Magazine | October 5, 2009, Issue

Costly Lessons

(Roman Genn)
How traditional universities rip students off

In a typical year over the past generation, the cost of attending college has risen at about double the rate of inflation. Family incomes have not kept pace. And despite huge increases in federal financial assistance, the proportion of lower-income Americans in the college population has actually declined over the past 30 years.

The other sector that has seen comparable inflation over the past generation is health care, and this is no accident. In both sectors, government intervention largely neuters the ability of markets to allocate resources efficiently, by establishing third parties (neither consumers nor producers) that pay many of the bills. When that happens, the consumer is not very sensitive to prices, and consumes wastefully. For these and other reasons, a good argument can made that we are overinvested, or at least mal-invested, in higher education.

Compounding the problem, over 90 percent of American higher education is nonprofit. Nonprofit institutions lack incentives to be efficient. The officers of for-profit entities work hard to do two things: increase revenues and reduce costs. But there is no well-defined bottom line in nonprofit higher education. Is Yale having a good year in 2009? Who knows?

For-profit corporations compete to win new customers and despair when they lose market share. But in the U.S. News & World Report rankings, higher scores come from turning customers away — in the form of a lower acceptance rate. Supply therefore tends to be rigid and unresponsive to demand at many of the nation’s best-known colleges and universities. Moreover, with third parties paying part or all of the bills (via government and private “scholarships,” subsidized loans, and subsidies of institutions), schools can often raise fees without dire financial or academic consequences. In particular, they sock it to more affluent customers — whose financial condition they know in exquisite detail, thanks to the Free Application for Federal Student Aid, which requires a level of disclosure unique in American consumer life.

The supply of educational institutions is itself rigid. Accreditation organizations have restricted the ability of innovative education entrepreneurs to enter the market. The for-profit higher-education sector costs less and, perhaps ironically, disproportionately serves the low-income, first-generation university students whom premier universities have largely abandoned.

In addition, perverse incentives for administrators and students often increase costs. It is often ambiguous who actually runs the school — the university trustees? Top administrators? Faculty? Students? The alumni and major donors? Tenured faculty and their deans usually control the curriculum and can make life miserable for university presidents. The presidents, to buy peace, give the faculty nice salaries and benefits, light teaching loads, and good parking, and maintain low-demand academic programs that should be axed. Students are given fancy country-club-like facilities in which to live and play, and a curriculum of decreasing rigor (average GPAs on a four-point scale have risen from about 2.5 to around 3.1 or 3.2 over the past 50 years), as well as the opportunity to lead lives focused on partying, booze, and sex. The alumni’s favorite collegiate entertainments, typically sporting events, are heavily subsidized. In short, everyone who is part of the “shared governance” of universities is paid off. To make things worse, decisions are often made by committee in a costly, bureaucratic fashion.

Allow me to offer a personal anecdote of university inefficiency at work. In a weak moment a quarter of a century ago, I agreed to be a department chairman. I conned my dean into letting me hire a new faculty member, meaning that 17 people now did what 16 had done before. In other words, the department’s productivity fell — yet I was nicely rewarded for my efforts, since my compensation was based partly on peer evaluations and my colleagues were grateful to have less work. (In what other business do employees have partial control over their boss’s salary, and even a say in who their boss is?) 

Universities do little to measure what students learn, and it is hard to assess the value of their research, so good estimates of academic productivity are hard to come by. Nonetheless, under almost any reasonable assumptions, it is lower than it was 40 years ago — and it is certainly not higher. Yet over the past 30 years or so, the number of non-instructional university employees, adjusted for changing enrollment, has roughly doubled. My university has a sustainability coordinator, a recycling coordinator, and umpteen diversity and public-relations specialists — almost none of whose posts existed when I began teaching. How much do they improve the instructional and research programs? Not at all.

Speaking of research, much of it achieves only trivial refinements of insignificant issues, and is produced for a nearly nonexistent audience. Jeff Sandefer of the Acton School of Business estimates that an academic-journal article costs on average $50,000 — and is read by 200 people. That’s $250 per reader. Mark Bauerlein of Emory University notes that over 22,000 articles about the works of Shakespeare have appeared since 1980. Are there that many new and insightful thoughts to be had about the Bard? Have not diminishing returns set in — for this topic and many others? 

More generally, statistical analysis from the Center for College Affordability and Productivity suggests that the correlation between economic growth and state-government appropriations for higher education is negative — i.e., resources are taken from the highly productive for-profit sector and reallocated to relatively inefficient universities, retarding growth. As the late Milton Friedman said to me a few years before he died, perhaps he was wrong in his early writings, and instead of subsidizing higher education we should tax it.

The solutions? Reduce, do not increase, the federal student-loan programs that have raised both demand and prices. Give money directly to students, rather than to institutions, and restrict aid programs to those who are truly needy and perform well (40 percent of students do not graduate within six years; support should be cut off after four years of full-time undergraduate study). Substitute a system of good consumer information for most of the current accreditation process, which stifles competition. Make it easier for students to transfer between institutions, and favor lower-cost community colleges that are not as afflicted with the ailments described above. Develop non-university programs for certifying vocational competence — for example, tests similar to the CPA examination. 

More radically, a strong case can be made that higher education is a truly private good, that the positive spillover effects of universities are vastly overrated or even nonexistent, and that government should get out of higher education altogether. 

In short, we should implement roughly the opposite of the strategy favored by policymakers in Washington and most of our states. 

– Mr. Vedder directs the Center for College Affordability and Productivity, is an adjunct scholar at the American Enterprise Institute, and teaches economics at Ohio University.


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