Illustration by Christoph Niemann

The protesters at Occupy Wall Street may not have put forth an explicit set of demands yet, but there is one thing that they all agree on: student debt is too damn high. Since the late nineteen-seventies, annual costs at four-year colleges have risen three times as fast as inflation, and, with savings rates dropping and state aid to colleges being cut, students have been forced to take on ever more debt in order to pay for school. The past decade has seen a student-loan binge, so that today Americans owe well over six hundred billion dollars in college debt. That’s a burden that’s hard to carry at a time when more than two million college graduates are unemployed and millions more are underemployed.

Some of the boom in student debt can be chalked up to demographics: in the past decade, the number of college-age Americans rose by more than three million and the proportion of eighteen-to-twenty-four-year-olds enrolled in college went from thirty-five per cent to forty-one per cent. Still, the piles of student loans are due largely to the fact that the cost of a college degree has been going up much faster than people’s incomes. And that has raised the spectre that we might be living through a “higher-education bubble,” in which Americans are irrationally borrowing money to spend more on college than it’s actually worth.

We’ve just endured two huge bubbles, which sent the value of stocks and then homes to ridiculous levels, so the theory isn’t implausible. Of course, a college-education bubble wouldn’t look exactly like a typical asset bubble, because you can’t flip a college degree the way you can flip a stock, or even a home. But what bubble believers are really saying is that young people today are radically overestimating the economic value of going to college, and that many of them would be better off doing something else with their time and money. After all, wages for college graduates actually fell over the past decade, and the unemployment rate for recent grads is close to ten per cent. That’s hardly a ringing endorsement of the economic value of education.

There’s a big flaw in the bubble argument, though: things may look grim for college graduates, but they’re much grimmer for people without a college degree. Though recent college grads are having a hard time finding a job, it’s much harder for recent high-school graduates, who have an unemployment rate of nearly twenty-two per cent. And the over-all unemployment rate for college grads is still, at 4.4 per cent, very low. More striking, the college wage premium—how much more a college graduate makes than someone without a degree—is at an all-time high. In fact, the spiralling cost of education has to some degree tracked the rising wage premium; as college has, in relative terms, become more valuable economically, people have become willing to pay more for it. It’s telling, in this regard, that the one period in the past sixty years when college-tuition costs flatlined was during the seventies, which also happened to be the one period when the college wage premium fell.

This isn’t to say that eighteen-year-olds are perfectly rational economic actors. Most obviously, many of them borrow a lot of money and then don’t finish college, ending up debt-laden and without a degree. But there’s little evidence that kids are systematically overestimating the value of college, the way homeowners systematically overestimated the value of homes during the bubble. Nor is there much reason to think that a degree will matter less in the future: the demand for college grads in the workforce has been increasing steadily for sixty years.

The bubble analogy does work in one respect: education costs, and student debt, are rising at what seem like unsustainable rates. But this isn’t the result of collective delusion. Instead, it stems from the peculiar economics of education, which have a lot in common with the economics of health care, another industry with a huge cost problem. (Indeed, in recent decades the cost of both college education and health care has risen sharply in most developed countries, not just the U.S.) Both industries suffer from an ailment called Baumol’s cost disease, which was diagnosed by the economist William Baumol, back in the sixties. Baumol recognized that some sectors of the economy, like manufacturing, have rising productivity—they regularly produce more with less, which leads to higher wages and rising living standards. But other sectors, like education, have a harder time increasing productivity. Ford, after all, can make more cars with fewer workers and in less time than it did in 1980. But the average student-teacher ratio in college is sixteen to one, just about what it was thirty years ago. In other words, teachers today aren’t any more productive than they were in 1980. The problem is that colleges can’t pay 1980 salaries, and the only way they can pay 2011 salaries is by raising prices. And the Baumol problem is exacerbated by the arms-race problem: colleges compete to lure students by investing in expensive things, like high-profile faculty members, fancy facilities, and a low student-to-teacher ratio.

The college-bubble argument makes the solution to rising costs seem simple: if people just wake up, the bubble will pop, and reasonable prices will return. It’s much tougher to admit that there is no easy way out. Maybe we need to be willing to spend more and more of our incomes and taxpayer dollars on school, or maybe we need to be willing to pay educators and administrators significantly less, or maybe we need to find ways to make colleges more productive places, which would mean radically changing our idea of what going to college is all about. Until America figures out its priorities, college kids are going to have to keep running just to stand still. ♦