The latest bubble?

by Schumpeter

ON September 2nd 2010 I wrote a mischievous column ("Declining by degree") likening America's universities to its car companies in about 1950: on top of the world and about to take an almighty fall. Since then I have heard the argument dismissed and denounced by the presidents of Harvard, Princeton and New York University. John Sexton, NYU's affable president, even likened me to a member of the tea party, for which there is no more damning condemnation in academic circles.

So I am particularly delighted to read Peter Thiel's latest thoughts on the higher-education bubble. Mr Thiel, the co-founder of PayPal and a legendary investor, has a long history of identifying bubbles. He insisted on striking a deal, against everybody's advice, when the market valued PayPal at "only" $500m, on the ground that the dotcom bubble was about to burst (this was March 2000). He refused to buy property until recently, figuring that the dotcom bubble had simply shifted to housing.

Mr Thiel believes that higher education fills all the criteria for a bubble: tuition costs are too high, debt loads are too onerous, and there is mounting evidence that the rewards are over-rated. Add to this the fact that politicians are doing everything they can to expand the supply of higher education (reasoning that the "jobs of the future" require college degrees), much as they did everything that they could to expand the supply of "affordable" housing, and it is hard to see how we can escape disaster.

Here is Sarah Lacy's summary of Mr Thiel's argument about the safety-blanket role of higher education:

"Like the housing bubble, the education bubble is about security and insurance against the future. Both whisper a seductive promise into the ears of worried Americans: Do this and you will be safe. The excesses of both were always excused by a core national belief that no matter what happens in the world, these were the best investments you could make. Housing prices would always go up, and you will always make more money if you are college educated."

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