|By Alan Hall, originally published in the February 2011 Socionomist|
The Education Industry Faces A Multi-Decade Peak
America’s higher education business is about to hit a patch of trouble. It is in the late stages of a bubble, one that is credit-fueled, government-supported and widely popular.
A massive shift in society’s attitudes toward education is beginning, as we shall see. If it continues in earnest, as we expect, educational institutions will soon encounter spectacular challenges to survival.
If your income depends on higher education, get ready by taking clues from the crumbling housing business.
Signs of Peak Psychology
Society’s feelings about education shift in concert with social mood. As a 1987 report, “Changing Public Attitudes Toward Higher Education,” said:
In the late 1940s … people had no quarrel with colleges. They wanted more of them, they wanted more young people to go, and they admired professors. This approving public attitude … continued into and throughout the Golden Era of higher education (1955–1970) … . The confidence of the general public in colleges and universities … diminished between 1965 and 1985, a period of time in which … the public and elected officials look[ed] critically at higher education.1
That bear-market attitude changed in the subsequent bull market. Public Agenda’s report on education, titled “Great Expectations,” recorded society’s mindset toward higher education in 2000, at a historic social mood peak:
Higher education is perceived as extremely important, and for most people a college education has become the necessary admission ticket to good jobs and a middle-class lifestyle.2
This peaking psychology is manifesting in record popularity of college education, record tuition prices, record debt levels and several other telling indicators as well.
Higher education is more popular in America than ever before.
Figure 1 shows U.S. per-capita college enrollment reaching an all-time high in 2008 (the latest data available). Note that while the rapid growth of enrollment from 1946–1969 has slowed, it has nonetheless continued; a larger percentage of Americans are in college today than ever before.
The top line in Figure 2 plots U.S. PhDs granted per capita from 1900–2008 (the latest data available), which has also reached a record high. The average U.S. PhD candidate requires 8.2 years to earn a doctorate,3 so we backset the line by eight years to reflect the moment of decision. Doing so reveals a fair correlation with the Dow Jones Industrial Average, our most sensitive indicator of social mood. We don’t know why the 1941 peak in PhDs lagged stocks by an additional three to four years, but it is clear that social mood, via waning optimism, economic decline and war, influences the decision to seek or not seek a PhD.
We predict these lines will continue to track the stock world. By our wave labels, we predict a decline.
Figure 3 shows Yale’s tuition prices from 1701–2009 and U.S. stock prices (spliced to British stock prices) from 1695–2009, both adjusted for inflation via the Producer Price Index. Note wave (V) in Yale’s tuition. This move began in 1917, and its five-wave structure implies a reversal to 1980s levels—which would erase three decades of tuition hikes. Harvard’s tuition data for this period (not shown), while spottier, display the same five-wave sequence.
Yale and Harvard have the longest tuition price histories we could find, and their correlation to social mood is strong, so they serve as our proxy for tuition prices in general.
The Ivies are not the only colleges that have experienced tremendous price inflation. Collegeboard.org reports that average tuition and fees for public four-year colleges in 2010–2011 are 3.59 times as high as they were in 1980–1981, after adjusting for inflation via the Consumer Price Index.4 In fact, many non-Ivy-League universities’ tuitions have approached and even exceeded those of the Ivies.5 According to campusgrotto.com, seven of the eight Ivy League schools made their list of the top 100 most expensive schools in 2008–2009.6 In 2010–2011, only five made the list. No Ivy League school reached higher than the 16th most-expensive university in either year, and Harvard never appeared.
Longer term, our research suggests that a larger five-wave Elliott advance in overall tuition prices began almost four centuries ago. If indeed this pattern is nearing completion, the 1917 wave (IV) low is a likely retracement target.7
A Flood of EduCredit
Since 1997, the total value of student loans has ballooned over 800 percent, from $92 billion to $833 billion. We compared that rate of growth to several other debt categories, such as total U.S. mortgages, government pensions, gross public debt, consumer credit outstanding, total credit card debt and credit market borrowing, none of which came close to this multiple. Student loan growth also far outpaced a number of significant indexes, such as the Case Shiller Home Price Index, the Bureau of Labor Statistics’ Medical Care Cost Index and the Bureau of Labor’s Prescription Drug Index. In fact, we were unable to find any significant measure that grew faster than student loans over this period. The total amount of U.S. education loans is only about seven percent less than total U.S. defense spending. In June 2010, it surpassed total U.S. credit card debt for the first time.
Despite record levels of federal debt, the U.S. government continues to encourage people to borrow for an education. AP reported on December 18 that Congress’ new $858 billion tax package includes $22.1 billion in tax breaks, deductions and credits for students and their families.8 This is exactly what it did with housing, to a disastrous end.
The For-Profit College Mania
Every asset mania has a heart—the emotional focus of the frenzy. In the late 1990s, it was high-tech stocks and the NASDAQ; in 2003–2006, it was real estate; and in 2007–2008, oil. The heart of today’s education bubble is for-profit colleges: private, profit-seeking companies such as Capella University, DeVry University and The University of Phoenix.
For-profit college enrollments rose more than 20 percent in 2007–2008, and are up more than 60 percent since 2004–2005.9
According to “College Inc.,” a PBS Frontline documentary, many for-profit colleges encourage and arrange loans for students, deliver questionable educational value, recruit at job fairs, sport high dropout rates and spend more on marketing than on teacher salaries.10 The New York Times writes, “Education experts … . say these schools have exploited the recession as a lucrative recruiting device while tapping a larger pool of federal student aid.”11 No wonder they are behaving this way. As Frontline says, “The taxpayers are essentially funding this industry.”10
A November 23 Pew Research Center study, “The Rise of College Student Borrowing,” says more students than ever attend private for-profit colleges and are more likely to be older, female, from minority and low-income groups and have dependent children and little parental support. The reason is that they don’t need money; they just need instructions on how to fill out the government’s loan forms:
For almost every field of study at every level, students at private for-profit schools are more likely to borrow and tend to borrow larger amounts than students at public and private not-for-profit schools.12
In 2008, 62 percent of bachelor’s degree recipients from public colleges borrowed money, compared to 97 percent in private for-profit colleges.
Even as jobs disappeared amidst the largest overall credit contraction in history, an education-related credit boom helped sell college to the broadest audience in history. Before the social attitude shifted, pundits rarely disparaged for-profit colleges, but now they increasingly portray them as shady characters.
Supercycle-Degree Grade Inflation
Positive mood inflates academic grades along with asset values. Writer and teacher Stuart Rojstaczer compared “grade inflation” to an asset bubble. In the January 28, 2003 Washington Post, he explained his perspective as a teacher:
Parents and students want high grades. Given that students are consumers of an educational product for which they pay dearly, I am expected to cater to their desires … . So I don’t give C’s anymore, and neither do most of my colleagues … . University leaders, like stock market analysts talking about the Internet bubble not so long ago, sometimes come up with ridiculous reasons to explain grade inflation … . Many students and parents believe these explanations. They accept the false flattery as the real thing. Unlike high-tech stock prices, the grade inflation bubble, I’d guess, will not burst.13
Figure 4 is from Rojstaczer and Christopher Healy’s March 2010 academic paper, “Grading in American Colleges and Universities.”14 Socionomists can see a clear five-wave rise in grades that began in the 1930s and may already have topped.
Chapter 14 of The Wave Principle of Human Social Behavior offers a possible explanation for this broad academic trend. It says a rising social mood generates alignment, benevolence, convergence, liberality, supportiveness and the tendency to praise. Declining social mood produces the opposite traits.
Social Mood Drives Academic Performance
We don’t have student performance data for the Great Depression, but we do have some telling anecdotes. In The Chosen: The Hidden History of Admission and Exclusion at Harvard, Yale, and Princeton, Jerome Karabel describes how Princeton’s social base became narrow and insular during the 1930 bear market. He also notes that Carl Brigham, who created the Scholastic Aptitude Test (SAT) and sat on Princeton’s Committee on Admissions, “witnessed the unpleasant spectacle of the SAT scores of Princeton freshmen dropping to record lows in the early 1930s.”
Figure 5 shows the academic performance rally that followed Princeton’s record-low SAT scores. The chart shows high-school seniors’ scores on the Iowa Tests of Educational Development (ITED). It is from John H. Bishop’s 1989 study in The American Economic Review, “Is the Test Score Decline Responsible for the Productivity Growth Decline?” The socionomic answer is no, and neither did the decline in productivity cause falling test scores. A trend toward negative social mood caused them both. Bishop’s graph shows that scores climbed with social mood to a record high right at the 1966 Cycle-degree wave III peak, bottomed in the late 1970s along with stock values, then rose with stock prices.
Figure 6 graphs SAT scores and the Dow Jones Industrial Average adjusted for inflation by the Producer Price Index from 1965-2009. The wave IV bear market carried stocks as well as SAT scores to lows in 1981. During the subsequent wave V rally, the rise in SAT scores was interrupted for several years by the 1987–1990 stock market correction, which resulted in recession, extensive layoffs and the biggest collapse in S&P earnings since the early 1940s. After bottoming in 1991, SAT scores then rose until 2005 to peak with real estate, the heart of the mania at that time. Although the causal relationship was not clear to Bishop, it is evident to socionomists that social mood determines educational, business and asset price performance.
A Multi-Decade Shift in Psychology
In financial markets, signs of exhaustion often precede a top. Higher education in the U.S. is giving similar signs. The weariness is apparent via rising dropout rates, declining international educational rankings, waning student effort, anger about student debt, chronic government intervention, and rising grassroots doubt about the value of higher education. All of these items, taken in context with EWI’s social mood forecast, point to a looming reversal.
Dropouts, Laggards and Slackers
The October 2010 issue of The Fiscal Times addresses the dropout rate:
Millions of first-year college students and their families now paying for the most expensive postsecondary education in U.S. history face a land mine: just 56 percent of those who enroll in a four-year college earn a bachelor’s degree … . Over the past decade, the U.S. has fallen from leader to 12th place in the ratio of young people with the equivalent of a bachelor’s degree, well behind Russia, Canada, Korea and Japan.15
A new book, Academically Adrift: Limited Learning on College Campuses, is a “damning indictment of the American higher-education system,” according to the Chronicle of Higher Education. The authors say large numbers of U.S. college students are failing to develop “general analytical competencies [and] higher-order cognitive skills.”16
Forty-five percent of students in our sample did not demonstrate any statistically significant improvement in Collegiate Learning Assessment [CLA] performance during the first two years of college. [Further study has indicated that 36 percent of students did not show any significant improvement over four years.]17
Students have slacked off studying. Academically Adrift also found that 35 percent of students reported studying five hours or less per week. And according to the February 2010 “University of California Undergraduate Experience Survey,” the number of hours per week that students spend on leisure and socializing jumped from 25 in 2003 to 41 in 2008. “At every type of institution, in every major, every demographic group, there’s been a longtime increase in leisure time,” said one of the researchers.18
As we have seen, the broader public’s attitude toward education grows more skeptical during bear markets. In 1972, during the Cycle-degree bear market (see Figure 3), Carl Bereiter’s essay, “Schools Without Education,” described rising disillusionment in public schoolchildren: “that a great deal of school work is pointless, that grades don’t really tell how good you are, that school rituals are a subject for derision.”19 A 1972 Gallup poll, “Public Attitudes Toward Education,” suggested parents shared these feelings.
As students graduate into today’s bear market, indebted parents, students—and many economists—are beginning to question the value of a college education. We’ve seen numerous stories about this new attitude, such as “What’s a Degree Really Worth?” in The Wall Street Journal and “Academic Bankruptcy” in The New York Times. A new book, Higher Education? How Colleges Are Wasting Our Money And Failing Our Kids, accuses U.S. universities of “educational malpractice.” It says that schools in the U.S. are unique in doling out crippling six-figure loans and that a $250,000 education from Harvard or Yale is a waste of money…
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Most economists, historians and sociologists presume that events determine society’s mood. But socionomics hypothesizes the opposite: that social mood determines the character of social events. The events of history—such as investment booms and busts, political events, macroeconomic trends and even peace and war—are the products of a naturally occurring pattern of social-mood fluctuation. Such events, therefore, are not randomly distributed, as is commonly believed, but are in fact probabilistically predictable. Socionomics also posits that the stock market is the best available meter of a society’s aggregate mood, that news is irrelevant to social mood, and that financial and economic decision-making are fundamentally different in that financial decisions are motivated by the herding impulse while economic choices are guided by supply and demand. For more information about socionomic theory, see (1) the text, The Wave Principle of Human Social Behavior © 2011, by Robert Prechter; (2) the introductory documentary History's Hidden Engine; (3) the video Toward a New Science of Social Prediction, Prechter’s 2004 speech before the London School of Economics in which he presents evidence to support his socionomic hypothesis; and (4) the Socionomics Institute’s website, www.socionomics.net. At no time will the Socionomics Institute make specific recommendations about a course of action for any specific person, and at no time may a reader, caller or viewer be justified in inferring that any such advice is intended.