Why tuition costs are rising

By Felix Salmon
November 21, 2011
Jim Surowiecki's column on student loans, but I wanted to respond quantitatively to his theory about productivity growth at universities:

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I’m late to Jim Surowiecki’s column on student loans, but I wanted to respond quantitatively to his theory about productivity growth at universities:

Education costs, and student debt, are rising at what seem like unsustainable rates. But this isn’t the result of collective delusion. Instead, it stems from the peculiar economics of education, which have a lot in common with the economics of health care, another industry with a huge cost problem. (Indeed, in recent decades the cost of both college education and health care has risen sharply in most developed countries, not just the U.S.) Both industries suffer from an ailment called Baumol’s cost disease, which was diagnosed by the economist William Baumol, back in the sixties. Baumol recognized that some sectors of the economy, like manufacturing, have rising productivity—they regularly produce more with less, which leads to higher wages and rising living standards. But other sectors, like education, have a harder time increasing productivity. Ford, after all, can make more cars with fewer workers and in less time than it did in 1980. But the average student-teacher ratio in college is sixteen to one, just about what it was thirty years ago. In other words, teachers today aren’t any more productive than they were in 1980. The problem is that colleges can’t pay 1980 salaries, and the only way they can pay 2011 salaries is by raising prices.

On its face, this makes sense. In widget factories, wage inflation is offset by productivity growth. In universities, it isn’t. So while the cost of a widget can stay the same or go down over time even as the widget makers get paid more, the same isn’t true of tuition costs.

In reality, however, the numbers show that wage inflation is — literally — the least of the problems when it comes to university cost inflation. Check out this excellent report, for instance, entitled “Trends in College Spending, 1999-2009″. The first thing to note is on page 26: spending on faculty compensation is never more than 40% of total spending, and “has remained steady or decreased slightly over time”. Then have a look at the numbers.

Overall, if we exclude for-profit schools, which were a tiny part of the landscape in 1999, we have seen tuition fees rise by 32% between 1999 and 2009. Over the same period, instruction costs rose just 5.6% — the lowest rate of inflation of any of the components of education services. (“Student services costs” and “operations and maintenance costs” saw the greatest inflation, at 15.2% and 18.1% respectively, but even that is only half the rate that tuition increased.)

The real reason why tuition has been rising so much has nothing to do with Baumol, and everything to do with the government. Page 31 of the report is quite clear: “except for private research institutions,” it says, “tuitions were increasing almost exclusively to replace losses from state revenues or other private revenue sources.”

In other words, tuition costs are going up just because state subsidies are going down. Every time there’s a state fiscal crisis, subsidies get cut; once cut, they never get reinstated. And so the proportion of the cost of college which is borne by the student has been rising steadily for decades.

There are other culprits, too, behind the rise in tuition costs. Surowiecki touches on one when he talks about “the arms-race problem”, where “colleges compete to lure students by investing in expensive things, like high-profile faculty members, fancy facilities, and a low student-to-teacher ratio”. Another is simply the ever-increasing amounts of money being spent on administration rather than instruction. And a third is the fact that administrators at many high-profile universities have no incentive to decrease costs, and in fact have an incentive to increase costs, since total spending outlay tends to show up as an input in university-ranking algorithms.

But of all the reasons why tuition’s going up, teacher productivity is — literally — at the bottom of the list. Whether or not teachers today are or are not more productive than they were in 1980 (and I suspect that actually they are more productive), that’s not the reason student debt in America is approaching one trillion dollars.

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