Can you have a bubble in something that can't be sold?

By R.A. | WASHINGTON

KASH makes an interesting point about the debate over whether higher education is in the midst of a bubble:

[I]t is simply not possible that the high cost of higher education in the US is a bubble the way that the housing market was a bubble, because it is not really possible to have "bubbles" for things that are not assets -- at least not the way we traditionaly understand the meaning of the term "bubble".

A speculative bubble, such as we saw with housing during the mid 2000s or with the US stock market in the late 1990s, is usually defined as a situation in which the price for something becomes detached from its underlying true value because people suppose that they will be able to resell the item for an even higher price at a later time... Once you think you will be able to resell something in the future at a higher price, then you become willing to pay more than its underlying value would actually recommend.

But with services such as education, there's no way to store the purchased item and resell it later...

Instead, if we want to understand why competition doesn't seem to work to bring down the price of education, we need to think in terms of market failures, just as market failures explain why competition doesn't work to bring down healthcare costs in the US.

There is a steady flow of suckers into the system, in the form of new students. And those students do intend to "sell" their degree on in the future, as part of the process of obtaining better employment opportunities. It's the sell-side that becomes critical here. Does rising tuition make "buyers" of obtained degrees—that is, employers of college graduates—more likely to hire at generous wages? And can a cycle then develop between rising tuition and a rising college premium?

The answer, I think, is no, but perhaps we should be careful. My instinct is to place employers outside of the racket altogether; they seek and employ workers based on their own expectations of worker productivity. It's not impossible, however, that employers have misled themselves about the value of a degree, and mistakenly assume that graduates from more expensive schools are more productive, thereby fueling the cycle. This effect should be short-lived, however, since actual performance and work experience are easy for a firm to observe.

Maybe this is the extent of the bubble; students accept rising tuition based solely on the idea that they can then flip their degree for a (relatively) lucrative starting job. If one weighs the premium from the first position alone against rising student debt, college indebtedness suddenly seems more problematic.

My sense is that Kash's argument is correct, however, and that rising tuition is primarily about cost disease within the educational system which is reducing the share of the surplus captured by students. Students learn useful skills in college, but ever more of the gains of this learning accrue to the universities themselves.