2014-04-15

U.S. Education Bubble Bursting

The U.S. higher education bubble is in the process of bursting. Like Chinese housing, there is too much supply and not enough demand even at lower prices. Like Chinese housing, people do not believe university tuition goes down.

"Death Spiral" - Harvard Professor Predicts Up To Half Of US Universities May Fail In 15 Years

Small U.S. Colleges Battle Death Spiral as Enrollment Drops
Declining enrollment has forced many colleges to offer deeper tuition discounts to attract students, according to the National Association of College and University Business Officers. The average freshman discount rate rose to 45 percent in 2012 from about 40 percent in 2008, according to Nacubo.
That sounds a lot like the Chinese housing market.

Harvard Business School professor Clayton Christensen has predicted that as many as half of the more than 4,000 universities and colleges in the U.S. may fail in the next 15 years. The growing acceptance of online learning means higher education is ripe for technological upheaval, he has said.
I have heard it quipped that half of the universities could be shut in America and there would be no impact to intellectual achievement. Even if you believe that there are no BS majors (not Bachelors of Science, the other BS), many people will be able to obtain a university degree at far lower cost online.

The corollary to universities in America is developers in China. They will go bust or exit the market, and many Chinese people will be able to buy homes at far cheaper prices. In both cases, this is a very good outcome. The short term in painful though. If half of universities do fail in the next 15 years, it would probably be a cluster event in the midst of another economic/financial crisis. Unemployment will soar, student loans will dry up, and many people will go to work instead of going to university. A crash in the Chinese housing market will be painful in the short-term, slowing GDP growth substantially and an outright recession is not an impossibility.

In the long-run though, the collapse of these bubbles will end the misallocation of capital. American and Chinese consumers will have more savings (less debt) and more disposable income, a good mix for future economic growth.

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