Texas and North Carolina have home price to buyer income ratios of less than 2.5. In comparison, the average ratio is more than 9 in San Jose! In Dallas, this ratio is slightly more than 2 and the area growth rate is 40% since 1990, compared to San Jose's growth of only 10% in that time. The average home price to buyer income ratio in all of California is more than 8. If more than 30% of your income goes to making your mortgage payment, you will most likely have to take a subprime mortgage. Consequently, it is most in the growth-managed areas that subprime mortgage loans have become a major problem.

The difference in home price brought on by government growth management requirements is such that in 2006, home buyers paid more than $250 billion in planning taxes, the cost of this government meddling in the home and land markets for that single year. Needless to say, these costs keep many families from owning the homes of their dreams, which is exactly what they are supposed to do. From 1940 to 1960, homeownership grew from 44% to 62%, but has grown to only 69% since. Homeownship has grown better in most states with no growth-management laws. This is important, because a home is the biggest investment most families have. It also provides the most common means for people to finance a new small business.

It is commonly said that growth management prevents the "urban sprawl" that planners hate, but that most people's dream of a single-family home with a yard requires. Yet, all urban areas now account for less than 3% of the land in the U.S. California requires 95% of its people to live in 5.1% of that state's land, but with no growth management, only about 8.5% of the state would be urban. In order to keep 3.4% of the state's land unoccupied, the state has tripled the cost of a home. Oregon requires its people to live in 1.25% of the state, but with no requirement and assuming the same densities of people in urban areas as in the rest of the country, they would occupy less than 1.7% of the land in Oregon.

O'Toole points out:

"Of course, when we say a particular law has 'protected' open space from development, we usually mean that the law has denied rural landowners the right to use their property as they see fit. Because landowners receive no compensation for this taking of their property rights, it should be viewed with even greater outrage than the Supreme Court recent decision allowing cities to take people's land by eminent domain -- with compensation -- and give that land to private developers."

"Russians say that Americans do not have any real problems, so they have to make them up. Urban sprawl is one of those made-up problems. Unfortunately for U. S. citizens, efforts to control sprawl have led to very real difficulties: unaffordable housing, higher land costs for business and industry, housing bubbles and busts, and increasing barriers to homeownership for low- and moderate-income families."

In an effort to address some of these problems, local governments create subsidized housing, which adds to the tax burden. They sometimes require builders to build money-losing housing so they will be allowed to build other single-family and townhouse homes, to which they shift the costs. This makes them more expensive. The federal government uses Fannie Mae and Freddy Mac to help insure a market for subprime home mortgage loans. Fanny Mae and Freddy Mac fed the bubble in the securities based on these unstable loans to the max, while greasing the palms of many Congressmen with heavy donations to keep them onboard with the program. It also used the Community Reinvestment Act to force lenders to make subprime loans to many of the riskiest borrowers. Critical error was piled upon critical error has governments wrecked havoc on the free market and addressed every problem with more government mandated havoc. Without the government interference, no one would have been interested in loaning out their money in so many risky subprime loans.

The financial problem we are facing today was not caused by Capitalism or by the free market, as the socialists in government and in the Democrat Party are claiming. They have been clamoring mightily to try to prevent the people from understanding what did cause the problem. It was caused by socialist governments all the way from the local to the federal levels.

This is not the first housing bubble that has burst. A bubble occurred in the 1970s in the few states with growth management then, while a worse bubble erupted in the 1980s with more homes involved as urban planning spread. O'Toole says this present bubble affects about 40% of the nation's housing. The bubbles are becoming worse as more and more areas turn to urban planning.