Thursday, October 25, 2012

The College Bubble – A Lesson in Diminishing Marginal Returns


10/5/2012 Portland, Oregon – Pop in your mints…

Today we came across one of the most insightful pieces on education that we have read in quite a while.  Perhaps we are biased because it we written by a member of our comparatively small generation, or perhaps it is something more.  Virginia Heffernan, the national correspondent for Yahoo! News posted an article today entitled:

How to burst the college bubble:  Stop pretending your Alma mater matters

With what appears to be the benefit of hindsight and a sober look at her own educational experience, she eloquently voices a viewpoint which, almost out of necessity, is quickly moving from the fringe to mainstream thought.  A traditional college education, circa 2012, not only fails to offer a competitive advantage in the workforce to those who can set aside four to six otherwise productive years and the untold thousands spent during that time period, it places undue financial and social pressure on both parents and their children from the time of admission to graduation day.

The College Education: A ticket to a rewarding career or four years of indoctrination followed by a trip to debtors prison? There must be a better way.
Photo of Harvard Yard in 2009 by chensiyuan
This undue stress is generally attributable to the fact that parents and students alike who find themselves in the middle of a financial commitment which equates to more than a few years worth of wages are collectively questioning the wisdom of throwing money at an investment whose return has turned unacceptably negative in recent years.


The reason for this, as most current economics students may struggle to tell you, is that the college education, like any other economic good, is succumbing to the workings of to the law of diminishing marginal returns.  This law is one of the beautiful, immutable natural laws which states that economic activity, if carried on long enough, will reach a point where each additional dollar of capital invested will render a lower return on investment than the previous dollars invested.

This phenomenon is attributable to changes in the underlying supply and demand dynamics which take place as the natural tendency to chase out sized returns drives more people to engage in high margin activities, which increases the supply of that activity’s output.  This supply, as it satiates demand, then serves to lower the price of the product until the producers with higher cost structures are driven out of business while producers with lower-cost structures continue producing profitably at lower price points.

The application of the Law of diminishing marginal returns when applied to College degrees in the US

For a period of time, beginning in the 1940′s in the US, it was relatively rare for an individual to obtain a four-year college degree.  In economic parlance, there was a scarcity of college educated individuals relative to demand.  Those individuals who did obtain a degree received a higher return on their investment in education in the form of higher wages for the rest of their working lives.

{Editor’s Note:  We recognize that this analysis ignores the dynamics in the US economy during that time period leading to the demand for college educated individuals in the workforce.  For purposes of this example, we submit it as a given to avoid further divergence from our theme.}

As time went on, more and more individuals saw the wisdom in investing in a college education, colleges and universities increased their capacity and course offerings to satisfy this demand.  As the workforce continued to demand college educated individuals, this created a virtuous feedback loop in the higher education industry.

This virtuous feedback loop became so normal, as did rising stock prices in the 80′s and rising home values in the 00′s, that seeking to attend a four-year college has become the goal for a great majority of teens.

Circa 2009, the supply of college educated individuals began to overwhelm the demand for their services.  At this point, the marginal return on investment for attending a four-year college for many has decreased to the point where it no longer has a positive net present value, the financial criteria most often used by rational individuals when determining whether or not to undertake an action.

Against this dismal backdrop for education entered a phenomenon which is poised to deliver the knockout blow, the widespread adoption of the Internet.

While the net productivity gains realized by the advent of the Internet are seen in many spheres, the Internet is maturing to the point that it is now fundamentally changing the structure of education.
Our mother wisely told us, during those difficult years we spent at the University in the 90′s, that the only thing college will teach you is how to access the information you need when you need it.
The advice has served us well, as has Google.

Unlike Heffernan, we do not feel that our college degree is obsolete.  In our epoch, it was necessary to attend a four-year school to learn the disciplines of accounting, finance, and treasury which support us today.

However, the Internet has fundamentally changed not the disciplines, but the delivery methods of said education.  Now, an individual desiring to learn a discipline such as accounting or economics no longer needs to pack their bags to party with others for four years while fitting in class between video games and other shenanigans.

That individual can peruse The Mint, for example, form the comfort of their living room.  Then, after leaving the site. thoroughly confused (for which we wish to be held harmless, mind you), they can access any one of thousands of free online tutorials and videos created by capable individuals who will provide an education on a specific subject on demand in a fraction of the time that it takes to obtain a degree.

Gary North has written recently on the YouTube educational phenomenon as well.  If one has something to teach the world, it is a small task to obtain a microphone, video camera (think web cam or smart phone), and a YouTube account.  Simply teach the class once to a camera, post it, and your done, saving countless hours needlessly spent drooling on yourself as you sleep through class in a lecture hall.  This is how a majority of education will be served over the next millennium.

The Internet is fundamentally changing the education industry in the same way it has changed communication, and many of our Alma maters will soon resemble the US Postal Service, which has struggled in vain to maintain its current state and sinecure structure as the world it grew up in has changed forever.

This analysis does not even address the fact that many four-year colleges have struggled to keep up with the ability to teach the skills demanded by the modern workforce.  The net result of this change in delivery methods and competitive disadvantage will be the loss of a number of sinecures in the hallowed halls of Liberal Arts colleges across the land.

While the liberal arts and art itself will always find ways to flourish, paying to be forced to read literature that one is not interested is quickly becoming a luxury that college students cannot afford.
Stay tuned and Trust Jesus.

Stay Fresh!

David Mint

Email: davidminteconomics@gmail.com

Key Indicators for October 5, 2012

Copper Price per Lb: $3.75
Oil Price per Barrel:  $89.90
Corn Price per Bushel:  $7.48 
10 Yr US Treasury Bond:  1.73%
FED Target Rate:  0.15%  ON AUTOPILOT, THE FED IS DEAD!
Gold Price Per Ounce:  $1,781 PERMANENT UNCERTAINTY
MINT Perceived Target Rate*:  0.25%
Unemployment Rate:  7.8%
Inflation Rate (CPI):  0.6%
Dow Jones Industrial Average:  13,610
M1 Monetary Base:  $2,355,800,000,000
M2 Monetary Base:  $10,070,300,000,000