While acknowledging that tuition and fees at colleges and universities have been rising faster than the rate of inflation, authors Robert Archibald and David Feldman (Professors of Economics at William and Mary College) oppose the view, increasingly espoused by economists such as Richard Vedder, that higher education is increasingly dysfunctional. Instead, their argument is that costs for colleges have risen as a natural byproduct of a growing economy.
I recently read their interesting book Why Does College Cost So Much? and was grateful that Dr. Archibald was willing to answer a few questions for us.
On pages 84-85, you give a three-part summary of your argument as to why college costs are rising faster than inflation. Ultimately, you write that the cause is economic growth itself. What do you mean?
Economic growth is fueled by productivity change. To have growing income per person a country needs to have growing income per worker. As we explain, the productivity growth that fuels economic growth is not shared evenly by various industries. Some industries, most in manufacturing and agriculture, have had rapid productivity growth, and other industries, most services, have had little if any productivity growth. The productivity growth in manufacturing and agriculture holds down the prices in these industries. This does not happen in service industries such as higher education. The result is that prices in service industries go up more rapidly than prices in the industries that experience productivity growth. Finally, since the inflation rate is measured by the rate of increase of a broad index that includes all goods and services, prices of the goods from the high productivity sector will go up less than inflation, and prices of the services from the low productivity growth sector will go up more than inflation. This claim is supported by any look at the data.
One of the ways one can see this result is to look at the long-run time path of higher education prices relative to inflation. During the 1950’s and 1960’s when productivity growth and economic growth were strong, the price of a college education rose more rapidly than the inflation rate. During the 1970’s when economic growth and productivity growth slowed down, the price of a college education grew at roughly the inflation rate. When productivity growth and economic growth picked starting in 1980, the price of a college education started to rise more rapidly than inflation.
When the media reports on this issue, they’re often concerned about the price of admission: tuition, fees, room, and board. What is the difference between the cost of college and the price (tuition, etc.)?
Higher education is one place where the difference between price and costs is critical. In most businesses, the price is a markup over costs. For example, it costs a business $5.00 to make and item, and it sells the item for $5.50. In this case the markup is 10%. While there is some variation in markups, generally competition keeps them close, so when price goes up it is usually because costs go up. Most colleges and universities are not-for-profit firms that receive subsidies, either from a state appropriation and/or from gifts and endowments. So the price a college charges is cost minus subsidy as opposed the for-profit firm’s cost plus markup. The vagaries of state government and the stock market cause subsidies to vary quite a bit. For higher education, when price goes up it is not so certain that costs went up.
To summarize, the costs is the amount the college or university has to spend to provide the education, and the price is the amount the student is charged for the education. Because of subsidies, costs are almost always quite a bit higher than price.
What do you say to the argument that colleges lack incentives to control costs, since an increasing percentage of the young adult population perceived they must attend anyway, regardless of how high tuition rises?
This argument denies the fact that colleges and universities are in a very competitive business. For every student there are lots of college options, and if one of them is less expensive than the others, it will have an advantage. The difficulty is that much of this price competition among colleges and universities is accomplished by giving students price discounts called scholarships. Lots of students are bid away from College A by College B because College B offered a better scholarship. When you give lots of scholarships you get less revenue from the class, so you have to be very conscious of costs. The reason this kind of argument might seem sensible is because people only easily see the list-price, and this is not the relevant price for the college or the student.
Do you think there is a growing student debt problem, and what should be done about it?
On average the data suggest that students leaving college with a debt who have attended a not-for-profit college or university leave with a debt that is roughly equivalent to the debt one would acquire if one bought a new car. This does not seem to me to be an unreasonable debt to take on given that a college degree adds a great deal to the earning power of the average graduate. College is an investment, and it is perfectly sensible to borrow when making an investment. Given this, I don’t think there is anything that needs to be “done about it.”
There are a several other things to say. First, the data are always for students who have debt. Lots of students have no debt, so the indebtedness of the average student is overstated in the data. Second, the data for students attending for-profit schools show that more students borrow and they take on bigger debt burdens. Some of these schools are not a good investment, and there may be a big problem here. Third, the data for the average mask difficulties that students with debts well above the average may have. There are some students who have borrowed more than is sensible given the payoff to college. There needs to be better advice given to students. Finally, the newspaper stories that focus on the outliers among this last group present a very biased view of what is going on. Because big scary numbers such as $100,000 stand out, even if they are not close to typical, people have an inflated sense of the actual problem.
We’ll come back to this issue, from another perspective, in a subsequent post.