College Costs and Quality—Posner

I graduated from Yale College in 1959. Tuition, room, and board at Yale in the late 1950s was $2000 a year; this year it is $60,000. Adjusted for inflation, this is a more than threefold increase. Average salary for a full professor at Yale went from $13,000 in 1959 to $186,000 this year (excluding medical school faculty), which after correction for inflation, an almost twofold increase. The rates of increase in these two variables varies from college to college, but I believe it is generally true that college costs have risen significantly faster than faculty costs. One thing that has depressed the increase in faculty costs is the increasing use of graduate students and other part-time faculty in lieu of tenure-track faculty. In addition, the administrative staffs of colleges have grown rapidly, in part because of increased legal regulation of education. Also, colleges have increased the quality of student housing and provided other amenities for students, in an effort to compete more effectively for rich kids. In addition, greatly reduced state subsidies for state colleges, in the wake of the economic depression that began in 2008, have forced state colleges to increase tuition. 

The increase in faculty salaries may be in part a “Baumol” phenomenon. The economist William Baumol pointed out long ago that competition may force up salaries in markets in which capital is not a good substitute for labor, and the result in those markets will be higher prices unrelated to higher quality. Suppose there are productivity increases in engineering but not in teaching; still, teacher salaries will have to rise in order for colleges to be able to compete with engineering firms for labor, and because there are few if any productivity improvements in teaching the higher salaries will be translated into higher prices. An alternative explanation is that salaries for skilled workers in general have risen, and college teachers are skilled. But it is only if skilled workers have alternatives in other
markets that their wages would rise in markets that do not show productivity gains. But, to repeat, increased faculty salaries, whatever their cause, do not explain the steep increase in college costs. 

I do not have the sense that the quality of college education has improved in the last half century. Colleges have become more competitive, but the forms that the increased competition has taken do not seem to have improved quality. From the standpoint of society as a whole, the goals of higher education are to enlarge general (as distinct from firm-specific) human capital by imparting valuable intellectual skills to young people of intelligence and ambition, and to produce research that generates mainly external benefits and so is underproduced by for-profit entities. To a large extent, certainly, colleges and universities work toward those goals, and with considerable success. But from the standpoint of a private college’s trustees and administrators, an equally important goal is to maximize the institution’s revenue (net of cost) and hence tuition income, donations, research grants, and income from consulting and patents—the grant money and income from consulting and especially patents being shared between faculty and university. The consequences of these endeavors include a high level of expenditures on student amenities (to attract rich kids), on intercollegiate sports (to stimulate alumni donations), and on faculty “stars” who can attract research grants and impress parents and alumni. Other consequences include light teaching loads for faculty stars as a form of untaxed compensation, the shift of teaching responsibilities from tenured faculty to graduate students and non-tenure-track floating faculty, pandering to students (beyond just the provision of amenities) and so grade inflation, reduction in required courses and distribution requirements, dilution of college-level education by promiscuous grant of advanced-placement credits (in effect giving college credit for high-school coursework), and proliferation of extracurricular activities—all being aspects of treating students as “consumers” to be pampered in partial compensation for high tuition and student debt and to encourage future donations. Still other consequences of endeavors to maximize revenue include recruitment of student athletes who may have no intellectual interests or promise, “legacy” admissions (discrimination in favor of student applicants who are children of alumni, especially wealthy alumni—though that is a very old practice, as is recruitment of student athletes), and encouraging applied research (because it is patentable, as basic research is not). False advertising of job opportunities for graduates of graduate schools and professional schools (such as law) is also a not uncommon university marketing tools. 

The federal student loan guaranty has pernicious aspects. In particular, it disincentivizes colleges to screen student loan applicants, and in fact incentivizes college administrators not only to raise tuition but also to encourage students to take on excessive debt, since the loans are guaranteed and therefore the university doesn’t have to worry about whether the students can pay back the loans. 

The greatest hope for improvements in quality and reduction in costs of higher education may be the
“MOOCs”—massive open online courses. They have revolutionary potential for enhancing competition in higher education by using computer and communications technology to improve quality and drastically reduce cost.

Comments

[David Strong]

Dear Professor Posner,
Your post reminds me of the work by Lessig, G Cohen, and others. Is there anyone doing quality work to shed some light on the cost of higher education over the past 50 years, the conflicts of interest, the corruption, the impacts of factors such as the federal student loan guaranty, etc. It would be interesting to understand this behavior. I am sure the work of Saez, Piketty and others would be well worth including in the analysis, as well. Just as Petrie Flom Center - G. Cohen recently held a conference on the FDA, it would be interesting to have one on higher education. I also think what you wrote equally applier to the private school scene in NYC, of which I am a product. In 1980 the tuition at places like Riverdale, and Horace Mann were $8 - 9k, now they are approaching $40k!
A fan of your work and writings, and UC alum.
David