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The erosion of American competitive advantage

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July 15, 2010 – Comments (11)

Very good post by Humble Student of the Markets. I have stated before that I am a mechanical engineer, and my job affords me the opportunity to work with a lot of very smart people in a lot of different industries. The amount of innovation and understanding of science by people in a number of fields is nothing short of astounding. This is a first-hand reason why I am very optimistic for the future. I do not buy the 'death of civilization' and despite my belief that the next 5-10 years will be very tough economically, I have a lot of long term optimism for the economy, the markets, human endeavors and humanity as a whole.

But I don't believe US policy is doing anything to fundamentally encourage America's continuation at the forefront of science and technology. The US economic policy is more concerned with propping up asset bubbles than building infrastructure (and yes that includes academic instiutions). The chart below showing tuition inflation says it all, as asset prices are all propped up tuition is rising faster, making less and less able to afford college. This trend has to change.

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The erosion of American competitive advantage
Thursday, July 15, 2010

http://humblestudentofthemarkets.blogspot.com/2010/07/erosion-of-american-competitive.html

[excerpt]

... The question is, can America retain its status as a leading economic power?

The news is grim. I have written before about the analytical framework of deficit reduction. That kind of macroeconomic adjustment is only effective if Americans retain their underlying competitive advantage. John Hussman wrote this week that the basis of American competitive advantage rests on superior physical capital and human capital [emphasis added]:

The main source of this difference in productivity is that U.S. workers have a substantially larger stock of productive capital per worker, as well as generally higher levels of educational attainment, which is a form of human capital. This relative abundance of physical and educational capital has been a driver of U.S. prosperity for generations. Neither advantage in capital, however, is intrinsic to American workers, and it will be impossible to prevent a long-term convergence of U.S. wages toward those of developing countries unless the U.S. efficiently allocates its resources to productive investment and educational quality. This is where our policy makers are failing us.

The US is squandering its lead on both fronts. Instead of investing on productive physical capital, we have seen excessive malinvestment leading to bubbles in technology, real estate and finance over the past couple of decades. The internet and real estate bubbles were plain to see.

As for finance, what does all of the malinvestment of human talent into Wall Street say to the world? Despite the ineffectual efforts at financial regulation, American remain in denial about the role of finance in society. The news of the Alan Greenspan chair at NYU is just another sign of denial.

‘Nuff said.

Trouble in higher education

In addition, there seems to be signs of trouble in higher education, which is a key driver of the productiveness of human capital. ...

.... Rising prices and ample credit to finance purchase – does that sound like anything we saw before, such as the housing market? Carpe Diem shows this chart to illustrate how fast prices have been rising and went on to warn of a bubble in higher education:

11 Comments – Post Your Own

#1) On July 15, 2010 at 10:36 AM, ocsurf (< 20) wrote:

Great write-up binve. As a member of a university system, I can attest that tutition will never go back down and will continue to increase. College tuition and fees continue to outpace inflation and and this trend will continue. We can expect college tuition to DOUBLE over the next 10 years. By 2020 a college education will cost about $250,000.

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#2) On July 15, 2010 at 11:04 AM, binve (< 20) wrote:

ocsurf ,

Thanks man!

>>We can expect college tuition to DOUBLE over the next 10 years. By 2020 a college education will cost about $250,000.

ouch! Man, that really stinks :(.

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#3) On July 15, 2010 at 11:15 AM, chk999 (99.97) wrote:

I agree with you. We need to get people to read Porter's book Competition In Global Industries and then do what is necessary to build up our competitive abilities, not sit in front of video games getting fat.

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#4) On July 15, 2010 at 11:18 AM, russiangambit (29.40) wrote:

My only hope that in 10-15 years , by the time my kids will go to college the bubble will collapse. If not, may be I'll send them to Europe. They'll get a better and cheaper education there . US bachelors degree is a joke, anyway, in many cases. Masters is OK because in masters you study what you actually need to study, while in bachelors people study all kinds of irrelevant suibjects that have no use in their future profession.

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#5) On July 15, 2010 at 11:23 AM, binve (< 20) wrote:

chk999,

Thanks, I am very much in agreement

russiangambit,

Hey man!

>>My only hope that in 10-15 years , by the time my kids will go to college the bubble will collapse. If not, may be I'll send them to Europe.

I hear you, that is my hope as well

I agree man, thanks!..

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#6) On July 15, 2010 at 11:32 AM, zymok (< 20) wrote:

Comparing tuition rise to CPI is pointless, since the cost drivers for a college education have little to do with the basket of goods in the CPI.  A more meaningful comparison would be the net cost of tuition (i.e. price offset by grants and scholarships) to starting salaries of graduates.  In many states, it is now possible for students to get a degree without paying any tuition at all, as long as they maintain a required GPA.

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#7) On July 15, 2010 at 11:34 AM, outoffocus (23.49) wrote:

We can expect college tuition to DOUBLE over the next 10 years. By 2020 a college education will cost about $250,000

I can't say I agree with this.  Like most other industries that went up double digits in the past decade, I think college tuition is a bubble. In order to understand why college tuition is a bubble you have to understand what is causing the tuition increases. And like every other bubble, this bubble is fueled by debt. Student loan debt to be exact.  At first, the government was subsidizing education and scholarships were easy to get.  But as the bubble got bigger, government subsidies fell, scholarships covered less, and student loan debt grew.  I think we may already be either top of the bubble or the bubble may already have popped. 

But if you haven't noticed, getting a college degree these days has deminishing returns.  At the height of the college bubble you could leave college with a $80000 liberal arts degree and still get a good paying job.  That is no longer the case. Now you have people graduating from college with over $100k in student loans, living with their parents, working at Mcdonalds.  I bet if we looked up the data, student loan defaults, deferments, and forebearances, are probably at record highs.

Also, lets not forget that credit is contracting everywhere. Student loans are no different.  Over the coming years, people who do decide to go to college will opt for the cheaper state schools and community colleges. No longer will banks fund $100k in student loans for a liberal arts degree.  This may cause some of those expensive liberal arts private colleges to contract and even shut down.

Tax breaks for student loans are slowly being phased out.  As of today, if you make over $75000 per year, you no longer qualify for the student loan interest tax deduction.  This will be painful for laywers and doctors who are carrying over $100k in student loans.

State funding for universities is being cut as states try to deal with their own budget deficits and debt.

All signs point to bad times for colleges and universities in the coming years.  So they can raise tuition and fees all they want. They have to deal with the laws of supply and demand just like everyone else.

 

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#8) On July 15, 2010 at 12:05 PM, binve (< 20) wrote:

zymok,

You make a fair point, but I disagree that it is pointless. When any good or service rises faster than a general basket of goods and services then a bubble potential exists. Tuition rising faster has a lot to do with the proflieration of loans to go school (just like the profliferation of cheap mortgages was a prime contributor to the housing bubble).

>>A more meaningful comparison would be the net cost of tuition (i.e. price offset by grants and scholarships) to starting salaries of graduates.

I agree, that would be a useful comparison.

>>In many states, it is now possible for students to get a degree without paying any tuition at all, as long as they maintain a required GPA.

The overall trend is scholarship money has (I believe) been decreasing the past several years

outoffocus ,

>> Like most other industries that went up double digits in the past decade, I think college tuition is a bubble. In order to understand why college tuition is a bubble you have to understand what is causing the tuition increases. And like every other bubble, this bubble is fueled by debt. Student loan debt to be exact.  At first, the government was subsidizing education and scholarships were easy to get.  But as the bubble got bigger, government subsidies fell, scholarships covered less, and student loan debt grew.  I think we may already be either top of the bubble or the bubble may already have popped. 

Good observation, I agree. See my comment above to zymok

>>Also, lets not forget that credit is contracting everywhere. Student loans are no different.  Over the coming years, people who do decide to go to college will opt for the cheaper state schools and community colleges. No longer will banks fund $100k in student loans for a liberal arts degree.  This may cause some of those expensive liberal arts private colleges to contract and even shut down. 

Another very good point. I think the government would have served us better by not creating the credit bubble to begin with. But since that was never going to happen, then it could have invested more money into university infrastructure, which would provide a future return on investment by allievating a reason for increasing tuition and therby increasing enrollment and then higher taxes in the long run from higher paying jobs. Certainly not a silver bullet but would be money better spent than say the AIG bailout.

>>All signs point to bad times for colleges and universities in the coming years.  So they can raise tuition and fees all they want. They have to deal with the laws of supply and demand just like everyone else.

I think you are right about this. Thanks!!..

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#9) On July 15, 2010 at 12:40 PM, outoffocus (23.49) wrote:

LOL i wrote that response before I read the actual article. Glad to see data (once again) confirming what I've been sayin for years.

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#10) On July 16, 2010 at 4:30 AM, Tastylunch (29.40) wrote:

the college bubble has been blowing for 100 years+, when it blows it will be extremely ugly. Most colleges simply do not have the mindset or willpower to cope with it all, especially the liberal arts ones. My alma mater's tution increases have been going at 5% + per annum for over 120 years. even the GD didn't dent the rate.

but assuming it will be soon might be a mistake.Education is one of the very most powerful lobbying forces around today.

if there is anything people will invest irrationally in it's their children. it's arguable that a good portion of the real estate bubble was driven by people desperate to get their kids in the right districts.

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#11) On July 16, 2010 at 8:32 AM, binve (< 20) wrote:

Tastylunch,

>>but assuming it will be soon might be a mistake.Education is one of the very most powerful lobbying forces around today. if there is anything people will invest irrationally in it's their children. it's arguable that a good portion of the real estate bubble was driven by people desperate to get their kids in the right districts.

Those are *very* good points. I never thought about it in exactly those terms but that makes a lot of sense. Thanks!..

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