This article will first outline the contradiction underlying modern economics; namely, our economy assumes infinite exponential growth is possible in a system with finite resources. Then it gives a brief overview of both the economic and academic context that modern higher education in America finds itself. It will explain the several compounding factors that are all undermining the industry’s current model, and explain why neither contemporary models of education nor returning to past systems can allow the industry to survive going forward. Both public and private funding cannot sustain education in its current form. However, these monumental changes in the character of education are not all bad. In fact, most of them will prove to be very positive in the long run.
Although those committed to the current means and vehicles of education may fear change, those willing to embrace the new world of opportunities afforded by the information age will benefit far more in the new education system driven by advances in technology and commerce than they ever could have in the old one. If the next generation mimics past generations, it will increasingly struggle to find employment in a world with fewer jobs and more competition. But if it embraces a self-directed, entrepreneurial spirit, then it will succeed in creating new jobs faster than any previous age.
Economics and the Environment: An Unavoidable Contradiction
Many who further their education do so in order to advance their economic standing. Whether this means acquiring a degree in order to find a competitive job, or adding additional education to their resume in order to earn a higher wage, more and more people are looking at education as an investment, and like all investments, people want their financial resources to yield fruitful returns. Likewise, education is an industry. Salaries need to be paid, laboratories need to be equipped, and numerous infrastructure projects must be both built and maintained. All of this makes education susceptible to larger economic trends, and consequently it is valuable for those involved in the industry to investigate these trends.
Unfortunately, there is an inconvenient truth underlying all modern economics. Few people realize that every aspect of our economy, from the most abstract and over-leveraged derivatives contract to the printing of cash, is based on a contradiction. America’s economy, and every other economy that uses a central bank (which includes all nations minus the postage stamp countries and North Korea), uses a debt-based monetary system. This means they use two separate financial institutions such as America’s Treasury and the Federal Reserve to loan their respective national or Euro style supra national currency and bonds back and forth to each other in their money creation process.
This system allows a nation considerable control over debt issued in its currency and therefore lets the government influence wide swaths of the economy. Whether one thinks this market manipulation is draconian or charitable is not the point. The point is that debt-based monetary systems require constant growth in order to pay down previous economic activity’s debt. A central bank-backed system cannot afford for Gross Domestic Product (GDP) to remain constant. It must grow by several percentage points per year. If it fails to do this for any substantial length of time the economic engine locks up in a deflationary crash and enters a depression.
This fact in itself is not necessarily a problem. National debts are always growing, but GDP almost always does as well. And in rare circumstances when growth slows or even turns negative, the central bank can lower interest rates, (thus lowering the price of debt), or even print more currency to stimulate growth.
The contradiction underlying this infinite growth model is that we do not have access to infinite resources. Our planet is finite. We only have so many trees to cut down, so many fields to plow, so many ore deposits to mine, and so much oil to pump. Thus, even a modest GDP expectation of 3% per year will eventually cause humanity to outstrip its resources. We can develop new technologies that are more efficient, (although often new technology leads to greater demands on the environment, not less), but no matter how fancy our toys become we still need a certain amount of raw materials to reshape in order to build them.
Stated otherwise, our economy has a problem with compounding interest. Chris Martenson puts the problem as follows:
Suppose someone put a magic drop of water in the palm of your hand that doubled in size every minute. After two minutes you would have two drops of water, and after three you would have a small drop almost equal to the size of a dime. Given this doubling, this compound interest, how long would it take before that little drop of water grew large enough to fill a water tight Yankee Stadium? Would it be days, weeks, or even months?
No, it would only take about 50 minutes. This is how quickly any system built on the mathematics of compounding interest can get out of hand, and our entire economy presupposes GDP growth, and therefore resource consumption, driven by compounding interest. To make matters worse, due to the fact that the amount of increase grows even while the rate of increase remains constant, the danger of compounding interest does not become apparent until the very end of a cycle after the process has taken on a life of its own.
To return to Chris Martenson’s 50 minute example, Yankee Stadium is still 93% empty and only covered by a few feet of water but we have a mere 5 minutes to go before the whole place is flooded.
Why does this foray into a basic mathematical concept matter to the future of economics and by extension education? It matters because any economic system that requires exponential growth, and therefore exponential usage of resources, on a finite planet with finite resources, is doomed to collapse. Quite literally, our economic order presupposes a mathematical impossibility. The question is not if our economic engine will run out of resources to consume, but when.
When Will This Contradiction Manifest?
Many will contest and say it is difficult to pinpoint when compounding interest will force our resources into terminal decline. Certainly, there are many factors which bare upon this discussion, and regrettably any conversation about the intersection of economics and resource allocation is likely to stir heated emotions. However, in an effort to avoid meandering through fake news allegations, global warming, and other such tangents, we can at least note several important facts.
The first is that oil companies have increasingly found it necessary to turn to the far less profitable and far more inefficient fracking methods to service the world’s ever-expanding desire for oil. This suggests that humanity is reaching the maximum amount of oil which can be easily procured in a given length of time. Likewise, whereas as recently as the 19th century, large quantities of above ground ores like copper and gold were still available, now mining operations need to hollow out mountains and build craters in the earth in order to filter through tons of dirt with higher concentrations of desired metals.
And let us not forget the rapid depletion of pollinating insects necessary for agriculture like honey bees and butterflies. These insects are struggling to survive as industrial farming increases its usage of pesticides. This suggests we may have reached peak food production as adding more pesticides only reduces pollinators.
This handful of facts does not prove that humanity has already reached an environmental tipping point, but it should at least give us reason to pause. We know with mathematical certainty that our worldwide compounding interest rate model of economic growth will eventually run into natural limits, and that there are several important resources that are anticipating stagnating growth and diminishing return on investment. Even if this contradiction has not already manifested there is good reason to believe it will within the foreseeable future, and thus all industries, including the education industry, need to be aware of mounting, and never previously encountered, economic challenges.
The Context in Which the Contradiction Now Operates
Despite this threat looming in the background, by some measures all is well in the world, especially for incredibly blessed Americans. After all, it feels like the stock market has broken all kinds of records in early 2017, with the Dow, S&P 500, and NASDAQ collectively going hyperbolic to start the year. During this past February, the market rose for 12 consecutive days. It has only done that once before, in 1987! Trumpflation has caused many investors to pour money in the markets, and the unemployment rate has remained under 5% for months on end. Now major media outlets are even asking whether we should, “just buy everything.”
Yet, for many Americans something is terribly wrong. Careers seem hard to come by for everyone including recent college graduates.
More and more of the jobs available to recent college graduates are part time gigs that provide no benefits and do not pay enough to facilitate financial independence. Millennials are waiting longer to move out, get married, have kids, and start their careers than any previous generation. In many ways their behavior looks like the beginning of the demographic nightmare now plaguing Japan, as what was once a world leading, prosperous nation has suffered through stagflation since the late 80s and consequently few amongst the next generation could ever afford to have kids of their own.
Likewise, Americans have lost their entrepreneurial spirit. The number of Americans willing to take a risk and move across state lines has dropped from 3.5 to 1.4 percent, and Americans are now more likely to relocate to cheap areas with less economic potential than the opposite.
Also, the total number of businesses in the U.S. has been declining since the housing market bubble, and Millennials in particular are not creating new businesses. Compounding with these problems is an ever-increasing rate of student loan debt, which unlike housing and credit card debt, did not decline during the last fiscal crises. Now, many students are graduating with school debt comparable to a sizable car payment or even a small mortgage.
Not only is education riddled with economic restraints, but these restrains exist against an increasingly turbulent financial backdrop. The world economy has been incredibly unstable throughout the 21st century. Early on, the markets were ravaged by the dot.com bubble and the horrific stock market crash that came with it.
Just seven years later, the subprime mortgage fiasco thrust America’s most trusted bank into bankruptcy, and Lehman Brothers almost took half of the financial world with it. Since then, the number of people on food stamps in America has grown to roughly 46 million people, and the out of labor participation rate reached a record high of 95 million people.
Anyone who doubts the instability of the market need only look at the substantial political and social unrest spreading across western civilization. Just a couple years ago, rioting was extremely rare in the United States, but now mass protests connected to a variety of racial, religious, and political issues has become common. Meanwhile, extremely unusual political candidates like Donald Trump and Bernie Sanders spearhead civil wars within their own divided parties while garnering praise and controversy in equal measure.
Yes, Wall Street is having a grand old time. And the real economy is still suffering, which both lends further credibility to the problem economics has with compounding interest, and grants a sobering warning for anyone concerned about the future of education.
The Result – The Treadmill Economy
The average American is living paycheck to paycheck while saddled down in thousands of dollars of debt. This system has put most Americans onto a treadmill. They know they cannot make ends meet without a higher paying job, but in order to get a higher paying job so they can pay their bills they must first get an expensive education, which takes time and money, and consequently raises their debt. Likewise, more income places one into higher tax and higher Affordable Care Act brackets. The situation has become so strained that roughly three out of five Americans do not have enough savings to readily pay an unexpected $500 bill.
And although the economy did take a reprieve from bad housing debt, student loan and car loan debt has only increased. The end result is a circular system where one must continuously raise his bills in order to increase his pay in order to pay his unpayable bills.
Financial analyst Mark Faber writes, “Stagnant wages and the jump in student debt levels has prompted growing concern among government policymakers and financial industry executives that student debt risks slowing U.S. economic growth as households reduce their spending to make their student loan payments.” It’s not difficult to see why so many people feel like the harder they try, the faster they jog in place.
So What Can the Government Do?
The fiscal debt ceiling returned on March 15, 2017. As of that date, the American debt became locked in at just over 20 trillion dollars. Once the debt ceiling is reached, it becomes illegal for the government to borrow any additional money until it is again raised. Given the 250 billion or so that the U.S. government brings in via tax revenue per month, this should give the government until late spring before it runs out of money.
After that, the politicians either have to agree on a budget and raise the debt ceiling or enter a government shutdown where their respective employees no longer receive pay. This self-imposed limit comes into existence against the backdrop of President Trump’s fiscal plans. Trump wants to massively increase infrastructure and military spending, while also providing more benefits for our veterans. He has said he does not plan on cutting Social Security, Medicare, or Medicaid, and wants to replace but not outright eliminate the Affordable Care Act. Given the recent failure of House Republicans to bring a new healthcare bill to the floor for a vote, all of these plans are very much in limbo. Still, the U.S. government has already been running roughly a trillion dollar a year deficit, and Trump’s plan could easily add another trillion or more per year. The current budget proposal does nothing to reduce the deficit, (although it at least does not increase it).
So what can the government do? Well the obvious answer is just borrow more debt. This is, after all, what we have been doing since we began using our current central banking system back in 1913. And the Federal Reserve has done everything in its power to make acquiring more debt even easier. Unfortunately, America’s magic trick of making money out of nothing might not work this time. The rest of the world is becoming more and more leery of U.S. debt. In 2009 Brazil, Russia, India, China, and South Africa built the BRICS alliance. This pact has one stated purpose, to build a post-dollar dominant world, and they have slowly undermined the credibility of American debt.
Both Russia and China have built alternatives to the SWIFT Banking system, which now allows their banks to transfer money from one bank to another while bypassing the U.S. banking system. Likewise, numerous nations are joining them and developing bilateral currency exchanges that circumvent the dollar as a unit of international trade. Furthermore, China has built a possible alternative to the historically Western-dominated International Monetary Fund through their Asian Infrastructure Investment Bank. Also, two of the world’s leading oil producers, namely Russia and Iran, are finding ways to sell their oil without using dollars.
Anyone of these attacks on the dollar by themselves would have little impact on a currency as globally accepted and liquid as king dollar. However, combined they have created an environment where countries bogged down in debt benefit more by selling their U.S. treasuries than they do by holding them. And now the Chinese, Saudi Arabians, and Japanese are aggressively selling off their holdings in U.S. treasuries.
This suppresses the value of U.S. debt, which in turn forces the interest rates of U.S. debt to increase. The more U.S. debt interest rates increase, the more expensive it becomes for America to borrow now and pay later.
Just imagine our 20 trillion dollar debt with a modest 5% interest rate. This would give America a trillion dollar a year bill on just its interest payments, let alone its debt, let alone everything it needs to cover its 4 trillion dollar budget. America needs more debt, but American debt is becoming more expensive. So what we must ask, can the government do if borrowing more debt is becoming increasingly implausible?
Raising the debt ceiling again, although technically possible, will invoke increasingly vicious long-term effects. One drastic move is to begin expanding the currency supply via a fourth round of quantitative easing, but this bold measure shocks the economic system by suddenly expanding the Federal Reserve’s balance sheet and makes the government even more vulnerable to the sort of economic fallout experienced during the last crisis.
Alternatively, the government could use a modified version of President Kennedy’s Executive Order 11110 to allow the Treasury to directly print its own money without referencing the bond market. The problem with this approach is that America no longer has the vast silver hoard which it once possessed under Kennedy. Back then, the Treasury could issue its own money without backing it with promises for future tax revenue because it had history’s largest silver hoard on hand. Without this vast supply of valuable silver, letting the Treasury issue its own dollars directly might pay down debt but it also means the dollar is backed by nothing. Under our current system, the dollar is backed by a faith in future tax revenue.
One final, extremely desperate action the government could take is to outright ban cash. If cash did not exist and everyone was required to keep their dollars in electronic bank accounts, then the government could artificially move the interest rates below the threshold that the market could ever normally take them, and even push the rates into negative territory.
Even if we assume this unprecedented experiment did not cause people to lose faith in the financial system, pushing interest rates deep into negative territory has its own drawbacks. If the government attempted to do this right now, everyone would pull their cash out of the banks and crash the financial system, so everyone’s wealth would have to be trapped in the system. Then, presumably the banking sector could slap a heavy penalty on anyone looking to save money without people taking their wealth out of the banks via cash.
The end result would be far cheaper debt for the government to gorge on, but by extension, no average citizen would be able to save money, which would have negative long-term impacts on entrepreneurship and promote even more debt in the future. Once again, it appears that the economy’s needs have outstripped the available resources.
The government may want to jump-start the economy with a fresh round of government spending, or a new round of quantitative easing, but the ability to do this seems inept. So when everything is all said and done, the United States government is trapped with no easy answers. The more debt it takes on, the less cheap debt it can get. If it massively increases the currency supply with more rounds of quantitative easing, it basically admits that we are still in need of the emergency measures invoked during the financial crisis, which expands the Fed’s balance sheet and puts the government on the hook for larger and larger amounts of systemic risk within the market.
One final solution the government could enact would be to return to a commodity backed currency system. Historically, many nations used gold as money, and so many cultures used silver as money that the two words are interchangeable in over 50 languages. A nation could also use another commodity, or even a basket of commodities, to back its currency. This option, although technically possible, is extremely unpopular amongst central bankers because it severely limits their ability to manipulate the currency. Also, not all nations will feel they have the physical resources necessary to build a commodity backed currency, and this will be even more difficult in the future as resource acquisition becomes progressively more difficult.
Maybe the government will come to a working compromise during this budget ceiling and maybe it will not. Maybe it will find a way to borrow more at ever increasing amounts of debt for the time being. But things that cannot go on forever will not, and this system continues to build debt faster than gross domestic product. Thus, we have every reason to believe that rough financial times lie ahead and that these times will undermine the government’s options.
So What Does This Mean For Higher Education?
America is the undisputed leader in higher education. Half of the world’s top 100 universities are located in America, and our nation boasts several thousand colleges and universities. What too few people realize is that this extraordinary dominance in higher education results from opulent funding. For example, Harvard University has a nearly 40 billion dollar endowment, while 5 other American universities have a more than 10 billion dollar endowment. By comparison, the leading schools in Switzerland and Japan, (two nations known for their heavy emphasis on education), run in the 2 billion dollar range. This massive sea of funding that floods our universities comes from the federal level, via organizations like the National Science Foundation, state funding, and 1.4 trillion dollars’ worth of students loans made possible by the Department of Education.
Yes, if this funding were to run dry, many schools still have substantial resources, wealthy alumni, and fruitful partnerships with local industry. Nevertheless, American universities remain hopelessly dependent on a steady stream of debt. Without this cheap debt, the U.S. higher education system would contract to levels comparable to other first world nations such as Switzerland and Japan. This would drastically scale back the amount of research done at places of higher learning, and the research that remained would most likely consist of extremely practical, lucrative fields like science and engineering. Those interested in studying the arts and humanities, no matter how noble these pursuits may be, are unlikely to enjoy the sort of funding previously employed in a contracting education budget.
This coming downsizing to education will reduce not just the scale of higher education in America but also its character. Currently, it is perfectly normal for a tenured professor to teach four three-credit classes for two semesters, each running about three and a half months, and perhaps 1 or 2 intensive summer classes. This puts the average professor in the classroom for a much smaller number of hours per week than the average high school teacher. The reason for this reduced teaching time has traditionally been that professors are also expected to actively do research in their field.
Professors live by the “publish or perish” rule, and publishing in peer reviewed journals takes a lot of time. But schools are unlikely to value professors’ publishing in an environment where research is no longer getting funding. In the future, schools will be far more interested in putting a larger number of bodies in their classrooms, because every student represents another revenue stream. Thus, the role of a professor will transition from a researcher who also happens to teach to primarily a teacher who does little or even no research, as professors are expected to teach more and more classes and consequently publish fewer journal articles.
Of course, many schools will still need some super star research professors to expand the school’s reputation, but these positions are already the exception rather than the rule, and this trend will only continue going forward. Likewise, schools have already become less willing to grant tenure to their professors. In the future, more professors will be overworked adjuncts rather than tenured and full time.
Can Education Return to a Trade School Model?
One might wonder amidst all these new barriers to our traditional, research-based university model if American higher education will return to the trades. After all, if one cannot make a living with a bachelor’s in the humanities, why not take up a more hands on field such as welding or plumbing? And let us not forget that the Trump administration has promised to make America great by bringing manufacturing jobs back to the U.S.
Unfortunately, this approach is becoming increasingly difficult as humanity marches deeper into the Information Age. America’s most prolific job, truck driving, might not exist in another one or two decades as machines take over the wheel. Brick laying, which use to be a highly skilled job, can now be done faster and with greater precision by a robot than any man alive. Virtually every major manual labor job is under siege, and a number of skilled professions are quickly evaporating. Thus, the education system’s current strategy is failing, and there is apparently no way for the economy to retrace its steps and recreate the manufacturing jobs in the grand numbers needed to employ a large percentage of the work force.
Speaking of Cost Saving Technology, Do We Even Need Universities?
This leads to another natural development in higher education: the continued rise of low cost and extremely portable distance learning education. To this day, a stigma still follows distance learning degrees from schools like Kaplan, Liberty, and Phoenix. Some accuse these schools of being degree factories that are too quick to give too many certifications. However, these negative stereotypes have waned as more and more students utilize their services. Slowly, the cheaper schools are moving from fringe options chosen by the desperate to mainstream options chosen by a higher caliber of student.
These distance learning programs will always struggle to be research centers. They cannot provide laboratories and libraries, and consequently they lack the resources necessary to compete with brick and mortar schools at the doctoral level in empirical subjects. However, introductory degrees at the bachelors level, or graduate degrees in fields that do not require access to expensive equipment, such as mathematics and the humanities, do not need to pay the additional costs that come with traditional research universities.
Thus, we can expect online schools to slowly acquire more market share from traditional, long standing universities while funding becomes harder to come by. This is both a good and a bad thing, depending on one’s perspective. From the university’s point of view, most of this information sounds grim. Professors do not want to lose their jobs, alumni from old schools do not want to see their Alma Maters decline or even go under, and those dependent on the old system will be fearful of change.
However, up and coming students will benefit from substantially cheaper higher education. Students will no longer feel pressure to take on exorbitant amounts of debt in order to finance mandatory degrees. Increasingly, the market will provide cheaper alternatives that better mold into a student’s life. Students will be able to work while taking classes, and not be geographically hindered if they live outside of the coastal regions where many of the nations’ best schools are concentrated.
What Can The Average Person Do?
Most readers by this point will assume that this article’s onslaught of pessimistic data will end with a sobering conclusion replete with dire warnings and little encouragement, but nothing could be further from the truth. Yes, the world is changing faster now than it ever has before. Thought patterns and traditions stretching back centuries, including the presuppositions upon which the modern university were built, are being rewritten. Entire industries are being replaced by new technologies, and just as truck drivers may see their jobs antiquated by electronic drivers, professors may likewise see their classrooms replaced by electronic equivalents that no longer need full time faculty to operate them. And this is happening in an environment where years of deficit spending has left everyone from peasants to nation states over leveraged and devoid of meaningful savings.
But there has never been a more exciting time to be alive, and no generation has had access to more opportunity than this one!
Most readers are probably scratching their heads, wondering where this 180 degree turn comes from. But think about it, right now anyone can monetize anything. Don’t believe me? Okay, imagine something. Go ahead, imagine anything at all! Great, now ask yourself, can you talk about this thing? Whether its football, Harry Potter, the world’s largest rubber band ball, a fantastic Lego collection, or anything else you can think of, you should be able to talk about it. If you can speak passionately about this thing, you can create a YouTube channel that promotes discussion of it, and the more YouTube subscribers you get, the more regular advertising income you make. Whether you are excited about a hobby, serious academics, art, or anything else, you can communicate information about this subject.
In bygone generations, you would have been restricted when sharing your information. Previously only those who personally knew you could act as an audience. Thus, your hobbies were exactly that, just hobbies. But the information age has simultaneously connected every individual on the planet while also alleviating the need to constantly labor. Free time, which centuries ago did not exist outside of royal bloodlines, now permeates through every sector of civilized society.
Thus, your social network can grow as large as the internet. A couple decades ago, only highly connected and credentialed people could be reporters, but now anyone can. Likewise, only those who could impress a handful of New York publishing companies by writing what their administrators predetermined would make a successful novel could produce a book. But now, with eBooks and print on demand, anyone can. And likewise, only those who got a lucky break with a well-known record company could produce a hit song, but now anyone with web access can.
At this point, you may think this all sounds very vague. Maybe Justin Bieber can get discovered on YouTube, or Salman Khan can create a One World Schoolhouse, but what about the average person? What about you? And that is the beauty of the new direction in which education is moving. Under the old system, people were treated as cogs in a machine. Education in America embraced a factory style, one-size-fits-all approach in the wake of the Industrial Revolution as more and more big money donors poured finances into rebuilding an allegedly superior education system. Everyone got up at the same time, read the same books, and took the same standardized tests.
But now your education can be tailored to your personal strengths and goals. People who are more self-motivated can benefit from home schooling and extremely cheap or even free online education. They can find likeminded people to communicate with via online message boards and Skype. And they can channel their interests into public interactions through mediums like Word Press, YouTube, Facebook, Twitter, and other information sharing platforms. Consequently, it is easier to start a small business in the 21st century when you have billions more people to can connect with than ever before.
As we move deeper into the 21st century, those who succeed will be people who first identify what it is that they are good at and find interesting. Then these people will use the increasingly cheap tools available to them to cultivate expertise in these areas, whether this learning happens through inexpensive distance learning schools or free online programs, and finally they will use technology to market themselves and their ideas. This model of education is becoming more intuitive every day.
The Khan Academy and Coursera have already brought world class education to everyone with internet access for free. One can acquire the equivalent to an associate’s degree’s worth of knowledge without ever spending a dime or leaving one’s home. As more and more high school students go to these resources for help with homework and other assignments, more and more students will consider electronic alternatives to traditional brick and motor schools. It is possible that many, if not most, students will be able to test out of half of their college courses with knowledge acquired for free via the internet. This is a fantastic option for students, but will place further pressure on colleges already suffering from cuts in funding.
So What Will Education Eventually Look Like?
World class research universities with substantial endowments will be in a good position to weather tomorrow’s financial storms. Their large scale research facilities cannot be replaced by distance learning formats, and they have many financial resources that make them at least partially independent of the government. Middle tier and lower level colleges and universities will struggle going forward. They will come under fire as a breaking economic model leaves fewer and fewer students capable of paying high tuition costs. Also, government assistance for schools will be harder to come by as economic reality limits what governments can do. Likewise, low cost schools, especially distance learning programs, will continue to rise in prominence.
With well over a hundred thousand students apiece, online programs through Liberty and Phoenix are already larger than any brick and mortar programs in the country, and there is little reason to believe this growing interest in low cost education will reverse. Furthermore, reputable resources like the Khan Academy and Coursera will continue to legitimize free, digital alternatives to traditional learning.
If all goes well, this will equip the average person to engage in entrepreneurship like never before. Note, we do not know at this point whether Americans will utilize the newfound opportunities now available to them. Technology can only open creative doors, but fresh thinkers need to walk through them. Nevertheless there is plenty of reason to be optimistic on the individual level. Education may be changing like everything else in the information age, and these changes should be more thrilling, not scary, for those who understand their moment in history and seize the day.