Wednesday, September 9, 2009

Economics of the Higher Education System: Ponzi Exploitation

College education exhibits the same structure as any other economic ponzi scheme: masses recycling of suckers through the bottom levels funnels big profits to those at the top of the pyramid. The really funny thing is, because it is the EDUCATIONAL industry, its main beneficiaries have effectively created the perfect mass brainwashing to support their scheme. People think they are supporting a necessary and benevolent educational system, rather then being exploited by a superfluous and destructive ponzi scheme.

--Lecture halls are the most visibly obvious place the masses are fleeced out of their money. These are the pedagogical profit centers for the universities, where the real money is made, like soda sales in a fast food restaurant.

--State legislative buildings are the hidden location where the masses are fleeced. State universities have most of their budget covered by legislative decree, extracted directly from tax dollars.

--The federal government completes the loop of economic exploitation through loan guarantees, extending the credit that pumps up the bubble.

When the credit flow is stopped, as it soon will be, the bubble will pop. The federal government delayed the day of reckoning this year through mass bailout money. State universities across the nation were facing huge budget cuts this year, but were largely spared big cutbacks by accounting tricks and the bailout money. The federal government, of course, covered those bailouts with borrowed money, expanding the federal debt. The problem is, the budget cuts which will be necessary next year and the year after, are going to be even worse, and the federal government will not be able to continue its bailouts.

The higher ed industry is also being undermined by the internet and a dawning race to bottom in cost competition. The internet is doing for education what it did for newspapers and music, threatening entire institutional paradigms by undercutting revenue streams. The latest headline-grabbing educational company is offering fully accredited college credits for $99 a month, and guess how they do it? Foreign outsourcing! Why not? This is the logic of the contemporary capitalist world. As long as the overvalued dollar persists, hiring Indian tutors and professors to grade online classes is cheaper than having Americans teach the classes.

The genie was let out of the bottle with the rise of private for-profit universities, who were the first to capitalize on the bubbly educational profit stream. Theoretically, you could offer a college degree via the internet for really cheap. However, in the actual market, online companies have been able to sell the products based largely on their convenience and availability, rather than on their cost.

Because the market is being pumped up with guaranteed government-backed credit, for the last decade there was little need for cost competition and a number of highly profitable private universities have arisen. Government subsidy sets the bar for costs, and everyone just charges up to that level. This is no economic theory, this is empirical fact: when government raises student loan amounts, for-profit universities simply raise tuition costs. Just like in the health-care market, when government picks up the check, costs simply spiral upward. Only when the credit flow is stopped do we see a downward trend in prices.

However, the dawning issue facing higher education is market saturation. When a market is saturated, price competition begins in earnest, even when the market is pumped up by credit. Higher education is approaching that saturation point, when everyone has access to classes offered by a wide range of companies, including the traditional universities themselves who are moving online. In economic terms, the supply of education is growing greater than the demand for education.

Under these conditions of market saturation and intense competition, price competition kicks in, which we are seeing exhibited spectacularly in such companies as StraigherLine, offering college credit for $99 a month. So far, StraigherLine is offering only a handful of lower-level classes, but there is no theoretical limit on classes that can be offered at that price.

StraigherLine’s main impediment to this point is simply regulation, but keep in mind, there is no regulation regarding the outsourcing of teaching. While StraigherLine is hampered by having to jump over the regulatory wall to get accreditation, there is no such impediment faced by they universities which are already accredited.

In short, any already-accredited online university could right now make the switch to a foreign faculty and slash its costs and prices. This is really just a matter of time. It is not just about increasing corporate profits. The fact is, under the new market-saturated conditions, many institutions will be fighting for their financial survival.

The more students take bargain-basement classes like that, not just the cash cow courses at the big universities, but the very survival of local colleges is threatened. At that price, even community colleges, as heavily subsidized by taxes as they are, are undercut by price competition. The irony is, students are often forced into online classes because classes at their local colleges are cancelled because of low enrollment, created a self-perpetuating cycle of low enrollment and cancelled classes driving students into online environments. If the local college can’t enroll enough students to pay the faculty salary for a class, the class has to be cancelled, but an online university paying teachers in India faces no such constraints. Another irony there, as community college are already exploitation machines, seeing that upwards of 80% of their classes are already “outsourced” to part-time faculty (which means a third of the salary with no benefits).

Thus, the current higher education system is strained by three forces: outsourcing of cheap classes, collapse in enrollment in the most profitable classes, and collapse of government subsidies. State budget cuts will be traumatic, but a loss of federal loan guarantees would be absolutely catastrophic, and I mean literally the collapse of higher education as we know it, the downsizing to maybe a tenth of its current size, without exaggeration. The upcoming collapse in debt financing at the federal level pretty much guarantees this end result.

Tis a consummation devoutly to be wished. Most higher education is simply a drain on society, not to mention a subsidy for anti-American post-modernist ideology. The costs of education should be born by industry and business, if it is required by them for vocational reasons. Vanity degrees should be paid for exclusively by the wealthy students who use them.

The best consequence of the coming deflation of the educational bubble will be the end of the credentialism hamster wheel that sucks up so much time for the average professional American these days. One of the prime reasons people feel so much busier and stressed today is that people are forced to constantly go to school, soaking up hours of their leisure and family time. Credentialism and its constant pressure to upgrade educational levels is a major source of stress today, one that we can frankly do without.


Anonymous said...

Should the education industry be considered trade based on comparative advantage and not be subject to tariffs?
Since cheap credit has raised the price of virtually all products from cars to houses, does globalization mean a continuing collapse in US employment?


Justin said...

Hi Morgan. Hiring a teacher or taking classes online is not really trade, so tariffs are not really applicable. Theoretically, they could put a tax on hiring foreign workers. I would support that.

Globalization does indeed mean that America loses jobs and our standard of living goes down. Its a horrid trap, because we have the world's reserve currency, we are the buyers of last resort, the whole world is dumping goods in our economy.