Home > Political Philosophy and Current Events, Politics > The Collapse of the Brain Bubble – How the federal government will end college education.

The Collapse of the Brain Bubble – How the federal government will end college education.

To listen to the audio version, play the video below. To read the transcript, simply scroll down.

Hello, internet. Today I’m here to talk to you about a serious threat to the stability of our economic system and our lifestyle in general. It is the “brain bubble”, a systemic miscalculation of how society’s resources should be allocated to education. To understand the severity of the threat posed by the brain bubble, we must first explore the basic misunderstandings of economics from which the whole problem stems.

The economy is simply the word economists use to describe the aggregate of all the things that people do with their capital. Capital is anything that exists through time and has value. Land and machines are good examples of capital. With capital, people can perform activities that produce valuable output. For example, with land and machines a company can maintain a manufacturing plant that produces stuffed animals or food products to sell.

The decision to allocate some capital, also called “resources”, to a particular economic activity is called “investment”. At any given time, there is only a certain amount of capital in the world, so society must be wise in how it invests. The world should not, for example, use half of all its factories to make stuffed elephants if only five percent of people actually want a stuffed elephant. The economy needs a system by which people can decide whether to invest their capital in a particular venture or not.

Fortunately, such a system exists in the form of interest rates. Money represents capital, in the sense that it can be traded for capital and vice-versa. Loans of money, therefore, are an investment by the lender in whatever the venture for which the loan is made. In a free market, interest rates on loans will tend to equal the average expected return value for investments in general. If a company borrows money to perform an activity, and that activity has a return that is greater than the interest rate, the company will pay off the loan and then expand. If instead the venture returns less than the over-all interest rate, the company will have to close its operations in order to repay the loan.

Suppose, for example, that I have imagined a better kind of soda than what is currently on the market. I think I can provide people with a beverage that tastes better than Coke or Pespi and costs less. An investor can make me a loan, with which I can build a factory and start marketing my product. If I’m right, and people want what I’m selling, then my sales will spread rapidly through the soda market, and I will turn a large profit. With that profit, I will pay back my lender plus interest, thus justifying his initial investment in me. If I am wrong, and my invention was not a good idea, then I will turn a small profit or none at all, I will be unable to make the interest payments on my loan, and my lender will not earn money on his investment. This discourages lenders from investing in products and services that people don’t want. This is the policy by which capital is invested in useful ventures.

Your actions are also business ventures. People can invest in you. They can do this, for example, by granting you a student loan so that you can go to college. If your activities after college prove highly productive, you will earn a large salary, and will pay off your student loan with interest. If instead you are lazy or dumb, or if you simply want to pursue a lifestyle that does not involve a lot of economic activity, your lender will lose money on you. This, of course, creates an incentive for lenders to try to determine the expected productive output of students while they are in college. Students who are likely to pursue high-end careers that require a lot of education will tend to get larger loans, while students who will not apply a degree in a productive fashion will be offered smaller loans or no loans at all.

At least, all of that would be true if interest rates were unregulated, student loans came from private investors with individual responsibility for the success or failure of the loans, and college education had a definable cost to each individual who received it. Instead, investors have been required to issue student loans through federal programs, at federally-approved interest rates, for the past several decades. The cost of college education has been increasingly subsidized and controlled by both federal and state governments. More recently, President Obama nationalized the entire student loan program, with the reasoning that attempts by lenders to profit from their investments were interfering with students’ opportunities for education.

The result of all this is that the discriminating factor in investing – the need for investors to profit on their investments – has been totally removed from the equation of who gets a student loan and how much they get. Student loans are no more or less likely to go to students that will actually make use of them and be able to pay them back than to students who have no future in higher education and have no ability to repay their loans at all. That would be fine if society had an infinite amount of educational resources to allocate to whomever the government pleased. However, resources are finite, and every dollar that is spent educating someone who will not work to pay back his loans is a dollar that could have been spent educating a more productive citizen or building a factory to produce food to end world hunger.

The progressives will tell you that investment in education almost always has a positive economic return. That is emphatically not true. Hundreds of thousands of students with federal loans cannot pay them back, and the problem is so widespread that Obama already has plans to “bail out” the student loans and nullify the debt. Even if it were true that education always produces positive returns on investments, that is still a construct of a government-regulated, artificially low interest rate which ignores the opportunity costs associated with investment. By forcing interest rates to be lower than the free market would naturally make them, the federal government has made it profitable to invest in students whose activities after graduation do not economically justify the initial investment.

By removing the need to allocate resources to education in precisely so far as it is efficient to do so and no farther, the federal government has created a brain bubble. Loads of people are going to college, no matter how much it costs, and no matter whether they actually care about their degree or have any plans to enter a specialized career after graduation. Students who don’t need a college degree can get federal loans, and, if they don’t ever make enough money to justify those loans, they will be absolved of all debt under Obama’s new plan.

The cost of college has soared exponentially above the rate of inflation over the past several decades. Every time book prices, tuition, and boarding costs go up, the federal government has responded by subsidizing higher education even more heavily, enforcing stricter regulation on lenders, and lowering interest rates. These policies are promoted as being necessary to allow people to continue to get a good education in spite of rising costs. The entire strategy has never worked, not even a little bit. At every turn the government has tried to curb rising costs by subsidizing even further, removing even more of the ever-dwindling incentive to allocate resources efficiently. Even as technology gets cheaper, books get easier to produce, dormitories become better-designed, and educational techniques get ever-more refined, the cost of higher education continues to balloon. In all of the government’s attempted analysis of this situation, the one question that is never asked is, “Why are costs going up?”

They are going up, plain and simple, because the interest-rate information, the driving need to supply education to those who will make use of it and not to others, has been destroyed. It has been destroyed by the very same policies that were meant to make education accessible to everyone. Costs will not go down because the government yells or the people protest. The only strategy that can mitigate the cost of college education is the cessation of all subsidies and the release of the government’s grip on interest rates. When lenders are allowed to seek profit in the loans they grant to students, colleges will again have an incentive to minimize tuition, and students will have an incentive to work hard in school to prove their academic worth.

However, it is clear that strategy will not be adopted in America barring massive political upheaval. Instead, through Obama’s recent decision to totally nationalize the student loan program and eliminate any remaining profits, college tuition costs have again spiked. Obama has set a precedent now that loans can be given to anyone for any reason. If the loan cannot ever be paid back, the government will bail out the lender. All incentive for fiscal responsibility and economic efficiency is gone.

The cost of college will continue to grow over the next ten to fifteen years. No later than 2030, the government will go completely bankrupt, and colleges will no longer be able to accept payment promises through Federal Reserve notes. When that happens, the brain bubble will burst. College will be so outlandishly expensive that no one will be able to afford it without federal assistance, and no federal assistance will be forthcoming. The well will run dry. When the government is no longer able to bail out society today with money it hopes will be created tomorrow, the college market itself will collapse. Dormitories will sit empty for years in much the same way that houses have been abandoned since the 2008 housing crisis. Just like all bubbles before it, the brain bubble is a result of systemic over-investment without regard for actual returns. It is guaranteed to burst, and the result will be an entire generation of Americans who will not have any of the skills of higher education.

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  1. Bubba
    May 25, 2010 at 9:25 AM

    I’m interested in your opinion on this: http://www.kontraband.com/videos/22673/Dan-Pink-Drive/

    • May 25, 2010 at 9:56 AM

      Thank you for the interesting link. After watching just the first 3:18 of the video, I have several remarks to make.

      1) It is not surprising to me that a higher economic reward doesn’t produce greater intellectual achievement. I think most people were probably already trying about as hard as they could from the start. After all, if you’re not very smart, you’re not very smart. Someone offering you money to be smart isn’t going to make you smart. Interestingly enough, the exact opposite has been found to be true when teachers pay students to perform well on tests. What this shows to me is that students in most schools today don’t care about their studies and aren’t trying hard at all. You can motivate them to do better by paying them. When a person feels his pride is on the line and is already trying his hardest, a monetary incentive won’t change his performance.

      2) This doesn’t contradict any principle of economics that I’ve ever heard. I don’t believe any economists think that you can make people smarter by paying them more. In a free market system, the highest-paying jobs often (not always) go to the smartest people because those people are already smart, not so much because they magically became smarter by getting paid more. The narrator seems to believe the study has stumbled upon some massive inherent contradiction in all the theories of economics. Why does he think that?

      3) The narrator refers to the Federal Reserve as an evil left-wing socialist institution. He appears to be joking. Why does he think that’s a joke? The Federal Reserve is a federally-backed monopoly on the supply of currency, which is a critical industry. No free market advocate supports the existence of the Federal Reserve. It *is* a fascist institution.

      Now to continue watching…

      I think the “Autonomy, Mastery, and Purpose” mystique is a beautiful and very accurate way to describe the incentive for doing better work. The example given of Linux and other open source software is a very good demonstration of this. I have always believed that one of the best aspects of the internet is its ability to utilize the spare time of millions of people around the world to create something lasting and useful. I really couldn’t agree more with this whole second section of the video. I think the idea of having an “Autonomous Day” where workers can work on whatever they want on company time is brilliant, and I have no doubt it’s effective. I’m not sure you’d want *every* day to be Autonomous Day, because eventually that could lead to people pursuing whole projects that are completely off the course of what the company needs to be achieving, but every now and then, it sounds like a great way to get all those little fixes that need to be done taken care of. What I don’t understand, though, is why the narrator still seems to think he’s upsetting fundamentals of economics here. The fact that people who love their work will tend to do better at it only reinforces the economists’ point that incentives produce results. If an economist is too narrow-minded to view love of work and sense of purpose as an incentive, that’s a different story entirely.

  2. May 27, 2010 at 3:11 PM

    If only I had a buck for each time I came to jasoncockrell.wordpress.com.. Incredible article.

  3. May 30, 2010 at 5:55 PM

    Super great writing! Honest..

  4. tilarien
    October 26, 2010 at 9:00 AM

    “When lenders are allowed to seek profit in the loans they grant to students, colleges will again have an incentive to minimize tuition”

    I fail to understand why, could you please explain?

    • October 28, 2010 at 3:32 PM

      Lenders who are permitted to maximize their profit will almost certainly want to do so. For this to happen, people need to be able to afford college. That competition drives prices down.

      In essence, a student loan in a free market has approximately the same effect on college costs as direct payments by students. Granted interest plays a role, and the lender cannot be presumed to have precisely the same goals as the students, but clearly the bulk of the influence the lender has on the college will be as a representative of students making payments. Thus colleges in the free market would compete for students’ money just like with any other product or service.

      But when lenders are forbidden from making profits, yet simultaneously guaranteed that their losses will be bailed out by the taxpayers under government orders, that relationship dissolves. Lenders who pay money to colleges no longer do so as representatives of students. They do not behave like ordinary consumers. They do not optimize their choices to get the most valuable college education for the least money. That obscures price information and makes it impossible for the market to correct for inefficiencies and mal-investments, allowing prices to rise through time.

      • tilarien
        October 29, 2010 at 7:25 AM

        That makes sense, thank you!

  5. October 12, 2011 at 9:57 PM

    I do like the manner in which you have presented this comment..

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  1. May 25, 2010 at 3:02 AM
  2. August 31, 2010 at 12:42 PM

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