September 07, 2003

Ronald Ehrenberg, Tuition Rising

The Invisible Adjunct finds another book I have to add to my to-read pile:

Invisible Adjunct: Why are Tuition Costs Rising?: I've just come across Ronald G. Ehrenberg's Tuition Rising: Why College Costs So Much. Though I haven't yet read the book, I'm intrigued by the following description:

America's elite colleges and universities are the best in the world. They are also the most expensive, with tuition rising faster than the rate of inflation over the past thirty years and no indication that this trend will abate. Ronald G. Ehrenberg explores the causes of this tuition inflation, drawing on his many years as a teacher and researcher of the economics of higher education and as a senior administrator at Cornell University. Using incidents and examples from his own experience, he discusses a wide range of topics, including endowment policies, admissions and financial aid policies, the funding of research, tenure and the end of mandatory retirement, information technology, libraries and distance learning, student housing, and intercollegiate athletics. He shows that elite colleges and universities, having multiple, relatively independent constituencies, suffer from ineffective central control of their costs. And in a fascinating analysis of their response to the ratings published by magazines such as U.S. News & World Report, he shows how they engage in a dysfunctional competition for students. In the short run, these colleges and universities have little need to worry about rising tuition, since the number of qualified students applying for entrance is rising even faster. But in the long run, it is not at all clear that the increases can be sustained.

So what do you think? Why are tuition costs rising and what, if anything, can be done about it? Comments, questions, criticisms, hard-nosed analysis, half-baked ideas, moderate reformist agendas, radical programmes, utopian flights of fancy, rhetorical sleight of hand...The floor is open for discussion.

Posted by DeLong at September 7, 2003 09:51 PM | TrackBack

Comments

Invest more in expanding our public universities.

Posted by: Mike on September 7, 2003 11:32 PM

Universities have claimed that one of the causes of high tuitions was the high salaries they had to pay to teachers (!) in certain fields. I speak of Computer Science, where recently the Universities had been saying they had to pay over $100,000 per year to compete with Silicon Valley and the Tech Revolution.

So, now that unemployment haunts the Valley, have the salaries of the professors gone down? And, if those salaries have gone down, have the tuition rates followed?

Inquiring minds want to know.

A confounding factor may be found in the undulations of demand for the product, subject to the same economic forces as the professors. Now that unemployment is the reward for a degree in CS, I've heard that enrollment in the CS undergrad courses is down considerably. I've also heard that the number of students applying is down, but that the class size stays the same.

With jobs going to India the demand for degress has diminished.

Has anybody been reliably tracking the relationship between the tech economy and these factors and tech tuitions?

Posted by: Warren on September 7, 2003 11:43 PM

I think tuition has been rising at something like twice the rate of the CPI. I donít know why, and Iím still numb from having paid the freight for 4 years at Dartmouth and 6 years at a private middle and high school. Now sheís a first year student at a well-known law school, but sheís paying the freight now. Both Dartmouth and that private school (near you Brad) are now much more expensive. Shockingly more, and still going up.

Dartmouth is so rich it really doesnít have to charge tuition; at least a few years ago they could have financed all their undergraduates off the returns from their investments. I think part of the problem is an expanding bureaucracy; itís a sobering fact that the British ran the whole Raj with fewer administrators than Stanford uses to run one university.

Looking back, I think dollar for dollar, the private school was a better buy than Dartmouth in terms of knowledge gained, but thatís a personal opinion. I think the college system is a very inefficient way to impart knowledge to people, and one day itís going to be obsolete.

Posted by: A. Zarkov on September 7, 2003 11:44 PM

Having also not read Ehrenberg's book, the description makes it sound like a supply-side treatment. Fair enough, but some attention to the demand side seems useful, as well.

Just a guess. There is high demand (low price elasticity) for education that will turn out graduates at the front of the line for whatever comes next (secondary school, college, job)? If you want your kid to have the advantages of the people just ahead of you in line for power and income, you cough up more than the other folks at your level of income and aspiration, in hopes of "pre-positioning" your offspring for success. In recent years, there has been plenty of cash for the educated classes to spend on locking in advantages for thier progeny. It may also be that, with less cash slopping around among the educated classes now, fear of an less pleasant future means even greater willingness to spend to secure that future for our young loved ones.

Posted by: K Harris on September 8, 2003 05:03 AM

Marginal cost is way above average cost. I remember the President of Swarthmore a few years ago saying that the average tuition was $10,000. I was surprised that my daughter received a small scholarship from Muhlenberg--it was like a store giving you a coupon when you weren't expecting it. I get the feeling that college tuition is like list price on a car--nobody pays that price.

So, the first step is to figure out exactly how fast costs are really going up. If you just use the list price, you may not be getting the right answer.

But let's assume that costs in fact have been rising a lot. I just had a discussion about this with Bernie Saffran, of Swarthmore College. Some hypotheses:

1) He says that we now need a Dean for all sorts of groups: all three genders (his line), every ethnic group, and various combinations. In general, a lot more labor is going into student services, like counseling, relative to teaching.

2) Parents and students now expect college life to be upper-middle-class. Instead of serving liver and onions for dinner, colleges must offer food courts.

3) I think that for an information-based business, universities are incredibly obsessed with physical plant. Swarthmore has a huge auditorium for large lectures--even though there are no large-lecture classes! The University of Maryland's performing arts center is competitive with the Kennedy Center. And don't get me started on the new football and basketball arenas.

4) Diseconomies of scope. As human knowledge expands, you need to cover more and more areas. Who needed a computer science department 30 years ago? Who doesn't need one today? Bernie says that diseconomies of scope are killing off small colleges. With an enrollment of a few thousand students, you need predictable demand for courses, and you just can't get that any more. My guess is that diseconomies of scope are a problem even at large universities, because every department requires administrative overhead, and co-ordination across departments becomes harder.

Posted by: Arnold Kling on September 8, 2003 05:43 AM

Isn't this at least partly related to what Baumol
called the cause disease of the service sector?
Wage changes are related to productivity changes
and to price changes. How do you make education and health care more productive on an ongoing basis? Professors have become "more productive"
by having adjuncts teach more courses while keeping adjunct pay flat...If professors and administrators don't receive real wage increases
relative to the economy wide inflation rate, they'll bolt from academia. Thus tuition tends
to rise at a rate fasster than the economy wide inflation rate.

Posted by: malcolm on September 8, 2003 06:18 AM

It's been a long time since I took econ (Walras and Pareto were Wild and Crazy Guys then), but I'm with K Harris on this one: the story here is on the demand side. A successful trip through higher ed in the US is still one of the best investments most people can make. For every Gatesian drop-out, there are a million guys who were transformed from dockworker to overpaid internet puke just by getting a BA from a decent school. (Heck, it worked for me.) If the demand for matriculation from schools in the (say) top few deciles outstrips supply, you don't need Jevons to explain why tuition is rising faster than prices for other goods.

Posted by: consigliere on September 8, 2003 06:39 AM

It seems fairly simple to me. When you have a child that is accepted at a university, the university interviews you for financial aid. You report to them whatever non-retirement savings you have. The university then calculates your financial aid as whatever amount is necessary to bring their tuition down to reasonable levels for you, after taking all your savings. Since the government provides the financial aid, the university has every motive to set tuition levels as high as possible; it leads directly to higher transfers from the government to the university, and parents of students don't complain because no one pays the full tuition rate anyway.

I've put my savings into retirement vehicles to protect them from some university down the line, carefully avoided investing in any of the education investment vehicles, and a year or two before the interview plan to put all my remaining savings into paying off my mortgage. That way, it will be immaterial what the tuition that the university charges will be; the government will pay almost all of it.

Posted by: Rich Puchalsky on September 8, 2003 06:48 AM

My daughter recently graduated from a college where the tuition was around $24K per year. As a reward for my spending about $250 worth of my time in filling out detailed forms, the college awarded my daughter a scholarship worth about $1.5K per year. I then donated $1K per year to the college (giving me a $1K tax deduction), and my employer matched the $1K donation.

Even without any direct government monetary involvement, the college was $0.5K better off and I was better off by $0.5K plus the value of my tax deduction. If my daughter's scholarship had been for $6K instead of $1.5K, the college and I could have played the same game for 4 times as much money.

Posted by: MurryMom on September 8, 2003 07:13 AM

One reason college costs increase is because of a failure to increase output (# of students) per university worker. Other sectors of the economy have increased in productivity, but universities and other sectors that are labor intensive must compensate by raising prices. Unless a way is found to instruct more students with fewer faculty or provide services with fewer workers, cost will continue to increase above inflation. It is undesireable to have large impersonal lectures, classes taught by grad students, etc. Since salaries must keep pace with the rest of the economy, the costs must increase.

Posted by: bakho on September 8, 2003 08:05 AM

Rich Puchalsky -- the childless aunt of a girl I know set up a special account for her niece the day she was born and religiously put money into it for 18 years. The account was in her niece's name, and as a result, it was deducted from the financial aid offer. The aunt was just sick.

Posted by: zizka on September 8, 2003 08:38 AM

Rich Puchalsky -- the childless aunt of a girl I know set up a special account for her niece the day she was born and religiously put money into it for 18 years. The account was in her niece's name, and as a result, it was deducted from the financial aid offer. The aunt was just sick.

Posted by: zizka on September 8, 2003 08:41 AM

I would assume the answer to this question partly relies on a thorough accounting of costs.

There are many more inputs and outputs than just tuition and bachelor degrees. There's direct aid from the state for public schools, indirect aid in the form of (usually federal) research grants for all schools, research itself as an output, and so forth.

Posted by: Stephen J Fromm on September 8, 2003 09:30 AM

"One reason college costs increase is because of a failure to increase output (# of students) per university worker."

I'd think productivity would be measured in the level of education provided to students per dollar, not the number of students a professor can educate in a time period.

I'm going with a combo of Rich & Katherine's.

Posted by: Jason McCullough on September 8, 2003 09:39 AM

I think the key factors have been identified by posters here:

1. a private college education is a positional good, and a valuable one. In a society where, as Franks has documented, 'winner takes all', as a responsible parent you send your child to a good college, which will lead to good internships at investment banks or McKinsey, entry into good professional schools etc. etc. This is presumably exactly the calculation the Bush family made with GWB, and it has paid off in spades!

2. the cost of education increases with real wages for university employees, unless there are improvements in productivity. To the extent that distance and computer-based learning has infiltrated the university sector (take a look at the offerings of the Open University in the UK or Canada's Athabaska University: the former awards about 1/4 of the MBAs in the UK) then there have been productivity improvements. But, largely, class sizes and methods are similar to what they were 30 years ago.

Universities, due to tenure, also suffer from age tilting in their staff. They have fought back: a substantial fraction of liberal arts teaching is now by non-tenure tract contract academics, and much science and social science teaching by graduate students (often non-American).

The crunch will come when university tuition reaches the point of unaffordability. It has been a general trend in American life the last 20 or so years that the top 10% of income earners or so have enjoyed higher income and higher wealth, and so far their appetite for this important positional good has not diminished. Affordability is not likely to become an issue in a hurry, for those colleges which remain in the 'top 100' rankings.

By contrast, in the UK, the entirely state run (and largely state-funded: tuition is capped at about £1500 for domestic undergraduate students) sector has more than doubled its student body in 15 years, with only small increases in real resources.

The result is a system creaking at the seams: class sizes have doubled, many departments have been closed, many academics have early retired, citing increased work loads. Even Oxford and Cambridge, which have substantial private resources (typically property the individual colleges have owned since the 17th century, plus large corporate donations associated with world-class scientific research) and are arguably 2 of the best universities in the world, complain of financial pressure.

The government has introduced a plan to increase tuition fees to ?£3000 (ie USD 5k pa for a 3 year degree) but is facing a revolt in Parliament over the measure.

Posted by: John on September 8, 2003 09:39 AM

"One reason college costs increase is because of a failure to increase output (# of students) per university worker."

I'd think productivity would be measured in the level of education provided to students per dollar, not the number of students a professor can educate in a time period.

I'm going with a combo of Rich & Katherine's.

Posted by: Jason McCullough on September 8, 2003 09:41 AM

Isn't it just supply and demand? Harvard has a monopoly on the issuance of Harvard degrees. Others can and probably do offer education of comparable quality; as long as a Harvard degree is perceived as more valuable and prestigious than other degrees, the demand for them is certain to grow regardless of how they are priced.

If this is the main factor, then tuitions at the top prestige schools (Ivys, Standford, Chicago, etc) should be rising a lot faster than tuition at the middle of the road schools, which I believe is the case.

Posted by: Alex on September 8, 2003 10:14 AM

I recall that in my Law School days in the mid 80's, they said nearly 50% of the students received financial aid. As a result, the incremental amount of any increase in tuition paid by those students was near zero. Their failure to pay the incremental cost led to costs rising twice as fast for the students who were not receiving financial aid. As a result, we should expect this to continue indefinitely.

I also recall a series of opinion pieces in the college newspaper, where some argued that the college should seek more students who would not receive financial aid so that tuition increases would be smaller. The counter-argument that it would prevent people who were not born rich from attending struck me as the better argument.

Posted by: Dantheman on September 8, 2003 10:29 AM

As long as we are on the subject of educational costs, remind me again. What is the purpose of a university?

Posted by: K Harris on September 8, 2003 11:36 AM

I think the following make the most sense as factors that have inflated costs:

1. Administrative expansion. Almost every university has expanded its administrative staff (relatie to the size of the student body). Some of this results from the need to comply with federal mandates (e.g., in student aid).

2. Lack of adequate controls on costs. This results, I think, from lack of knowledge of what costs are. How many universities can tell you, with any degree of accuracy, what the cost of a student credit hour is, by course of program? I know mine can't, and does not seem interested in finding out. If you don't know which programs cost what, it's hard to determine whether your costs are in line.

3. Changes in technology that have not been cost-reducing. Oddly enough, I'm thinking here about technology. When I was an undergraduate (35 years ago), only the sciences and (to a lesser extent) the fine and performing arts had much of a budget for equipment. Now, business schools have huge technology budgets and even the humanities. And these costs are not really capital costs, because the changes in technology lead to on-going upgrade expenses. I firmly believe that this technology has enhanced the quality of higher education, but tuition is per student, not per-unit-of-quality (and, in any event, we don't measure the quality of the product all that well, either).

4. Baumol's cost-disease argument. Rising real wages coupled with constant (of falling, at many schools, as they attempt to compete with their rivals) student/faculty ratios lead to rising real costs per student.

One must, as well, couple all this with the increased demand for higher education, as the earnings bonus for higher ed has increased. If the marginal costs of providing higher education are rising in enrollment, then the increased demand will cause higher tuitions as well.

Note as well, as some other posters have pointed o ut, that the "list price" is not exactly the "realized price," as more and more students at more and more institutions receive some form of financial aid. At some private colleges, the actual tuition revenues may be as little as half the stated tuition.

Finally, if we really want to talk about a case of rising prices, someone ought to talk about textbooks, which have increased in price at an even faster rate than the increases in tuition.

Posted by: Donald A. Coffin on September 8, 2003 11:49 AM

The purpose of almost every university is to aggregate young single people into a small geographic area. The economies of scale in finding good parties and cool friends, is like, really big.

Posted by: boban on September 8, 2003 12:02 PM

I'm with John, and particularly with Arnold.

It seems we're headed toward university education offerings all along the demand curve. That's already happening at K-12, with every option offered from home schooling to traditional big public schools. That's probably good price news for the biggest private brands, but may require others to reinvent.

There may be continued high demand for state residential universities (until the Republicans mandate right wing faculty quotas, as they're trying to do in Colorado now ... but that's another topic), as more and more kids graduate from socially-narrow K-12 experiences. The value of mixing it up with lots of diverse kids will go up, regardless of the quality of the education.

But I can equally imagine non-residential colleges/junior colleges corroded by low-cost distant learning options.

Posted by: JB on September 8, 2003 12:04 PM

I'm with John, and particularly with Arnold.

It seems we're headed toward university education offerings all along the demand curve. That's already happening at K-12, with every option offered from home schooling to traditional big public schools. That's probably good price news for the biggest private brands, but may require others to reinvent.

There may be continued high demand for state residential universities (until the Republicans mandate right wing faculty quotas, as they're trying to do in Colorado now ... but that's another topic), as more and more kids graduate from socially-narrow K-12 experiences. The value of mixing it up with lots of diverse kids will go up, regardless of the quality of the education.

But I can equally imagine non-residential colleges/junior colleges corroded by low-cost distant learning options.

Posted by: JB on September 8, 2003 12:05 PM

I'm with John, and particularly with Arnold.

It seems we're headed toward university education offerings all along the demand curve. That's already happening at K-12, with every option offered from home schooling to traditional big public schools. That's probably good price news for the biggest private brands, but may require others to reinvent.

There may be continued high demand for state residential universities (until the Republicans mandate right wing faculty quotas, as they're trying to do in Colorado now ... but that's another topic), as more and more kids graduate from socially-narrow K-12 experiences. The value of mixing it up with lots of diverse kids will go up, regardless of the quality of the education.

But I can equally imagine non-residential colleges/junior colleges corroded by low-cost distant learning options.

Posted by: JB on September 8, 2003 12:05 PM

I'm with John, and particularly with Arnold.

It seems we're headed toward university education offerings all along the demand curve. That's already happening at K-12, with every option offered from home schooling to traditional big public schools. That's probably good price news for the biggest private brands, but may require others to reinvent.

There may be continued high demand for state residential universities (until the Republicans mandate right wing faculty quotas, as they're trying to do in Colorado now ... but that's another topic), as more and more kids graduate from socially-narrow K-12 experiences. The value of mixing it up with lots of diverse kids will go up, regardless of the quality of the education.

But I can equally imagine non-residential colleges/junior colleges corroded by low-cost distant learning options.

Posted by: JB on September 8, 2003 12:06 PM

I'm with John, and particularly with Arnold.

It seems we're headed toward university education offerings all along the demand curve. That's already happening at K-12, with every option offered from home schooling to traditional big public schools. That's probably good price news for the biggest private brands, but may require others to reinvent.

There may be continued high demand for state residential universities (until the Republicans mandate right wing faculty quotas, as they're trying to do in Colorado now ... but that's another topic), as more and more kids graduate from socially-narrow K-12 experiences. The value of mixing it up with lots of diverse kids will go up, regardless of the quality of the education.

But I can equally imagine non-residential colleges/junior colleges corroded by low-cost distant learning options.

Posted by: JB on September 8, 2003 12:09 PM

I've always assumed that part of the explanation is that the universities compete for students by offering more amenities. Its the parent who pay the bills.

Posted by: sash on September 8, 2003 12:28 PM

I read an article about a decade ago (in the now defunct New England Monthly, IIRC) that I thought hit the nail on the head here. It attributed the runaway costs at elite colleges to what some economists call the "Chivas Regal" effect, which occurs when raising the price of a good or service actually increases demand for it.

Two factors must be in play to get the Chivas Regal effect: it must be difficult to discern the true value of what is being sold, and there must be a certain snob effect to it. Both of these certainly apply to elite colleges. Prospective customers use the price as the chief indicator of quality.

The article had several examples, but I remember in particular the experiences of Swarthmore and Smith. Swarthmore used to price itself a cut below the Ivies. Then they started ramping up tuition closer and closer to the Ivies. Each time they did so, both their applications and their enroll rate from acceptances increased, and they pretty quickly got to parity with the Ivies.

Smith once tried the opposite, cutting tuition to make themselves more affordable, and both applications and enroll rate immediately dropped. Also, the required tighter budget enraged faculty and staff. They quickly raised tuitiobn again and got back to normal.

If you were a college president, what would you do?

Posted by: Curt Wilson on September 8, 2003 12:39 PM

The poster above who mentions the UK misses the big point about why UK HE price per student has actually fallen: UK academic salaries are down by >40% since 1979. US academic salaries are, um, not.

Posted by: Nasi Lemak on September 8, 2003 05:23 PM

curt wilson:
the "chivas regal" effect is actually known as the giffen effect, after tha 19th century neo-classical british economist who first thought of it: when supply increases, price increases. yes, clearly he was thinking of consumption of luxury and fashionable goods.

Posted by: john c. halasz on September 8, 2003 06:25 PM

The Chivas Regal effect is evidence for the conclusion that one of the main products universities offer is class (rather than classes). Perhaps eventually you'll have these merger universities, with Harvard and B.U. students taking exactly the same classes, but with different logos on the accreditation depending on how much tuition was paid.

Trying to figure out "The Goal of College Education" is a hopeless task. Different people do it for different reasons. (Conclusion: "College education is a social institution". Social institutions don't need reasons.) Trying to figure out who buys the goods and who ends up receiving them is also very hard.

Posted by: zizka on September 8, 2003 06:32 PM

Um, as far as I know Giffen was thinking of subsistence consumption. With a Giffen good, the income effect of a price change dominates to such extent over substitution effect that as price rises net result on quantity demanded is that it goes up.

Standard example is that of potatoes and very
nice steak. Price of potatoes goes up.
Substitution effect says you should switch away
from potatoes to steak. But the income effect says that now overall you're poorer and can't afford steak at all - hence you end up eating
a lot more spuds.

One implication is that if a good is Giffen
it must be inferior (in the standard economic
sense). So unless you think education at top
schools is an inferior good I don't think the Giffen effect is at work in the topic under discussion.

The Chivas Regal effect seems to be something else - based on informational assymetry and snob quality, though I don't know much about it.

Anyway, a Giffen good is like a Yeti. Some have
claimed to have found them in the real world, but
no one has proved that they really exist.

Radek

Posted by: radek on September 8, 2003 07:03 PM

Consider the underlying myths of university economics, and the odd shape of the actual "market."

1) For universities, cost is always greater than price. (Tuition typically covers << 1/2 the cost.)
2) For students, cost (not room and board, but foregone opportunity) is always greater than price.
2A) Price does not clear either side of the market.
3) Students are an odd sort of "customer" -- not only are they are a major input for "production", but much of what they seem to pay actually comes from 3rd parties (gov't and institutional subsidies).
4) Financial aid works like a crude income tax stacked on top of the regular one. For every additional dollar of income in the range $50K - $150K, the expected family contribution goes up, and financial aid goes down, by @ 30 cents. The result is an effective marginal rate (Fed, state, fica and school aid phaseout) as high as 70% on income of family with child in college.

Posted by: gwailo on September 8, 2003 09:47 PM

Curious the comment by Nisak that UK academic salaries have fallen by 40%?

I assume he does not mean in nominal terms ;-).

Does he mean in real terms? I seriously doubt the fall (adjusted for seniority) has been anything like that: AFAIK academic salaries have,
broadly, been indexed to RPI.

Perhaps he means in relative terms? *This* is absolutely true. Real wages have risen by something like 60% since 1980, but not the real wages of academics (although there would be seniority effects) by anything like as much. This was true of public servants in general in the UK since 1980.

I still believe a major source of the increase in UK tertiary educational sector productivity has been the increase in student: teacher ratios, a doubling of student numbers since the late 1980s, with a very much smaller increase in real resources, and a consequent halving in the real spending per student.

Posted by: john on September 9, 2003 02:34 AM

I'd like to deny his major. I don't think tuition levels have much relationship to costs. For private schools which practice need-blind admissions, award financial aid solely on need and meet full need (which is most of the household names), students pay what the college determines, after inspection of their finances, they can afford. A raise in nominal tuition doesn't result in anywhere near a concomitant increase in revenue, so can't be cost-driven. Public schools' tuition is set by state politics.

My sense is that provosts and deans by and large do a fairly good (if distributed) job of routine cost containment. This leads to a lot of penny-pinching practices, relying on the ready availability of cheap student labor: labs routinely make rather than buy, for example. But avoids crisis.

The recent examples of "drastic" cuts at, for example, the University of Nebraska at Lincoln are relatively trivial compared to the sort of carnage that results when a real cost-cutter (Chainsaw Al, anyone) is let loose in a corporation.

Posted by: jam on September 9, 2003 06:22 AM

Wild idea - gov't provides a tax loan. Anybody who attends college can get a loan, for as much as needed. After graduation (or 4/5/ ?? years), half (80, 90%?) of their income tax goes to pay off their loan. PLUS they pay a 5% surtax on the amount over poverty level income (~12k?), and another 5% on the amount over average (~30k?). The surtaxes continue until the loan plus interest (at US unpaid tax rates) is repaid. A LONG time, for expensive schools.

The point is to enable poor folk to go to expensive schools AND to have an incentive to save money. When Harvard or Stanford is much below the 10x applicants for each slot, down around 5 or 3x, only then will there be real pressure to lower tuitions.

Note also this is gov't program that emulates a private solution. The user/beneficiary is using "their own" money, not other people's. This is necessary for cost control action and attention.

Posted by: Tom Grey on September 10, 2003 07:26 AM
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