The Great Recession of 2007/08 was originated in the USA and triggered a worldwide economic crisis and the consequences are still noticeable. The trigger for this recession was the burst of the real estate bubble in the U.S. which was caused by a low-interest rate level, careless granting of credits, complex financial instruments like CDO (Collateralized Dead Obligation) and MBS (
Mortgage Backed Securities) and insufficient risk analysis. Since the second World War housing prices were rising and as long as they continued everyone profited (Havemann, n.d.). As the agreed-upon interest rates were rising mortgage holders defaulted on their loans which lead to a worldwide panic between the financial institutions as they lost trust in each other (Havemann, n.d.). Even though this crisis was made in the USA, it had an impact on the world economy since the CDO and MBS were sold worldwide.
Caused by the financial crisis of 2007/08 a considerable number of nations did cut their spending on education whereas other countries increased their investments in education. Due to the crisis, the value of education was reinforced. In particular, the demand for higher education increased, since the unemployment rate among lower educated people increased by 3.8 percentage points, whereas among higher educated people it only rose by
1.5 percentage points (OECD, 2013). Moreover, according to the human capital theory, those with a higher education will also have a higher income which is another incentive to strive for tertiary education.
The purpose of this paper is to elaborate the tertiary education systems of the USA and Germany and draw conclusions about the benefits of investments or expenditure cuts in higher education during the economic crisis of 2007/08.
Firstly, the paper elaborates the current situation of higher education in the USA. Secondly, it deals with the higher education system in Germany. Thirdly, the paper compares these two countries regarding their tertiary education and concludes the upsides and downsides of whether it is smart to invest in education or not.
2. USA
The financial crisis of 2007/08 was made in the USA which disrupted their economy and resulted in a global economic crisis with impacts on the spending on education. In a previous recession after the second world war, the USA came up with the solution that comprised promoting greater access to higher education and was called the GI Bill which aimed to reduce projected unemployment rolls and producing a more skilled labor force (Douglass, 2010). Douglass (2010) claims that the strategy of expanding funding for postsecondary education, then became a key component in debates over the route to economic recovery. Nevertheless, during the Great Recession, the USA was one of the first countries that launched a stimulus plan also called American Recovery and Reinvestment Act, which also implied investments in education (Education and the Global Economic Crisis, 2009). However, due to a decline in state revenues, the majority of state governments either had to increase taxes or making large cuts in budgets like education which was in their opinion the preferable choice (Douglass, 2010). The consequences of this decision were higher tuition fees and a restriction of admissions at public universities in order to compensate for decreased state funding while the demand for postsecondary education increased by 11.4 percent from 2008 to 2009 as Douglass stated. Oliff, Palacios, Johnson and Leachman (2013) claimed that in 2013 the entire nation was spending
28 percent less per student on tertiary education than they did in 2008. Consequently, the students have to burden most of the cost of their higher education for which reason it has become less affordable. Therefore, the high costs or debt that students have to face in order to get a higher education are exceeding the future income as even rating agencies like Moody’s confirm that the benefits of a postsecondary education do not compensate the costs anymore (Rossi, 2014). Currently, the sum of all student loans is 1.3 trillion US-Dollars which exceeds the sum of credit loans. Regarding to the recent crisis that was caused by the careless granting of loans, it is rather risky to grant such a huge number of student loans when they have no security of the students that they will be able to get a job and pay back their debts. Therefore, the US government’s view that higher education is not a public good and cannot be provided for free should be reconsidered as the government benefits by generating higher tax revenues gained through higher salaries of their employed population.
The hypothesis that the US could have made based on their observations is that a “massification” of higher education does not enhance the competitiveness in the global labor market for young graduates and, in fact, a significant share of them would be un- or underemployed (Mok & Neubauer, 2015). Following the empirical cycle, the USA could have concluded that the benefits of investments in tertiary education would not exceed the cost they would implicate. However, this hypothesis is refutable as it can be proven to be false in the future (Gravetter & Forzano). Douglass argues the present low degree production rates could lead to a shortage of workers with college-level skills by 2020 since 68 percent of all enrolled students fail to graduate within four years. As the US economy is still struggling and not yet fully recovered this indicates that investments in higher education could have benefited the economy, especially in the long run. Nevertheless, with the funding of postsecondary education and making it more accessible the economy also has to provide sufficient jobs for the graduates in order to increase productivity. Otherwise, the US economy would have an excellent educated population which suffers from un- or underemployment and results in economic activity below its potential.
3. Germany
Germany is Europe’s leading and the world’s fifth largest economic nation which is mainly due to its high export numbers (Yeh-Yun Lin, Edvinsson, Chen & Beding, 2014). Although the German economy also suffered from the 2007/08 financial crisis, the government did not decide to cut its spending on education. This reveals that the government either intentionally agreed on not cutting expenditure on education or that the rate of investment in education plummeted slower than the German national GDP (European Commission, 2013). In 2009, Germany decided to spend an additional 18 billion Euros on higher education than in the previous year. Figure 1 depicts that Germany spent 9.9 percent of its budget on education in 2006. Five years later, the government expenditure for educational purposes was 11 percent. Moreover, Germany wanted another 275,000 students to attain higher education until 2015, which costs the German government 26,000 Euros per student (Douglass, 2010). Clearly, German politicians view education as a long-term beneficiary investment, as it will raise the average educational levels and thus increase German competitiveness on the global market. It is noticeable that German universities charge their students no or very low tuition fees. The universities obtain a monetary amount from the state they are located in. Additionally, they receive money from agreements with the state´s government with respect to the number of students at the university (Kehm, 2014). Germany regards the higher educational system as part of the public body. Other than only investing in academic education, Germany also spends money on apprenticeships which are considered to substitute for an academic career. In this way, Germany ensures that there are also people to cover the lower paid jobs. The strategy of continuing to invest in education during the 2007/08 financial crisis has proven to be successful. The unemployment rate decreased from 8.4 percent in 2007 to 6.8 percent in 2010 (Yeh-Yun Lin et al., 2014). The trend can be connected to the increase in expenditure on education and other reforms in the educational sector, such as abolishing early academic tracking that starts at the age of 10 (OECD, 2014).
Babbie (2007) suggests that one reason deductively by moving from a generally expected pattern in society to an actual observation that proves or refutes the pattern. Through deductive reasoning one can predict the general pattern that increasing expenditure in education will always, even during an economic crisis, have long-term beneficial effects on a country's well-being. In the case of Germany, it is yet too early to say whether the increase in expenditure in the educational sector has a positive effect in the long-run. However, German universities now score higher on international rankings and more and more universities now offer English programs. Furthermore, more adults now receive tertiary education and the unemployment rate has dropped as well. Nevertheless, one cannot assume that these trends can all be connected to the increase in investment in education. These trends most likely have many other reasons that go beyond the scope of this paper.
Another concept that Babbie (2007) discusses in his book is the nomothetic type of explanation. This way of explaining suggests that one describes a few factors that have an effect on an event. It is an economical way of explaining how things work. When examining Germany’s way of coping with the economic crisis, one can seek to explain it nomothetically by mentioning only a few reasons why Germany decided to raise its spending on education. As already mentioned, this would be that Germany, for instance, views investments in education as an investment in human capital and workforce.
4. Comparison and Conclusion
The USA and Germany have faced the 2007/08 financial crisis in entirely different ways. The United States decided to choose a short-run solution in cutting some budget areas like the budget for higher education instead of increasing the taxes when Germany kept investing large amounts of money in tertiary education. The USA has decreased the budget of the tertiary education by 28 percent. The approach of the US is a suitable solution in the short-run, however, in a long-run the American population is going to be less educated which could have negative consequences for their economy and could result in a new crisis.
Based on these examples it can be said that investing in education is a suitable long-run solution during a crisis. Indeed, Germany has understood that education is a beneficial investment because the educated population generates more money for the government through its work. It has already been proven; Germany has decreased its unemployment rate by 1.4 percent between 2007 and 2010. In contrast, the US, which have not been investing in the education during the crisis, have known a massive increase of the unemployed population by 5 percent. For this reason, it is important to invest in education, although, the government also needs to invest in other areas, otherwise, the educated population will be useless as they are not able find a job where they could apply their knowledge and talent. In conclusion, based on the available knowledge, it can be said that it is smart to invest in education during a crisis, because today’s students are tomorrow's workers and an educated population is the most precious resource a country can have because it generates a significant share of the tax revenues for the government.