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April 22, 2008 The Economics of College, Part I (Go to: Part I Part II Part III )A front-page headline in the New York Times captures much of the economic confusion of our time: "Fewer Options Open to Pay for Costs of College." The whole article is about the increased costs of college, the difficulties parents have in paying those costs, and the difficulties that both students and parents have in trying to borrow the money needed when their current incomes will not cover college costs. All that is fine for a purely "human interest" story. But making economic policies on the basis of human interest stories &mdash which is what politicians increasingly do, especially in election years &mdash has a big down side for those people who do not happen to be in the categories chosen to write human interest stories about. The general thrust of human interest stories about people with economic problems, whether they are college students or people faced with mortgage foreclosures, is that the government ought to come to their rescue, presumably because the government has so much money and these individuals have so little. Like most "deep pockets," however, the government's deep pockets come from vast numbers of people with much shallower pockets. In many cases, the average taxpayer has lower income than the people on whom the government lavishes its financial favors. Costs are not just things for government to help people to pay. Costs are telling us something that is dangerous to ignore. The inadequacy of resources to produce everything that everyone wants is the fundamental fact of life in every economy &mdash capitalist, socialist or feudal. This means that the real cost of anything consists of all the other things that could have been produced with those same resources. Building a bridge means using up resources that could have been used building homes or a hospital. Going to college means using up vast amounts of resources that could be used for all sorts of other things. Prices force people to economize. Subsidizing prices enables people to take more resources away from other uses without having to weigh the real cost. Without market prices that convey the real costs of resources denied to alternative users, people waste. That was the basic reason why Soviet industries used more electricity than American industries to produce a smaller output than American industries produced. That is why they used more steel and cement to produce less than Japan or Germany produced when making things that required steel and cement. When you pay the full cost &mdash that is, the full value of the resources in alternative uses &mdash you tend to economize. When you pay less than that, you tend to waste. Whether someone goes to college at all, what kind of college, and whether they remain on campus to do postgraduate work, are all questions about how much of the resources that other people want are to be taken away and used by those on whom we have arbitrarily focused in human interest stories. This is not just a question about robbing Peter to pay Paul. The whole society's standard of living is lower when resources are shifted from higher valued uses to lower valued uses and wasted by those who are subsidized or otherwise allowed to pay less. The fact that the Soviet economic system allowed industries to use resources wastefully meant that the price was paid not in money but in a far lower standard of living for the Soviet people than the available technology and resources were capable of producing. The Soviet Union was one of the world's most richly endowed nations in natural resources &mdash if not the most richly endowed. Yet many of its people lived almost as if they were in the Third World. How many people would go to college if they had to pay the real cost of all the resources taken from other parts of the economy? Probably a lot fewer people. Moreover, when paying their own money, there would probably not be nearly as many people parting with hard cash to study feel-good subjects with rap sessions instead of serious study. There would probably be fewer people lingering on campus for the social scene or as a refuge from adult responsibilities in the real world. April 23, 2008 The Economics of College, Part II (Go to: Part I Part II Part III )Those who argue that the taxpayers should be forced to subsidize people who go to colleges and universities seldom bother to think beyond the notion that education is a Good Thing. Some education is not only a good thing but a great thing. But, like most good things, there are limits to how much of it is good &mdash and how good compared to other uses of the resources required. In other words, education is not a Good Thing categorically in unlimited amounts, for people of all levels of ability, interest and willingness to work. Nor is there any obvious way to set an arbitrary limit. These are questions that no given individual can answer for a whole society. The most we can do is confront individuals with the costs that their choices are imposing on others who want the same resources for other purposes, and are willing to pay for those resources. Those who cannot bring themselves to face the tough choices that reality presents often seek escape to some kind of fairy godmother &mdash the government or, more realistically, the taxpayers. When the idea of conscripting taxpayers to play the role of fairy godmother for some arbitrarily selected favorites of the intelligentsia, "the poor" are often used as human shields behind which to advance toward their goal. What will happen to the poor if there are no government subsidies for college? If this argument is meant seriously, rather than being simply a political talking point, then there can always be some means test used to decide who qualifies as poor and then subsidize just those people &mdash rather than the vastly larger number of other claimants for government largesse who advance toward the national treasury, using the poor as human shields. Another option would be to allow students to sign enforceable contracts by which lenders would pay their college or university expenses in exchange for a given percentage of their future earnings. That way, students would be issuing stocks to raise capital, the way corporations do, instead of being limited to borrowing money to be paid back in fixed amounts &mdash the latter being equivalent to issuing corporate bonds. Not only would this get the conscripted taxpayers out of the picture, it would also make it unnecessary for parents to go into hock to put their children through college. Still, the financially poorest student in the land could get money to go to college, with a good academic record and a promising career from which to pay dividends on the lender's investment. More fundamentally, it would confront the prospective college student with the full costs of all the resources required for a college education. Those who are not serious &mdash which includes a remarkably large number of students, even at good colleges &mdash would have to back off and go face the realities of the adult world in the job market. But not as many jobs would be able to require college degrees if such degrees were no longer so readily available at someone else's expense. If individuals issuing stock in themselves sounds impossible, it has already been done. Boxers from poor families get trained and promoted at their managers' expense, in exchange for a share of their future earnings. Even some college students have already gotten money to pay for college in exchange for a share of their future earnings. However, in the current atmosphere, where college is seen as a "right," there has been resentment at having to pay back more than was lent when the recipient's degree brings in large paychecks. What is truly repugnant to some people about college students issuing stocks as well as bonds is that this not only takes the government out of the picture, it takes the intelligentsia out of the picture as prescribers of how other people ought to behave. Reality can be hard to adjust to. The most we can do is see that the adjustments are made by those who get the benefits, instead of making the taxpayer the one who has to do all the adjusting. April 24, 2008 The Economics of College, Part III (Go to: Part I Part II Part III )Why does college cost so much? There are two basic reasons. The first is that people will pay what the colleges charge. The second is that there is little incentive for colleges to reduce the tuition they charge. Those who want the government to provide subsidies to help meet the high cost of college seem not to consider whether government subsidies might have contributed to the high cost of college in the first place. In any kind of economic transaction, it seldom makes sense to charge prices so high that very few people can afford to pay them. But, with the government ready to step in and help whenever tuition is "unaffordable," why not charge more than the traffic will bear and bring in Uncle Sam to make up the difference? The president of a small college once told me that, if he charged tuition that was affordable, even an institution the size of his would lose millions of dollars of government money every year. In a normal market situation, each competing enterprise has an incentive to lower prices if that would attract business away from competitors and increase its profits. Unfortunately, the academic world is not a normal market situation. Some of the ways of cutting costs that a business might use are not available to a college or university because of restrictions by the accrediting agencies and the American Association of University Professors. There was a time, back in the early 1960s, when my academic career began, when many &mdash if not most &mdash colleges had their faculty teaching 12 semester hours and a few had teaching loads of 15 semester hours. Spending even 15 hours a week in a classroom may not seem like a lot to people who spend 35 or 40 hours a week on the job. However, there is also the time required to prepare lectures, grade tests and do other miscellaneous campus chores. Even so, 12 hours a week in a classroom is not a killing pace, especially for professors who have taught a few years and have their lecture notes from previous years to help prepare for the current year's classes. But that was then and this is now. Today, a teaching load of more than 6 semester hours is considered sweatshop labor on many campuses. Incidentally, since academic class hours are 50 minutes long, 6 semester hours mean actually 5 hours a week in the classroom. Why was it considered necessary to cut the teaching load in half? Mainly because professors were expected to do more research. Why was more research considered necessary? Because research brings in more money from the government, from foundations and from other sources. On many campuses, a beginning faculty member cannot expect to be promoted to a tenure position unless he or she brings research money into the campus coffers. Once 6 semester hours of teaching becomes the norm, an individual college that tried to economize by having its faculty teach 9 or 12 semester hours could run into trouble with the American Association of University Professors and the accrediting agencies. The University of Colorado law school had its accreditation by the American Bar Association put in jeopardy simply because they did not spend enough money on books for their law library &mdash even though their students passed the bar exam on the first try at a higher rate than the law students at Harvard and Yale. The criteria used by most accrediting agencies are based on inputs &mdash essentially spending &mdash rather than results for students. Competition among academic institutions therefore seldom takes the form of lowering their costs of operation, in order to lower tuition. The incentives are all the other way. Competition often takes the form of offering more upscale amenities &mdash posh lounges, bowling alleys, wi-fi, finer dorms. None of this means better education. But, so long as the customers keep buying it &mdash with government help &mdash the colleges will keep selling it. Back To Leeconomics.com
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