Tag: college cost

Higher Education Subsidies Wasted

A study from the American Institutes of Research finds that federal and state governments have wasted billions of dollars on subsidies for students who didn’t make it past their first year in college. The federal total for first-year college drop outs was $1.5 billion from 2003 to 2008.

Due to data limitations, the figures are only for first year, full-time students at four-year colleges and universities. Community colleges have even higher drop-out rates, and part-time students or students returning to college are more likely to drop out. Therefore, the numbers in the report are “only a fraction of the total costs of first-year attrition the nation and the states face.” Moreover, it doesn’t include the cost for students who drop out some time after their sophomore year.

Federal policymakers from both parties are fond of lavishing subsidies on college students. Proponents argue that without federal subsidies, an insufficient number of future workers will possess the skills necessary to compete in a global economy.

However, a Cato essay on federal higher education subsidies argues that students wishing to attend college already have plenty of incentive to save or borrow from private sources:

Supporters of student aid subsidies argue that higher education is a “public good” that would be underprovided in a free market. However, that is probably not the case. People have a strong incentive to invest in their own education because it will lead to higher earnings. Those with a college degree will earn, on average, 75 percent more during their lifetime than those with just high-school degrees. That is a big incentive for people to save or borrow in private markets to pay for their own college costs. There is no “market failure” here.

In fact, higher education subsidies drive up tuition prices:

It is matter of supply and demand. More and more Americans have sought a college education, which has pushed prices higher. Ordinarily, such upward pressure would be restrained by consumers’ willingness and ability to pay, but as government subsidies have helped absorb tuition increases, the public’s budget constraint has been lifted. Peter Wood, a professor at Boston University noted that federal subsidies “are seen by colleges and universities as money that is there for the taking … tuition is set high enough to capture those funds and whatever else we think can be extracted from parents.”

But isn’t it great that Uncle Sam is helping put more young folks in college? Not necessarily:

Many of those additional students may not have been ready, or suited, for college. As evidenced by the rising shares of college students who require remedial work. Further evidence of the problem is that institutions have lowered their standards to adapt to the rise in second-rate students. The American Academy of Arts and Sciences reported that from the mid-1960s to the mid-1990s, college grade point averages grew steadily but Scholastic Aptitude Test scores declined. The share of entering college students who complete degrees has also fallen over the decades. In addition, while college attendance is up, overall adult literacy has barely budged over the last 15 years.

The essay also notes that college students devote 3.2 hours to education on an average weekday, versus 3.9 hours to “leisure and sports,” and that the six-year graduation rate for bachelor’s students is only about 56 percent, indicating that many students are not very serious about education.

Just as housing subsidies incentivized people to purchase homes that they otherwise shouldn’t have, higher education subsidies have incentivized people to go to college who weren’t ready or suited for it. In both cases, the cost to taxpayers has been substantial while the alleged benefits have proven illusory.

Lots of Higher Ed Stuff

Probably because it’s back-to-school time, there are lots of interesting higher education related items worth checking out today. Here are a few:

  1. I have a new op-ed on the Student Aid and Fiscal Responsbility Act, the bill that we’re told will save taxpayer money but will almost certainly cost us tens of billions. Meanwhile, the Associated Press published a big article on “spin” about the legislation that ignores supporters’ extremely dubious assertions about SAFRA’s true costs – the AP repeats the supposed savings line without question – but instead focuses on whether Pell Grant increases will be as large as some people hope .
  2. Over at the Pope Center for Higher Education Policy, they’re running a three-part series that’s really a lengthy email exchange among numerous experts, including myself, on controlling college costs. The central question is whether more government “transparency” requirements hold the key to containing skyrocketing college prices, or whether what we really need is to cut third-party payments. I think I’ve made it clear where I stand, but if you’re not sure (or even for some reason want other opinions) definitely take in the Pope series. Also, mark your calendars for a debate we’ll be having on this subject right here at Cato on October 6!
  3. William McGurn has an excellent commentary in the Wall Street Journal explaining that – shocker! – you can make a very good living without getting a college degree.
  4. I haven’t read it yet but have seen a summary, and if the summary is accurate a new paper from the National Bureau of Economic Research shows that colleges and universities contribute no more to their local economies than “other forms of economic activity.” This puts another serious hole in the highly suspect argument that more public money for higher education is good because enriching colleges is better for everyone.

And that’s the ivy-ensconsed news for today!

Wait! How’d I Get in This Invisible Box Again?

Kevin Carey has posted his response to my reply to him, and apparently he just won’t take it from a libertarian that we libertarians see no dilemma in the college-cost problem. At least, he can’t see how libertarians could “think seriously about restraining college costs” and still come to the conclusion that the best way to cut government spending on higher education is to, well, cut government spending. He still insists that the only way to “bend down the long-term higher education cost curve and thus reduce government spending is to increase government regulation.”

The mime who is boxing libertarians in must be one powerful illusionist, because Carey just can’t seem to not see a real box. But reading Carey’s post makes clear why this is: He wants desperately to believe that we must spend more on higher education, and that regulation is all that will work to keep colleges’ excesses under control.

What makes me say this? For one thing, Carey for all intents and purposes admits the spending part:

Just to be clear: I’d like to spend more public money on higher education, not less, albeit in a way that’s substantially more performance-sensitive and directed toward institutions that serve academically and economically at-risk students.

What about his obsession with regulation? Well, the whole point of his argument is that we must regulate higher ed more. Perhaps just as telling, though, is that he offers nothing to refute – or even acknowledge – what I wrote about government failure and the huge inefficiencies of regulation in my previous reply. You know, the hugely important cost side of the regulation ledger that most people whose first response to a problem is “regulate” typically ignore.

But let’s get to what Carey does offer in substantive response to my critiques, namely my argument that market forces, not regulation, best provide the information consumers need and most efficiently deliver goods and services.

I want to start by making one thing very clear: We absolutely do not have a free market in higher education! Far from it! State and local governments control the institutions attended by about 74 percent of students, and almost half of students receive federal aid in the form of grants, cheap loans, or work-study, (not to mention tax credits). In addition, governments fund billions of dollars of university-based research. Indeed, when you tally total revenues for public and private, not-for-profit institutions in the 2005-06 school year (the latest with available federal data), and then tally the amount that comes through government (directly to institutions and through student aid), it turns out that more than 52 percent of total postsecondary revenues come from taxpayers, making them the majority share holders in Ivory Tower, Inc.!

That shows clearly that higher education is absolutely not a free market! It also provides powerful insights into the principal/agent problem in higher education, the problem discussed at length by Robert Martin in the paper that touched off this whole debate, and the focus of Carey’s reply to me.

In general, the principal/agent problem boils down to the reality that everyone is self-interested, and the interests of, say, a company’s owners are not always aligned with those of the people they employ. At the most basic level, employers want employees to work as hard as they can for as little pay as possible, and employees want to work as little as possible for as much pay as they can get.

Carey believes – and is bolstered by Martin’s agreement – that the best way to mitigate this problem in higher education is regulation, because schools and their employees will not voluntarily reveal bad things about themselves:

In higher education, Martin argues, the principal / agent disconnect is less about risky profit-taking and more about status. Colleges are inherently status-maximizing institutions, even if the principals—taxpayers, donors, and students—would rather colleges focused on a different set of priorities, like giving every student a high-quality affordable education. As Martin writes,“senior administrators can persuade themselves that lavish offices, extensive building projects, expensive public relations events, luxury travel, and high compensation are in the institution’s interest. Board members may consider expensive social events to be in the institution’s interest.” The same could be said for giving too much weight to the research mission at the expense of teaching and lots of other things.

How do you get more status, particularly in an industry where reputations are seemingly as ancient and permanent as the stone buildings themselves? You buy it, by purchasing nicer buildings (old-looking stone is a popular choice of materials) and more prominent researchers and students with better SAT scores. Or you just let it accumulate in the endowment, also a major benchmark of prestige. All of this dovetails with Bowen’s revenue-to-cost-hypothesis: college spending is capped only by revenues and colleges have every incentive to spend, so they constantly build up fixed costs, raise more money, spend more money, raise more, spend more, and so on.

Martin’s solution? More information. To mitigate the principal / agent problem, give the principals more data so they know what’s really going on. And the government has to play a role

So how does the principal/agent problem get controlled – though it can never be totally eliminated – in the private sector? Yes, there is regulation, but as I made clear in my previous post, regulation has serious costs and often fails completely. I urge you to re-read my previous post for details, or, if you really want to get a feel for regulatory and government failure, consider the current economic mess, driven by government pushing risky mortgages; implied – and then very real government bailout assurances for large financial institutions; and, if you’re inclined to think good regulation could have prevented our current woes, regulators failing in their duties. And no, unlike what Carey says, government requiring McDonald’s or Ruth’s Chris to publish nutrition information isn’t what makes them set consistent standards or deliver food people want – it’s the need to acquire and keep customers, who are highly motivated to spend their money on things that they think are worth it.

Wait. Customers? Of course! What forces high standards and constrains costs in true private markets is not regulation, but the need for firms to maximize revenue, which means competing with one another and, ultimately, serving customers as best they can. That is also what aligns the interests of principals and agents – if they don’t both focus primarily on satisfying customers, both will be out of jobs and money. Of course, principals help keep agents in line with performance bonuses and other tools, and there is the threat of legal prosecution if an agent outright steals from a principal, but mutual self-interest is the most powerful force keeping principals and agents aligned in the private sector.

The problem in higher education is that this alignment is all but nonexistent! With over half of the “business owners” involuntary shareholders with no power, the agents can run wild. Worse yet, the principals’ customers consume their product to a large extent on the principals’ dime, greatly inflating what the customers demand and are willing and able to pay.

Now, consider the very real-world, negative ramifications of this misalignment of interests. Because students are largely paying for their education with someone else’s money, they have greatly reduced interest in shopping for the most efficient education, and instead look for the swankiest rec facilities; celebrity professors who may teach few, if any, classes; and buildings made of “old-looking stone.” They also have reduced incentives to determine if higher education is really best for them to begin with, explaining such colossal waste as 34 percent of first-year students taking remedial courses; only 56 percent of students graduating within six years of entry; and 29 percent of Americans ages 25 and older having bachelor’s degrees, though only 25 percent of jobs require them. And, of course, there’s the rampant tuition inflation that ends up scaring away many of the truly poor people that government is supposed to be focused on helping.

But it doesn’t end with those things. Because college employees don’t have to provide a return to their “shareholders” – or anyone else, for that matter – to make their money, they can pursue their interests without much if any regard for how their interests align with those of principals or customers. And their interest is, often, to pursue the “prestige” that Carey (and certainly many others) laments is the coin of the realm in higher ed. Oh, and it doesn’t help that principals are often forced to directly fund things like research that adversely affect a college’s teaching mission but really build professors’ reputations.

What if we were to remove much of the forced, distorting, third-party money? Carey, in unfortunate, scaremonger fashion, warns that “massive public disinvestment in higher education…would cripple thousands of institutions and shut the doors to college for hundreds of thousands of students nationwide.”

If you think reducing the amount of money colleges spend on wasteful extravagances, or professors who teach very little, is “crippling” institutions, then you’ll think Carey is right. If you believe eliminating much of the aid that encourages people to pursue education they aren’t ready for, often don’t finish, and that seriously inflates college prices is shutting “the doors to college,” then you’ll think Carey is right again.  But if you realize that by reducing aid many of the major distortions that drive up prices would also have to be reduced – the cheap, third-party money wouldn’t be there to fund them anymore – then you also realize that the new higher education market would still provide necessary education to most if not all of those people who could truly benefit from it. Indeed, even the poorest person would be able to get aid if he or she had strong, demonstrated earning potential, because both a private lender and the student would gain in the long run from agreeing to a loan. And there is such a thing as “charitable giving,” by the way.

Amazingly, Carey actually finds a way – though a very weak one – to blame the free market for the distortions in higher education. And by “free market” Carey means, simply, the much reviled U.S. News and World Report college rankings:

The free market has given us the U.S. News & World Report college rankings, which are all about status and spending. Fully 10 percent of each college’s score is based on a simple measure of spending per student — the more you spend, the higher you rank. Another 20 percent is based on things that cost money to buy — low class sizes, faculty salaries, etc. — and much of the rest flows from larger reputational and selectivity factors that are directly and indirectly enhanced by spending.

In other words, the free market has created an information environment that exacerbates the runaway college-cost problem that McCluskey is supposedly interested in trying to solve.

Where to start…

Yes, the U.S. News ranking probably relies too much on reputation and spending, but it also includes valuable output information, such as graduation and retention rates. And here’s the thing: Despite what Carey would lead you to believe, there are a lot more college guides out there than U.S. News! The Princeton Review gives you all kinds of insights into the atmosphere at numerous colleges. The Intercollegiate Studies Institute’s Choosing the Right College furnishes lots of insights into schools for conservatives. Forbes, in conjunction with Richard Vedder’s Center for College Affordability and Productivity, recently published rankings based on several college output measures. In other words, there seems to be almost a competitive rankings market burgeoning, a sign of market forces pushing their way into a non-market system, like shoots that somehow find a way through cracks in even the most concrete of jungles.

And rankings aren’t the only sign of market forces adapting as best they can to a government-distorted system. Indeed, in a system where everyone is artificially encouraged to pursue higher education, and employers are essentially banned from using the most straightforward way to assess applicants’ qualifications – direct testing – it makes sense to use the prestige of the schools that applicants attended as a proxy for their potential as employees. From an employer’s point of view, it is a relatively useful and inexpensive signal for what an applicant would bring to the job. Of course, it would be much better, especially for taxpayers, if employers were free to use more efficient and effective measures, and we didn’t push so many unqualified people to get increasingly watered-down degrees, but considering the restrictions and incentives government has imposed, market forces are doing the best they can.

With all that now said, I’m pretty sure I’m once again out of the mime’s box, hopefully this time to stay. Analyzing the principal/agent problem as it applies to higher education, as well as the numerous costs and failures of government regulation, point clearly not to regulation as the solution to what ails the ivory tower, but reducing or eliminating government spending. And please, don’t blame the free market for our higher ed problems. It’s doing all it can to fix them, but government failure is a heck of a tough thing to overcome.