Market Distortions and Failures

by Daniel L. Bennett

I posted a blog yesterday that compared the current condition of higher ed to that of the housing market that recently imploded, concluding that the fundamentals of the higher ed market are completely out of whack due to the mass subsidization of it by the government. This post spurred an interesting series of emails with the author of No Sucker Left Behind: Avoiding the Great College Rip-Off, who stated that:

I think that higher education is much more essential than home ownership. If someone doesn't own a home, they can simply rent. If someone doesn't go to college, they are at an extraordinary disadvantage in getting a decent job. In our current economy, employers are unfortunately very lazy and therefore require applicants to have a college degree (because employers are too lazy to evaluate each candidate - the degree requirement provides an easy screening criteria for them). Therefore, a person without a college degree is in a much worse position than a person who does not own a home.

Likewise, I enjoyed Marc's note and replied to him:

I agree with you that the two markets (homes and colleges) are difficult to compare, as the former is tangible and has a resale value while the latter doesn’t. And I largely agree with you concerning the current state of affairs - employers use a college degree as a screening device.

The point of my original post is that the government’s meddling in the higher ed market, similar to that in the housing market, has created tremendous distortions in not only pricing, but also the supply and demand conditions for college education and graduates in the labor market. I would argue that many employers now demand a college degree for entry level work because they can, not because the type of work requires it. Again, I believe that the government’s subsidization of college, combined with all of the rhetoric that a college degree is essential to succeed, has helped create these distortions. A court case, Griggs v. Duke Power, played a role as well by banning the use of pre-employment intelligence testing.

I think that we must also must consider that many people either (A) get a degree and wind up doing a job that wasn’t worth the investment of their time and money (in other words, college education doesn’t pay off for everyone), or (B) fail to finish and are left worse off than had they not attended college at all, often with debts that must still be repaid and the opportunity cost of not working or spending their time doing something else.

For the above two cases, which combined are not an insignificant percentage of persons attending college, I think that such persons are in a sense as bad off (if not worse due to the non-discharge ability of student loans) as homebuyers who are forced into foreclosure. They are certainly as worse off as someone unable to buy a home because they themselves are unlikely to be able to buy a home due to high student debt and/or insufficient income, and in the extreme, may be worse off if they are so far in student debt that they have to move in with relatives because they can’t even afford to rent an apartment. Of course such cases are the minority, but as the cost of attending college continues to rise and more people enroll chasing the dream, I think that we can expect the number of these instances to rise.

To which Marc replied:

I thoroughly agree with you regarding the drop-outs. Have you ever noticed that college drop-outs are NEVER included in the calculation of the financial benefit of college? Instead, researchers simply compare high school grads with college grads. That's like estimating the payoff of the stock market by comparing those who have not invested in the market vs. those who have invested in the market but never lost money!

Something has to be done to highlight the plight of the drop outs.

Marc is absolutely right - something has to be done about the rising number of dropouts (as well as those who finish but fail to benefit from college). But let's not "solve" the problem the way that we solved the high school dropout problem many years ago - by reducing standards. Face it, the lowered standards of high school have at least partially contributed to the high attrition rate among college goers. I believe that part of the solution is providing alternative forms of education (hands-on technical and vocational training, for instance) to those who struggle in the more traditional academic setting. And perhaps traditional colleges and universities could learn a thing or two about student retention and how to utilize resources more effectively from the career colleges.