Thursday, November 29, 2012

Higher Education is More Socially Useful than Home Ownership

Yves Smith has a really interesting blog post about the prospect of massive student loan default rates on the horizon:
"This is the new subprime: escalating borrowing taking place as loan quality is lousy and getting worse. And in keeping with parallel to subprime [sic], one of the big reasons is, to use a cliche from that product, anyone who can fog a mirror can get a loan.
The most popular type of loan, Stafford loans, allow undergraduates to borrow up to $57,500, no questions asked. Perversely, this practice, in isolation, looks rational. Look, if you could put borrowers in virtual debt slavery, would you care much about lending standards? All you need to worry about is death and those few cases where borrowers are so clearly unable to ever work for a decent amount of money that they can get their student debt that they can get their loans reduced or discharged."
Obviously this is a worrying trend, with potentially terrible economic consequences for both the country generally and for individual graduates who might be swamped with debt. But associating this bubble in debt-fueled education with the bubble in debt-fueled house buying is unfair.

As a general principle, well-functioning markets provide socially optimal outcomes. Based on this assumption, many economics commentators see the higher-education market functioning poorly and conclude that it's producing socially sub-optimal outcomes. Here's where many economics commentators err: market-clearing outcomes (no big shortages or gluts) are socially optimal in general, but in practice there exist lots of examples of good things resulting from markets going haywire. The massive railroad expansion into the American western frontier crashed the economy, but in the end the U.S. was left with a huge transcontinental transportation network. Dubai nearly went broke by building crazy stuff, but its glittering towers aren't going anywhere anytime soon. The crash of 2007 was terrible, but was particularly destructive because the wreckage had little social value: complex financial instruments and loads of houses.

Higher education, on the other hand, has powerful social benefits grounded in non-economic values. Higher education promotes civic virtue. Educated people invent more useful technology. There is a strong moral rationale for society to provide the opportunity for every person to enjoy the fruits of our accumulated knowledge. This sort of stuff cuts across the potential market inefficiencies of subprime student loan standards and reveals the "nominal" character of the market critique. Education is a "real" good that makes our society better. Debt is useful insofar as it allows our society to flourish. If our dysfunctional higher education market crashes after producing too many educated people, I say okay. There's no such thing as too many educated people. Until everyone who can fog a mirror has an education, we've got work to do.

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