The post below is about half common-sense reasoning about the current crisis and half bloggy speculation about its effects on the higher-education biz. Much of it is brain dump, though there are a few useful links thrown in. You have been warned.

Common-sense reasoning about the current crisis:

In one view of the world, people make spot decisions over whether to buy based on current prices—this applies to people in shops as well as to employers thinking over whether they should “buy labor”, i.e., hire someone. In this model everyone’s got a strike price in mind, and when the thing they want hits the price they’re willing to pay, they buy. And in this model, the thing to do in a crisis like this one is to sit, and wait while prices fall, till they hit the point at which people will start buying—till they reach their market-clearing price.

But anyone who’s had a little extra money to spend over the past couple months knows this isn’t quite so. A lot of shoppers looked at the desperation pre-Christmas 25%-off sales and held off buying, because they thought, I bet things will be cheaper after Christmas. And then a lot of shoppers looked at the desperation post-Christmas 50%-off sales and held off buying, because they thought, I bet things will be cheaper in the New Year. And then there were 70%-off sales, and so on and so on.

Which is to say that the price one’s willing to pay depends not only on supply and demand, but also on expectations about price movements. A lot of people who would be willing to pay the 50%-off price, were it offered in an ordinary economic time, thought—rightly—this is no ordinary economic time, and I can get that gizmo cheaper if I wait.

When you factor in these expectations, it’s no good just waiting for things to sort themselves out—it’s no good waiting for goods to hit their market-clearing low price—because owing to these expectations that things will continue to get worse, people will sit on their hands and decline to buy even what they can readily afford. Lenders will decline to lend, employers will decline to hire, and at the very least you’ll way overshoot your low, market-clearing price before things begin looking up; quite possibly, you’ll end up watching as GDP falls off a cliff and unemployment shoots through an unconscionable roof and people in the world’s richest economy suffer malnutrition and begin actually starving to death. Which is what happened in the Great Depression.

And which is why even a poorly implemented policy like the National Recovery Administration might in theory have been successful, as Gauti Eggertson points out in a math-heavy paper here: if you can shift expectations so that people no longer think prices will continue falling, then you can get them buying again.

And which is why Robert Shiller is mildly arguing here that

Different kinds of stimulus have different effects on confidence, depending on how they are viewed and interpreted by the public. The focus has to get off of “what fraction of this stimulus will be spent” to “how does this stimulus affect confidence”.

Bloggy speculation about the effects on higher ed:

I expect some industries are more vulnerable to these shifts in expectations than others. One of them is probably higher education: the prospective value of a university degree is difficult to determine by any means other than current reputation, which is based on recent performance—which is to say, assessing the value of a university degree, whether to purchase one, and which one to purchase, asks the entrant to make a decision based on expectations.

Some of the choice of whether and where to go depends on family history, locality, other path-dependent kinds of circumstances. But there is a more-free market in university education, consisting of people who leave their own country to get educated abroad.

For a long time, the reputation game has given the advantage to US higher education in this market. People going on the world market to choose their university degree choose to attend college in the US more often than they choose anywhere else—according to the OECD, about 20% of students going abroad to study go to the US; the UK gets a little over 11%, Germany about 9%, France 8.5%—and those four countries together account for about half the market in education of students from foreign countries.

But the trend has been bad for the US, the OECD says; the 20% figure for the US is down from 25% about five years before. Australia, France, Japan, South Africa and New Zealand have by contrast been big gainers.

Higher education in the US is losing its relative appeal. Possibly this is because concrete measures of reputation show that higher education in the US is losing its value: e.g., the US share of cited scientific papers has been steadily falling.

To some extent, this is a natural and desirable convergence, as other parts of the world develop and do better. But to some extent, one can’t help feeling, it’s maybe part of the cavalier attitude we’ve taken toward higher education in general and science in particular in the recent past. During the Cold War, we cared an awful lot about, and invested an awful lot in, the relative worth of our educational systems and our scientific prowess, which dramatically improved through the middle of the twentieth century. Lately, not so much.

As it happens, also, the seeds of the improved public attitude toward higher education and science were planted by New Dealers. I’ll have more to say about this later, I think, but note—via Ars Technica, who link to the searchable stimulus bill—the government is once again using a recovery/relief program to increase emphasis on science.

Will this kind of thing be enough to shift expectations and the reputation of US higher education back in the right direction? Or will the disasters now evident simply continue to cascade toward an apparently bottomless abyss?

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