Two Strikes, One Time Up

by Jane S. Shaw

When it comes to analyzing higher education, New York Times columnist Robert Frank needs a fact-checker. While his overall point that schools are constantly competing for prestige is correct, he makes a big understatement. He says that the federal government’s annual subsidies to higher education “exceed $30 billion.” Thirty billion? Pell grants alone are up to $36 billion. Add to that billions of dollars in research grants and you start to arrive at real money.

And then he pulls out that old canard, William Baumol’s cost-disease theory. Baumol’s 1967 explanation of why costs go up in service industries (it takes just as many people, and just as much time, to play a Beethoven string quartet now as it did 100 years ago) is largely irrelevant in higher education. In 1980, H. R. Bowen introduced a much better theory, the revenue-to-cost hypothesis, which is discussed in some detail in a paper by Robert E. Martin, “The Revenue-to-Cost Spiral.”