Why Does College Cost So Much? Posner

The back page of the Education section of the Wall Street Journal for October 9 features a very interesting debate among three economists; I have given the debate’s title to this blog post. The economists are Rudy Fichtenbaum, Katharine Lyall, and Richard Vedder, all experts on the economics of education and two (Fichtenbaum and Lyall) with considerable practical experience in academic administration. They don’t agree on the causes of the high costs of an American college or university education; and though they agree that those costs are a problem, they don’t agree on the solution. That is characteristic of the academic and journalistic literature on American higher education. 

When I was an undergraduate at Yale College in the late 1950s, the cost of tuition plus room and board was $2000 a year; it is now almost $60,000, which after adjustment for inflation represents almost a fourfold increase. Yale is not unique, and the costs of a college education are comparable to those of Yale and other Ivy League schools (and their counterparts elsewhere in the United States, such as Stanford, the University of Chicago, and the University of Texas) even at many much less  prestigious colleges. 

The causes are various. They include the enormous—I am tempted to say the stifling—increase in legal and other regulation of colleges (and universities, but for simplicity I’ll use “college” to denote all higher education), the decline in financial subsidies to state colleges, the increased cost of scientific equipment, and the expense of computerization and other electronics. But another important cause,paradoxically, is the increased cost of college education, which tilts the student body toward richer kids—and rich kids and their parents expect superior amenities in the way of housing, food, athletic facilities, and police protection. Such students expected to be treated as consumers, rather than as kids with no rights or representation (the situation of students at Yale in the 1950s; there was no student government, and no appeal from expulsion). 

In addition, the availability of federal loans to students enables colleges to jack up tuition. This is in part because the loans are subsidized, in part because young people tend to exaggerate their future prospects, and in part because even very intelligent young people often have difficulty comprehending interest rates. Still another cause is the very strong demand for college education. Word has gotten out that the gulf in employment opportunities between college and non-college educated young persons has widened and is likely to continue to do so. Supply lags demand because it takes a long time for a new college to establish credibility in the eyes of prospective employers, and because expansion of existing colleges, while of course both feasible and common, is costly and slow; it requires enlarging faculty, administrative staff, security, and physical plant—there are few if any economies of scale in higher education. When demand outruns supply, price rises. 

Another factor in the rising cost of college, perhaps an uncontrollable one, is the shift from a professional to a business model of higher education, a trend similar to that observed in the legal and medical professions. Colleges seem far more competitive than of old, as symptomized by the big-business type salaries increasingly commanded by successful college executives, where success is measured primarily in financial terms. This competition has I think resulted in greater investment in intercollegiate athletics, greater attention in admissions to the income of an applicant’s family, grade inflation, reduction in number of required courses, and other pandering to student preferences. I worry that college trustees do not have the same incentives to hold down costs as corporate directors, who are answerable, at least to some extent, to shareholders. Private colleges (the majority of colleges and the best colleges) don’t have shareholders. 

There is also a question about the value added of a college education. Although college seems a good
investment, whether it is depends I think on the underemphasized factor of IQ. The average IQ of Americans is (by definition) 100, and about one-sixth of Americans have an IQ of 85 or less. And many kids who have a sufficiently high IQ to benefit, in principle at least, from a college education have character or psychological or other personal problems (including family responsibilities) that prevent them from deriving significant benefits from higher education. Not every career track should begin with a college graduation. 

It is relevant to note that college completion rates have declined even though colleges require less effort by students to graduate. This is consistent with colleges’ enrolling more students who can’t benefit significantly from a college education. 

I see hope, however, in the MOOCs—massive open online courses, which offer enormous potential cost savings and quality improvements for colleges. They can eliminate most of the living expenses associated with college (students can live at home, presumably cheaply) while enabling a reduction in faculty size (because there is no limit to the number of students in an online course) coupled with an increase in average faculty quality, since there is no limit on the number of students that a superb teacher can teach online. The MOOCs are not a panacea, but they are the most promising response to the problem of the high costs of a college education in America.

Comments

[plus.google.com/108462903081369503773]

"But another important cause,paradoxically, is the increased cost of college education, which tilts the student body toward richer kids—and rich kids and their parents expect superior amenities in the way of housing, food, athletic facilities, and police protection. Such students expected to be treated as consumers, rather than as kids with no rights or representation (the situation of students at Yale in the 1950s; there was no student government, and no appeal from expulsion)."

But wasn't Ivy League elite education more the preserve of the rich and privileged in the past? There was no affirmative action, and elite colleges didn't have 'diversity' programs.
I think a greater percentage of students in the 50s came from upper class backgrounds.

The real difference is that the culture of the rich has changed. The rich in the past tended to be less showy and believed in instilling work ethic and thrift in their young ones. Maybe this went back to the Protestant roots of America.

But the culture of the rich has become more demanding, narcissistic, brazen, and shameless since boomers became parents. In the 60s, boomers wanted to have all the fun and be young forever. As they grew up and made money, they wanted to have all the wealth and fun.
They raised their kids to be crass and materialistic than reserved and moderate. All races wanna strut around like Paris Hilton or millionaire rap stars.

[Eric Rasmusen]

There is probably a lot more price discrimination nowadays. If the average amount of tuition plus housing paid is half of the sticker price, then the real price of college education has merely doubled. In light of the increasing cost of skilled labor (professors) and the increased quantity of services(fancier gyms, single rooms, air conditioning, ethnic group counsellors, career service centers, grade appeals, psychological counselling) and regulation costs, maybe the surprise is that tuition is so low now. I bet Harvard, Yale, and Chicago could triple their tuition and still attract excellent students. That they do not might be explained by the diminishing return to budget size and their preference for even slightly more talented students.

[Eunice Kim]

One aspect that economists have tended to leave out of the debate is the devastating effect that student loan debt has on the ability of individuals to obtain credit. I am a University of Chicago grad with substantial student loan debt. I have a great career, earn enough income to obtain a mortgage (never missed a rent payment), however no bank would ever underwrite me for a mortgage with this student loan hanging over my head.

As you know, owning your own home has been, by far, the #1 way to accumulate wealth in this country and was one of the reasons why we had a 'strong middle class' in the 50's. This is no longer the case. This phenomenon leaves behind millions of educated, young people from acquiring wealth, whereby further exacerbating growing inequality in this country.

[Neilehat]

Why does College cost more today? Inflation is certainly one cause, given its compounding nature over the years. Yet, there is something else going on that impacts the Supply and Demand Curves and consequently price. I do believe that it can be traced back to fundamental changes that have taken place in the Economy and its impact on Primary and Secondary Education. Prior to today, the Nation was heavily Industrialized with a massive Manufacturing base that absorbed the majority of graduates from Secondary Institutions. Hence the gearing of the Educational system to the importance of the Industrial Arts and the fitting of students to this Economic reality. Over the years we have seen this portion of the Economy decline, for what ever reasons, leaving the Primary and Secondary Institutions with the task of simply educating their students to simply advance into the Post Secondary education realm. Case in point, almost all gruaduates from Secondary Institutions today are "Manually Illiterate" and can only move into the Post Secondary Realm.

With this increased influx of additional students into the Post Secondary Institutions the Laws of "Supply and Demand" kick in driving costs ever higher.

[B Wilds]

The government effects the cost of higher education in many ways. State governments subsidize the budgets of public colleges and universities and federal and state governments give money to students through programs like Pell Grants and the American Opportunity Tax Credit. A below-market interest rate for Stafford Loans is just another subsidy mechanism. Like the government programs involved in supplying people with paid healthcare making cheap government loans available for education encourages people to consume more than they otherwise would. While many would argue that this is a good thing when it comes to education the policy also causes some negative distortions in that it encourages students at the margin, to choose more expensive educational institutions than they otherwise would, and to finance more of their education with borrowing. These incentives leave students burdened with debt and also makes them less focused on price than they should be. More on the subject of student loans and the cost of education can be found in the post below.

http://brucewilds.blogspot.com/2013/07/interest-in-and-on-student-loans.html