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the fear and uncertainty, and contributed to the stock market
plunge. This recession turned out, however, to be relatively
short and shallow, as monetary policy was dramatically
loosened so that interest rates hit historic lows and stayed
low, and vast sums of liquidity were pumped into the system.
Unfortunately, loose monetary policy, coupled with new
financial instruments such as derivatives, collateralized debt
obligations, credit default swaps and other arcana, set the
stage for the financial collapse through which we are currently
living.
Highlights of this brief summary are
that the causes of recession are many
and varied, and that the cause matters in
determining both the cure and the likely
duration of the problem. Until recently,
consumer demand tended to remain
strong even when other economic
indicators were not, and thus could be
counted on to help pull the economy
back to capacity. Monetary policy
was broadly effective in stimulating
investment, and often helped the
economy to rebound in a V-shaped way,
rather than the slower U-shaped pattern.
But the current recession is
significantly different from those that have preceded it, and in
that sense, parallels to the depression of the 1930s are apt. The
current problem has its roots in the financial sector—banks
are failing, credit has been much reduced, monetary policy
is ineffective, consumers are not spending as freely as before,
retail businesses are closing, investment projects are put on
hold, and demand for liquidity is so strong that in recent
weeks short-termTreasury bills, presumably the most secure
financial asset, were actually paying a negative interest rate as
people clamored for safety, regardless of return.
The Keynesian model is highly relevant again, as
we confront sharply declining aggregate demand from
consumers, investors, and from abroad for our exports.
Government is once more the force being called upon to get
the economy moving, and hence the Troubled Assets Relief
Program (TARP), enacted in the waning days of the Bush
administration, and the new fiscal stimulus package of the
Obama administration. As this essay is being written, the
future of the economy is strikingly uncertain, for we have not
experienced conditions like this in the recessions of the ’70s,
’80s, ’90s or early 2000s.
Few think that the economy will rebound rapidly, as
consumers and investors are nervous and cautious, and the
fiscal stimulus will be slow in working. Unfortunately, the
recession that began in the U.S. has spread throughout the
globe, and no other major country seems poised to pull the
rest of us out of the swamp. Some argue that much of the
“wealth” created in the last decade was little more than paper
wealth floated on a sea of new and unfathomable financial
instruments; thus, the air going out of this bubble is just that—
air—not substance.
Perhaps the greatest source of optimism is that we have
experienced the Great Depression before and have learned
from it, and thus will not repeat the policy mistakes of that
era, such as initial timidity in stimulating demand, that made
the problemworse. But one does have the sense that the
psychology of debt—of buying on credit and overextending,
whether as a household or as a company—may be changing
in ways that will mark this time as one of national, even
international, cultural change.
Significance for Higher Education
A review of the past four recessions prior to the current
one reveals that, on balance, higher education in the United
States weathered each of these economic storms reasonably
well (the
Chronicle of Higher Education
, October 10, 2008).
But most observers agree that the current recession, officially
announced as having begun in December 2007, is a different
breed of recession, with disconcerting similarities to the
Great Depression of the 1930s, as noted above. After years
of neglect, Keynesian economic policy is being reintroduced
in the form of aggressive fiscal actions designed to increase
aggregate demand in the economy. While it seems unlikely
that the world will slump into prolonged depression, the
economic outlook is cloudy at best, with conditions likely
to be more severe, and depressed longer, than in other post
WorldWar II recessions. What might this situation mean for
higher education in the United States?
We have no definitive evidence yet, but early warning signs
abound. Most state governments are experiencing a sharp
drop in tax receipts, and because states have to operate with
balanced budgets, expenditure cuts are being reported daily.
In recent days, for example, the states of Washington, Nevada,
Texas, Oregon, Idaho, California and South Carolina have
announced cuts in state appropriations to public colleges and
universities, ranging from ten to 36 percent. And few states, if
any, will avoid such cuts.
While it is true that state support for public higher
education has been declining as a share of institutional
revenues for more than two decades, the severity of the
current cuts might push public institution leaders to reduce
enrollments, something they are normally reluctant to do.
For example, the California State University and University
of California systems have announced plans to reduce the
number of entering undergraduates by several thousands of
students. The new round of state cuts will also prompt yet
higher public tuitions, further dampening demand.
It has been common in past recessions for enrollments
to actually jump, as the opportunity cost of forgone earnings
for the newly unemployed declines. While not yet definite,
there are early signs that such an enrollment surge might not
be happening this time around, in part because institutions
are reluctant to keep expanding when revenues drop, but
also because of the rising student charges and general
uncertainty about the economy. The United States has been
on a borrowing binge fueled by low interest rates for several
years, and much of what is happening now is an unwinding of
unsustainable debt levels, both in families and in businesses.
Higher education has become increasingly dependent on
student and family debt to cover student bills, but not only is
the credit market harder to tap now, but increasing numbers
of would-be students may be reluctant to borrowmore for
higher education.
The conditions that
provide access
and opportunity to
complete various forms
of postsecondary
education and training
are languishing in
this country.