"Invest in education!" It is the rallying cry of many who think that more education spending is the silver bullet that is going to solve most of America's problems. However, the bullets seem to be hitting student's balance sheets more than America's other problems. In the past year, Mark Kantrowitz of FinAid.org claimed that the total education debt outstanding has passed the total credit card debt outstanding. Unlike credit card loans, these are loans that cannot easily be discharged in bankruptcy. These loans will follow students for the rest of their lives, potentially going so far as to allow lenders to go after tax refunds or a person's social security payments. This is a debt overhang that cannot be solved by jingle mail*.
The confusing thing about education is that it is partially a private good and partially a public good. An educated person is be more likely to promote positive aspects of society by being a well behaved and productive citizen. Basic education is obviously very valuable, because a literate population is capable of many more things than an illiterate population. It is also necessary for most people to be trained in more advanced skills, since there is a level of educational attainment that it is important for a developed country to reach. In the past, economic growth has been associated with increases in education. Economists have documented this trend and like many forecasters they assume that the relationship that has occurred in the past will continue to hold into the future. However, the nature of education as a private good might be causing this correlation to breakdown.
Education is also a private good because it serves as signal to other people of the student's qualities, and that signal only benefits the person holding the degree at the expense of those who don't hold a degree or those who hold a lesser degree. Bryan Caplan suggests that the qualities signaled are work ethic, intelligence and perhaps even the conformity required for an employee to be a productive corporate worker. If education is being used mainly for signaling purposes, the limited number of degrees being given out by top colleges would be a feature and not a bug. The value of adding on more slots at lower tier colleges is also low because lower tier colleges generally price themselves similarly to top tier colleges so that they don't look like they are lower tier.
An important question is whether or not education is more of a cause behind students becoming more productive students or if the kids who are selected to become students were already going to be more productive in the first place. One way to measure this is to look at the demand for university material by non-students. If many non-students thought they could receive most of the benefit of an education by attending lectures given at the top colleges and doing the work on their own time then we would see more security outside of lecture halls keeping non-students out. ITunes would also be able to sell their lecture series for nontrivial prices that they are now giving away for free at ITunes U. Another question is how much additional spending directed towards education helps. When inflation in education has increased at four times the rate of inflation since 1986, it should make people stop and think before deciding throwing more money at the problem is the obvious answer.
If education is more about signaling than teaching, then it means that as spending increases most of that spending is merely being wasted on an inefficient status competition. Perhaps this is why Peter Thiel has been calling education a bubble. One way he is drawing attention to this bubble (while at the same time cleverly expanding his network for recruiting talent) is with his "20 under 20" program. This program involves paying 20 students to leave college for at least two years. One of the ingenious things about this program is that the applicants are being promoted as very elite students with articles about the program specifying that many of the applicants are from top colleges. If this program is repeated year after year and becomes fixed in people's minds as one of the most elite programs out there for aspiring entrepreneurs it should give the winners the status they were hoping to get from their college diploma. They will only go back to college if they think that they will really benefit from the education.
Those who agree with this general perspective and think bubbles should have direct tradable implications should review Steve Eisman's May 2010 Ira Sohn conference presentation about the for-profit education companies. If there is a subprime of the education bubble it is probably the for-profit education companies. For-profit education has the unfortunate distinction of being among the lowest status providers because of their willingness to take almost any type of student in order to make a profit. If people wake up to the idea that most of the value in colleges comes from increasing a person's relative status** and that these colleges are at the bottom of the totem poll, then the for-profits will be in trouble.
It's nice to think that education is a race to the top that everyone can win, but we shouldn't ignore that once we get near the top the real game starts to look more like king of the hill.
*The situation is more complicated than this for many of the people who took out multiple loans on their houses. It will also be hard for some of these people to walk away.
**Certain government workers who are merely trying to get additional certification in order to quality for higher pay might be the last to care until their compensation system is changed.