The government reallocates resources through both fiscal and monetary policy. Expansion of production in areas stimulated by fiscal expenditures are not self reversing as the production in areas stimulated by monetary inflation are. For example, the build up of public education, funded through taxes and expenditures of the state, is sustainable as long as the budget is intact. (Of course, the state’s budget deteriorates during the bust and some cutbacks may occur in public education, but it’s not like liquidation in the private sector.)
Higher education is partly funded through budgets and partly through private credit. So, the build up in higher education over the years has not been purely through credit expansion. But, the build up of higher education was much more rapid from 2000-2010 than it was from 1990-2000.
Some of this expansion in enrollment has been financed by credit and a growing portion has been by private credit. In assessing the prospects for the future it’s one must also keep in mind that some downsizing at universities after the financial collapse because of budget cutbacks and declines in university endowments has already been done. And, the credit financing of higher education has been steadily rising, not spiking in the last few years:
If there is a bubble that will pop, it will likely happen upon the recognition by potential borrowers that “investment” in higher education will not pay off. If their withdrawal from higher education is significant, it will force some institutions into bankruptcy. For them to liquidate their campuses, the prices of their assets will have to collapse. Construction will be affected. Lots of highly paid administrators and tenured faculty will have to take big pay cuts.
Given the state’s desire to have a kept intellectual class, I think it less likely it will sit by and watch a significant collapse of higher education than some private industry.