The education crisis spreads to the professions. Watch the universities crack

2 JANUARY 2014 Fabius Maximus

Summary: Posts on this website (Fabius Maximus) have long forecast massive structural change in America. In 2013 this process slowly becomes visible. Today we look at the first signs of collapse in the business model of America’s universities. The For More Information section has a wealth of information about the crisis in education (and links to posts about the crisis in journalism).

Contents

More education as a solution for America
The universities act like vampires, bleeding their students
The law of supply and demand strikes back
Articles about the collapse of universities
For More Information

(1) More education as a solution for America

Decades of falling real wages has sparked a frantic scramble by youth (and increasing numbers of older people) for undergraduate and advanced degrees. In July 2009 I wrote that this made sense for an individual — but could not work for a nation, and would not end well.

For a generation or two college costs have risen faster than both US household incomes AND governments’ tuition support. The effect of rising costs was muted by increased borrowing by parents and students.

… A college diploma has value unconnected to anything actually learned by the student, as it became the key component of American’s social allocation system — by which a new generation was steered into the job market. Colleges charged excess tuition to skim off as much of this as possible, expanded their costs to the maximum extent the market would bear. This is classic rent-seeking by colleges, described by Wikipedia.

Now that structure has crashed. People are less willing to borrow for college; lenders are less willing to lend to parents and students. Students and parents know a liberal arts education is seldom worth the cost either financially or intellectually. Now they increasingly wonder if thediploma is worth the cost.

Colleges are left with broken business models: large inflexible cost structures, and disenchanted clients. Much like newspapers and airlines. And like them, those working in colleges only slowly realize the grim outlook. Their first response is to hope the good times return.

(2) The universities act like vampires, bleeding their students

People crowded into professional degree programs, seeking to rise above the falling-wage rat race. Universities responded by what economists call “rent-seeking”. They increased tuition to capture a larger share of the value-added by their degrees. For example, law schools are one of the major profit centers of US universities. Look at the increases in median annual tuition at ABA-accredited schools (in 2011 dollars):

1985: $15,438
2011: $39,915

That’s a lot of money. Fortunately we have public universities. Unfortunately, their tuitions have increased even faster (per Paul Campos):

1985: $3,746
2011: $20,076

Paul Campos puts these numbers in context:

To get a better sense of what these numbers mean in regard to how expensive American legal education has become for the average American family, let us return for a moment to the University of Michigan Law School. Recall that in 1971 annual resident tuition [at Michigan] was $4,443 in 2011 dollars. In that year, median household income in America was $49,709 in 2011 dollars. One year’s resident tuition at what was then and remains now one of the nation’s pre-eminent law schools cost almost exactly a month’s (pre-tax) income for the average American household.

In 2011, median household income in America was $49,909, i.e., almost exactly what it was 40 years earlier. But now the average American household would need to spend slightly less than an entire year’s worth of pre-tax income to pay for a year’s resident tuition at Michigan Law School.

(3) The law of supply and demand strikes back

As always, the laws of supply and demand have their inexorable effect. A larger supply of lawyers has decreased the wage premium of these degrees. Technology has reduced the demand for their credentials. And now the last act: students see the unfavorable math, and fewer seek these degrees. All but the elite universities must respond by cutting tuition (including more aid, a form of discounting), reducing enrollment, and cutting costs.

Let’s look at just one of these dimensions: volume.

The ABA has just released first year enrollment figures for the fall of 2013 at the nation’s 202 ABA-approved law schools. 39,675 students enrolled this fall, marking the third straight year that has featured a steep decline, after enrollment reached an all-time high of 52,488 in 2010. You have to go back to 1975 to find a smaller first year class.

… What’s particularly striking about these numbers is that first year enrollment is down by 24.4% even though admissions standards have been slashed all across legal academia (Yale, Harvard and Stanford are the only elite schools that haven’t dropped admissions standards, and many non-elite schools have cut median LSAT scores for admits by ten percentage points or more).

— Paul Campos, Lawyers, Guns, and Money, 17 December 2013

The same dynamics have begun to affect other advanced degree programs. These are the cash cows of most universities; their decline will crash their finances.

Ahead lies the far larger challenge of online education programs. Primitive today, like the Internet in 1990. Like the Internet, their great future is visible — and coming fast.

The effect of these changes will reshape the higher education system, destroying those universities unable to successfully adapt. No matter what the result, it will be bad news for their employees. Today universities provide an oasis of high paying jobs (albeit not for the growing ranks of adjunct teachers; see the next section). The new system will be a harsher one: less job security, fewer jobs, lower wages for most employees.

(4) Articles about the collapse of universities

(a) Articles about the crisis of MBA programs:

“MBA costs soar. Salaries? Not so much.“, Fortune, 18 November 2011
“For Newly Minted M.B.A.s, a Smaller Paycheck Awaits“, Wall Street Journal, 6 January 2013
“There Are Officially Too Many MBAs“, Jordan Weissmann, The Atlantic, 7 January 2013
“Is an MBA Bubble Popping?“, Jordan Weissmann, The Atlantic, 19 December 2013 — “Surveys show declining pay and shrinking job opportunities for business grads, even as the rest of the job market keeps healing.”

(b) Articles about the crisis in law schools: