To be clear about my last post, there are some catastrophic economics of higher education down the pike; they just aren’t bubbles.

The biggest one? Rising health costs for seniors and the disabled. As health care takes bigger and bigger chunks out of the GDP it is going to crowd out spending on a lot of things, and education is going to be one of the places hardest hit. As Kane and Orzag’s excellent paper predicted in 2003:

Curiously, the biggest challenge casting a shadow on public higher education’s future—the Medicaid program—is not yet on the agenda for most university administrators. The evidence suggests that rapid growth in state Medicaid obligations over the past few decades has crowded out public higher education expenditures, and state Medicaid obligations are expected to continue to grow rapidly over the coming decades. As a result, state support for public higher education is likely to come under increasing pressure, even as state revenues recover. Because roughly three-quarters of all college students in the United States attend public institutions, the implications for the nation’s higher education system are potentially profound.

They go on to calculate that each dollar of Medicaid spending reduces state expenditures on education between six and seven cents. And there is a lot more Medicaid spending on the way.

Incidentally, I’ve seen these problems discussed in literature on European systems as well; they are not problems unique to the U.S. Everybody aware of the coming wave fears it. 

The U.S. has a couple drivers though that make the situation particularly grim — the biggest probably being that U.S. health costs are increasing at a much faster rate, but another factor being that state Medicaid dollars are matched federally, where as state university system dollars are not, which creates an insurmountable pressure to cut education first at the state level.

In any case, I laugh at bubbles. Crowding out, on the other hand, scares me to death.