"Education bubble"?

[ja_va]

There is a popular conservative motto which is repeated over and over again recently: "education is the next bubble, people have already said. Financing college is the new real estate, and we know how that works out."It has been repeated so frequently that there seem to be a need to address it

Comments

[ja_va]

As with houses, increasing demand leads to higher prices in education.

This would not have been a problem until people began to buy houses purely for profit. They would buy to resale. This is how bubble is formed - you do not need a house, but you buy anyway, you buy bigger one, you buy second one, etc.

I do not think you can seriously expect someone to buy education for speculative profit and hope to re-sale it later. First, like I said, you have to work for it. It takes years. It takes work and dedication. You can end up dropping out and no degree, but still with a hefty loan. Compare this to a purchase of a house and you will see the difference. Here is a real story for you- in Florida guy signed a contract to purchase a condo for 400 000 dollars. On his way from the office he was asked to sell it, because another guy wanted this very same condo very badly. He did resale, and made 100 000 dollars. It took him about 1 hour. (the story reported by Time magazine)
Now, can you honestly imagine something remotely similar with education? This is why "education bubble" is impossible. And, again, unemployment for college graduates is twice as low as for high school graduates (see link above).

Funny that I have to repeat all that, did you bother to read the post?

[harry_beast]

unemployment for college graduates is twice as low as for high school graduates
Wow, twice as low. That's deep. And you didn't have to repeat it. It has no bearing on the argument. Whether it's twice as low or half as high, some people, not you, evidently, have trouble paying back their student loans on the salary that the market gives them.

[ja_va]

It means that there is more demand for college grads than for highschool grads.
It means that the problem is not that too many people are getting degrees, but that degrees cost too much.
So the solution should be not to cut off people from college, but to make education cheaper, better yet- free.

Direct bearing on the argument for you.

[ja_va]

Compare the situation with housing bubble:

1) There was no demand for homeowners, only for homes, driven by homeowners themselves. (there is demand for degree-bearers (college graduates), which is shown by low unemployment I quote, and not just for the degrees themselves.

2)Demand for degree-bearers (college grads) is independent from the price, since it is employers who need them, and employers do not care about the cost of the degree, so they do not need more degree-bearers just because the price of the degree went up - THEY DON'T CARE. They need more because they have a need for skilled well educated labor)

3) When house market prices went up buyers were actually happy - they were making more profit on the homes they bought! Compare to the college students - how can they be happy? Some of them actually have to drop out when prices go up.

4) Houses were bought for resale. Degrees are never bought "for resale"

Do you still not see the difference? Do you still not understand why low unemployment is important indicator? There was no such indicator in housing market.

[gunslnger]

This would not have been a problem until people began to buy houses purely for profit. They would buy to resale. This is how bubble is formed - you do not need a house, but you buy anyway, you buy bigger one, you buy second one, etc.

Incorrect. Prices going higher than the "real" value was the problem, regardless of why it was doing it. Speculation was happening after the bubble was formed as it takes advantage of the bubble, it doesn't cause it.

[ja_va]

Look, buddy, who are you to tell me what is "correct" and what is "incorrect"? Did you even go to college?

There is no "real" value, value is a relative term and depends on personal preference. My "real value" of the same good may be vastly different from yours. Learn some economics before you start arguing economic issues.

[gunslnger]

Look, buddy, who are you to tell me what is "correct" and what is "incorrect"?

Someone who obviously knows more about the American college system than you do.

Did you even go to college?

Yes, many times at several places.

My "real value" of the same good may be vastly different from yours.

And yet economics tells us exactly the opposite of what you assert. Yes, there is a real value that is subjective, but that's not what economics cares about. Economics shows that there is a "real" value, which is the common aggregate value placed on something by a mass of people individually. For example, you may think that milk is crap and wouldn't pay more than $.20 for a gallon, but most people are fine with paying $2.00 per gallon for it. So its "real" value in economics terms would be $2.00 even though for you the real value is $.20.

Learn some economics before you start arguing economic issues.

Take your own advice.

[ja_va]

but most people are fine with paying $2.00 per gallon for it. So its "real" value in economics terms would be $2.00

You are confusing "real" value with the market value.

If "most people" are fine with paying 2.00, i.e they value it at 2.00 or more, then the market value will be 2.00
If I value milk at 0.20 and it is priced at 2.00 by the market, I will not buy it.
If I value milk at 20.00 and it is priced at 2.00, I will buy it and will have surplus value of 18.00
"Real value" for me will still be 20.00

Market value will be 2.00, but it is the result of interaction between buyers and sellers and has nothing to do with "real" value. If everyone will decide that they really need milk, its market value may go up to 200 dollars, and if everyone will decide, that milk is bad for you and stop buying it , then its market value will be zero. But neither of this has anything to do with imaginary "real value". The only important things are market value and cost of production. As long as market value is above the cost of production it will be profitable to produce milk.

[gunslnger]

You are confusing "real" value with the market value.

No, I'm not. That's exactly what I mean by "real" value, which is different than real value, which is what you're trying to refer to when it's not appropriate.

[ja_va]

But here is where your mistake is - market value depends on people perception. It can range from zero to infinity and can change at any time for any reason. It does not matter how much it costs to build the house - if there are enough people to buy it for a million dollars, its market value = $ 1000 000. If nobody wants it, then its market value = $0
One day it can be a million, next day zero.
So when you say "Prices going higher than the "real" value was the problem" it makes no sense. Prices were always equal to market value. Market value was dependent on people's perception of what the house was worth. What it was worth depended on how much people were willing to pay for it. The problem was not with "real" value, the problem was that people were willing to pay extra to make profit on resale. When you buy a house not to live in it, but to flip it and make quick profit it is speculation. More and more people did exactly that. Because of that bubble formed. Nothing to do with elusive "real" value.

[gunslnger]

market value depends on people perception

Only a little bit.

It can range from zero to infinity and can change at any time for any reason.

This is incorrect. There are limits.

When you buy a house not to live in it, but to flip it and make quick profit it is speculation.

And this was not the cause of the bubble. Look into it.

[ja_va]

This is incorrect. There are limits.

Actually, it really is not exactly correct, I agree. In reality it ranges not from zero to infinity, but from negative to positive infinity.

For example, I hire 10 people to dig a trench in your back yard. They work for 10 hours and get paid 1000 dollars total.
Question: what is market value of that trench?
Answer: negative 1000 dollars, since this is the amount you will make me pay for covering that trench, which you did not need in the first place and do not want on your property ;)

As for whether there are limits or not - it is irrelevant, since your point was not that there are limits, but that the amount is fixed. It is not. It can change at any time and for any reason.

this was not the cause of the bubble. Look into it

I am very well aware of the conservative interpretation of what caused the bubble. It is very convenient to blame it on Clinton. There is just one problem - there was no bubble during Clinton administration, prices began to grow after George W. Bush went into office and interest rate was lowered to almost zero from 2001 to 2004. Interest rate = cost of borrowing, cheap borrowing = easy money = bubble formation.
http://en.wikipedia.org/wiki/File:Federal_Funds_Rate_1954_thru_2009_effective.svg

[gunslnger]

No, the limits are quite far from infinity.

As for your question, your answer is wrong, as it makes assumptions about things we don't know, such as whether the trench is desired or not, whether there is something going in it or if it's an end product, etc.

since your point was not that there are limits, but that the amount is fixed.

No, that wasn't my point.

I am very well aware of the conservative interpretation of what caused the bubble

That's nice and irrelevant.

Interest rate = cost of borrowing, cheap borrowing = easy money = bubble formation.

Better. But you'll probably still insist that speculation is somehow to blame even though nothing in that progression right here shows any speculation happening or required.

[ja_va]

No, the limits are quite far from infinity.

Name one. And be exact, give me the number.

For prices to "go higher than the "real" value"" , the real value must be fixed. If real value changes with the price, it can not be different. The whole point is that market price = market value.

nothing in that progression right here shows any speculation happening or required.

Cheap money go after profit. The whole point is that you can get money and you look where to invest. You invest in housing, because it seems like a safe bet. Prices rise, you invest more. Prices rise more, you invest still more. Unlike people who mean to live in a house, you actually like prices rise, because this is how you make profit. No one would buy bigger or better house when the prices rise if all they want is to live in it, this is counter intuitive. But if all you want is to make profit, then it makes perfect sense.

I think you do not know exactly what was happening at the top of the bubble, 2005-2006. Let me tell you. People were getting what in the industry is known as NINJA loans - No Income, No Job, Asset. The "asset" part was the house. They would have zero downpayment and they will get 500 000 dollar loans for a house worth 500 000. Monthly payment would be like 5000 dollars, while monthly income would be far less - maybe 3000, maybe 4000, but nothing close to 5000. But for one year only they would pay "interest only", which is something like 2000 a month. Everyone knew they can not afford the house. But the prices were rising, and next year the same house will be 600 000. At that point they would either re-finance and skim 100 000, or take out home equity loan of 100 000, or sell it for 600 000 and walk with 100 000. If you think this is not speculation than you are even dumber than I thought.

[gunslnger]

Name one. And be exact, give me the number.

You will never see a billion dollar house while milk is under 10 dollars a gallon.

For prices to "go higher than the "real" value"" , the real value must be fixed.

Incorrect. It just has to not be tied together.

I think you do not know exactly what was happening at the top of the bubble, 2005-2006. Let me tell you

That isn't the cause of the bubble, that's a result of the bubble.

[ja_va]

You will never see a billion dollar house while milk is under 10 dollars a gallon.

I am talking about general concept of value, not about value of particular objects. Value of a house may be limited, concept of value is infinite.

I think that your policy of uttering few words at a time shows complete lack of understanding of an issue and a fear of showing your lack of understanding of an issue. Unless you want to present a sound and valid arguments you will not be granted any further responses. Education costs money, and I will not provide it for free.