The Root Cause of Market Failure In Higher Education

The Root Cause of Market Failure In Higher Education

November 28, 2011
Originally published in Real Clear Markets

A little noticed Associated Press news story last week reported that China now plans to phase out college majors that consistently produce unemployable graduates. Any program in which 60% of the graduates failed to find work for two consecutive years would face funding reductions until supply was brought back into balance with demand.

This Chinese hand may not be invisible, but it would be one that Adam Smith would recognize. Isn't it amazing that even self-identified communists are figuring out that markets only work when adjustment mechanisms act to reduce surpluses and shortages? Destroy those mechanisms and unemployable college graduates pile up as fast as unsold electric cars.

The back story is a simple one illustrating the old adage: He who pays the piper calls the tune. In a world turned upside down, China's rulers want to make sure the young cadres they educate at the people's expense actually find jobs in the private economy. Here in the U.S., where outstanding government guaranteed student loans have recently passed the $1 trillion mark, education policy is geared not toward maximizing the employability of graduates, but toward garnering votes for politicians.

How so? After years of cultural bombardment, a college education has gone from being a means to an end - a successful career - to an end in itself. Parents who don't send their children to college lose status. American kids feel both entitled and pressured into getting a college education regardless of whether they have the intellectual capacity to profit from it, the work ethic to manage it, or the money to pay for it.

Alternative means of career training, like apprenticeship in trades that remain in demand - because, after all, you can't fly in Chinese plumbers - get no social respect. This despite the fact that skilled plumbers, with a little hustle, can out-earn most liberal arts majors.

Countless politicians now call college education a "right," alongside food, housing, and medical care. They pander to the education establishment, promising to deliver diplomas no matter how much of other people's money they have to spend. Meanwhile, the intelligentsia looks askance when college students are encouraged to choose a major based on practical expectations of future employment, suggesting instead that students should follow their muse.

To finance this so-called "right" to a college education a Government Sponsored Entity known as Sallie Mae, originally the Student Loan Marketing Association, was created in 1972 to issue below market rate student loans guaranteed by the federal government. Like its cousin Fannie Mae in the home mortgage business, lending practices were guided by political considerations, not sound economics. Just as Fannie Mae fueled an unsustainable housing bubble, Sallie encouraged runaway college tuition increases. And just as the federal government was forced to nationalize Fannie Mae when the bubble bust, Uncle Sam has now nationalized the college loan business with an eye on disguising the coming tsunami of student loan defaults.

Such policies have consequences. Too many aspiring young museum curators can't find jobs? The pragmatic Chinese solution is to cut public subsidies used to train museum curators. The free market solution is that only the rich would be indulgent enough to buy their kids an education that left them economically dependent on Mommy and Daddy after graduation. The progressive American solution is to seek increased public funding to build more museums.

When such make-work spending fails - as it must during periods of fiscal belt tightening - do progressives encourage maleducated kids to look around, see what needs doing, and start businesses of their own? No. They urge them to take to the streets to bang drums and chant slogans.

The system is nearing breakdown, which will come when student loan defaults finally push the federal agency that guarantees such loans into bankruptcy. At that point, we will have to face the fact that capping off adolescence with a four-year party at taxpayer expense is a luxury we can no longer afford.

College participation rates will have to go back down to historical norms. Slots will have to be reserved for students that can actually profit from them, restoring graduation rates to where they were before colleges were flooded with people who don't belong there, including illiterate freeloaders. Selection will have to be based on merit, not social engineering. Loans will have to be restricted to majors that confer capacity to pay the loans back. Dead-end programs used to train the next generation of professors - whose only skill will be to teach more such dead-end programs - will have to be limited, funded not by taxpayers but by ideological philanthropists with a hankering for fineries like literary criticism and gender studies.

This may seem like common sense to most people, but it strikes horror into the hearts of the liberal professoriate. After years of feathering their nests so they can produce students trained only to bite the hand that feeds them, perhaps it's time to serve up a few helpings of horror. We can no longer afford to take the snobbery of academics seriously. Taxpayers just don't have the money to keep them or their young acolytes on the dole.