The Great Education Bubble…?
Quite a lot of the fundamental theory that economists have prized so dearly, and relied upon so
catastrophically, has proven to be defective. Even Alan Greenspan, who was famously Chairman of
the Federal Reserve for 19 years, went so far as to publicly admit he had found a flaw. However,
there is one central law of economics that still appears to be holding true, I’m referring to the law
of supply and demand. Too much supply of anything and the demand, reflected in the price, drops.
Too little supply of something when demand for it is great, means the price will rise. This simple
theory seems to have been forgotten by U.S. and U.K. universities, yet it goes a long way to explain
the plight in which many graduate and post graduate students now find themselves. Recent
graduates are discovering that demand for their skills is low and their fellow graduates are
numerous. This comes as a frightening and depressing shock to most of them. The unstated
assumption, (almost always a dangerous thing), accepted until recently by university students
everywhere, is that if you go to university, work hard, and get your Batchelor’s or Master’s degree,
you will get a better paid position and be set up for a more interesting career than your non-
graduate peers. This proposition held true for many years, in fact right up until the turn of this
century, but this is no longer the case.
The reason for my reflecting on this sorry situation was that I’d been asked to talk to a Steering
Group, led by Michele Morgan - a recognised expert in student experience - which is part of a £2.74
million project, studying the post-graduate student experience. I was chosen to speak because I
spent many years running successful businesses, my own and other people’s, before spending
three years at a Russell Group university teaching Master’s students. So my experience bridges the
disparate worlds of business, technology and academia. The cruel fact is that at this moment if you
have just graduated with any sort of degree, the odds of getting a good job that is going to use the
skills developed at university are stacked against you. The above chart, taken from my presentation
to the Steering Group, illustrates some of the reasons why this is the case.
You might think this state of affairs was caused by the Great Recession, or what I prefer to call
more accurately: the Great Long Depression. Obviously the uncertain economic climate hasn’t
helped graduates and post graduates get employment, yet this is only one of several factors that
has lowered the demand for them. We have to appreciate that this is part of the overall lack of
demand for employees of all sorts and hopefully this will eventually change, although I can’t see
how this could happen soon. Sadly, far too much money and credit is flowing into unproductive
investments like property, and little is going into businesses, especially industries, which provide
essential services, manufacture goods and create jobs. By some estimates only 17% of the total
money held by banks is going into non-property investment. Link that to the sobering thought that
multinational corporations are deliberately holding on to large reserves of money because they can
earn more on their deposits than investing in novel products and the factories to manufacture
them. Add the fact that Central Banks are still pumping out evermore liquidity as we totter on the
brink of a deflationary spiral. Now stir these ingredients together and if you don’t recognise the
similarities with Japan’s lost years, then I don’t know what will convince you.
It is widely accepted that the demand for goods and services is lower than it has been for decades
and on the demand side The Great Long Depression is a factor. But so also is a long term trend
that started around the year 2000. I’ve taken the left hand chart on the slide from Working Paper
18901 at the National Bureau of Economic Research. Using U.S. Job Census data, the graph shows
the demand for Managerial, Professional and Technical jobs over the last 30 years. These are
exactly the sort of positions that graduates and post graduates hope to fill, and the graph line
shows a clear decline. I’ve marked the start of that fall in demand with a red arrow. Why the
decline? And why did it start around the year 2000?
We don’t have any solid evidence at the moment although some people are linking this to The
Second Machine Age, as explained in the book with that title by two MIT professors. At first sight it
would seem counterintuitive that during the first eight years of the heady boom at the start of the
21st Century, the demand for the cognitive skills developed by graduates and post graduates would
be simultaneously falling. Yet that is exactly what this data seems to be telling us. This implies that
the U.S. and any other developed economy, like the U.K., which follows similar liberal, free market
principles, now needs fewer thinkers, planners and managers. Governments and politicians in the
West have steadfastly believed that an advanced “knowledge economy” needs as many graduates
and post-graduates as can be produced. These governments and politicians, egged on by the
vested interests of the universities, thought that it was impossible to ever produce enough
graduates and post-graduates, yet the above data appears to be proving their assumptions false.
Obviously for some specialist vocational professions a university education remains essential but
even so there may well be a limit to the total number of graduates that any economy can absorb.
And we may well have reached this saturation point about 14 years ago, so blinded by established
conventions that we didn’t notice. Perhaps we also didn’t notice that the subjects taught at
universities began to be at variance with the demands of the workplace. For example, many
companies frequently use complex software that takes many years to learn and yet there don’t
appear to be any computer departments in the U.K. teaching such applied skills. And for these sort
of jobs, there is a chronic shortage.
For some time to even tentatively question the sacrosanct view held by the universities that ever
more graduates and post-graduates are needed was to encourage disparaging scorn. However,
when I obtained my Batchelor’s degree in 1966 I was one of only 6,000 graduates in the U.K. that
year. Contrast that with the approximately 500,000 students who will graduate in 2014. An
exponential rise even given the expanded population. This is the supply side of the equation. Look
at the right hand chart on the slide, this graph line shows the incredible explosion in the number of
university graduates in the U.K. The same phenomena has been occurring in the U.S., and the
visionary entrepreneur Peter Thiel for one has been calling it an education bubble for several years.
Thiel explained back in 2011: “A true bubble is when something is overvalued and intensely
believed. Education may be the only thing people still believe in in the United States. To question
education is really dangerous. It is the absolute taboo. It’s like telling the world there’s no Santa
Claus.” The implicit social promise to would-be students is still: if you can graduate you will get
a better job. Invest in yourself by paying university fees and your future is assured… That
promise precisely matches Thiel’s definition of a bubble - something that the data shows is
overvalued, and we can see is “intensely believed”. As we all know, thinking that house prices can
only go up, eventually led to the crash of Lehman Brothers in 2008. Both concepts, thinking that a
degree will ensure your future, and that property prices will always appreciate, are highly
seductive. Both of these concepts share an appealing level of certainty and risk avoidance in an
uncertain and risky world.
If you have recently been infuriated about bankers’ bonuses, what about the scandal of all the
young unemployed and underemployed graduates and post-graduates. In the U.S., since 1985, the
consumer price index has increased 121% yet the cost of gaining an education has gone up 538%.
Administration costs now account for a third of university fees. That’s partly a result of the top
dogs in universities getting pay rises. The U.K.’s Russell group universities justified their recent
generous pay rises by citing the 46 colleges in the U.S. which paid their vice-chancellors over
$1,000,000 (£640,000) in 2011. This made a similar level of vice-chancellor in the U.K., on an annual
salary £4-500,000, appear to be a bargain. For comparison David Cameron, the U.K. Prime
Minister, is paid a salary of £142,500 ($237,205). So spare a thought for the hapless students both
sides of the pond as they struggle to pay off their monumental student debt. In the U.S. student
debt now totals over one trillion dollars, with a delinquency rate (over 90 days unpaid), that’s
significantly higher than the delinquency rate for credit cards and any other form of debt. This is all
highly indicative of an education bubble, and who knows when it will burst?
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