Thesis, Antithesis, Synthesis and the Cost of College – Continued

Last week, I began an attempt to reconcile two competing theories over why college costs as much as it does.

One theory (the “Bennett Hypothesis”) holds that schools are responsible for the ever-inflating cost of tuition due to their readiness to suck up funds from any source (families, government grants, banks loans, etc.) through ever-escalating tuition increases. These funds are then used to support ever-more ambitious building and programming schemes – both academic (new or expanded departments, expensive labs, etc.) and non-academic (such as fancy dorms, student centers and athletic facilities), not to mention the high salaries paid to administrators to manage such growth.

An alternative theory (the “General Economics” argument) holds that hyperinflation in the cost of college is no different than what you see in any industry that employs highly-skilled labor to deliver a service, especially a craft service like education which cannot “scale” in the same way manufacturing can. According to this theory, so-called “cost disease” (coupled with tuition discounting that forces up the list price of college faster than it does average pricing) is responsible for college prices reaching the stratosphere – not the decisions made and priorities set by individual schools.

In the first half of this series, I noted that the tuition discounting portion of the General Economics argument is pretty sound, but that the “cost disease” component makes two assumptions (that higher education is like dentistry with regard to employing highly-skilled labor, and that technology improvements in higher education will necessarily push up the cost of running a school) that are less convincing.

Fortunately, the authors behind the General Economics argument provides a valuable thought experiment that can be used to link their theory to the seemingly opposing Bennett Hypotheses “schools are to blame” argument, a thought experiment which might allow us to create a synthesis which reconciles two seemingly exclusive choices.

That thought experiment involves a 100-student school that costs $2,000,000 a year to run which receives a $1,000,000 subsidy (either from the government or the school’s own endowment) which means the school needs to collect $1,000,000 from students to break even.

If you’ve been reading this blog over the last few weeks, you’ve already seen this example used to explain the impact of tuition discounting on school sticker prices. For instance, if the school wants to reduce the price to $9,000 for half its students, its sticker price must go to $11,000 which allows the school to provide 50 students a $2,000 scholarship while the other 50 students pay full boat ($11,000), allowing the school to still collect the $1,000,000 it needs to keep revenue in line with expenses.

But the authors of the book Why Does College Cost So Much? who created this thought experiment also use it to explain why government subsidies cannot be responsible for rises in tuition.

This argument looks at what might happen if a school came into an extra $100,000 (let’s say in the form of a new government grant). To the originators of the General Economics theory, this leaves the school with lots of choices. They could give all 100 students a $2,000 scholarship (effectively reducing tuition for everyone to $9,000). Alternatively, they could give the 50 students currently receiving a subsidy an even bigger discount (reducing their out-of-pocket cost to $7,000) while keeping sticker price the same at $11,000. Finally, they could keep their current tuition and scholarship policies intact and use that extra $100K to improve programming. Whichever choice a school makes, the authors point out, neither sticker price nor average price goes up.

But outside the abstract world of economic theory, there is an obvious mechanism whereby a $100,000 in found money can lead to more than $100,000 in spending. In theory, a school might spend that $100,000 and no more to improve programming. But expectation that this new revenue source will continue for many years might lead the school to decide to borrow $1,000,000 which will allow them to engage in even more ambitious program or facilities expansion. And if that $100,000 subsidy does not continue throughout the life of the loan, the school can always raise tuition to make up the difference.

In fact, “found money” is not required for a school (or any institution) to decide to spend money it does not immediately have. Families, private companies, even the government (believe it or not) all borrow and spend money, sometimes wisely, sometimes foolishly. And unlike a business that goes into debt to fund new product development or an acquisition binge, schools can close revenue gaps by raising tuition prices without necessarily losing market share to less debt-laden competitors ready to sell at a lower price.

So unless colleges and universities are immune to the kind of “invest (i.e., spend) for tomorrow” mentality that impacts every other category of institution (as well as individuals), there does indeed seem to be room in the simple model created by the General Economics theorists that allows schools to make choices that will lead to increases (in some cases, vast increases) in the cost to run a college – and thus the price to attend.

Also, the mechanisms needed to reduce cost (and thus tuition) are not likely to be ones that the culture of the academy would approve. For example, in Is College Worth It?, the authors point out an obvious way for a state college system that has seven universities, each with departments in every field, to save money through consolidation. Rather than having seven anthropology departments at seven different schools, for instance, a state system could arrange resources so that just one of the seven schools would end up with a top-notch anthropology department and students interested in studying that subject would know which school to attend.

Now there are many arguments for why such consolidation would be bad for institutions and students (not to mention the employment prospects for teachers). But if this mechanism for controlling costs (or any mechanism that involves teaching fewer subjects) would cause a school to lose status vis-à-vis competitors, then we are looking at a societal factor that limits areas for savings, thus limiting ways to reduce college costs (and prices).

Spending money you don’t have in order to increase status and the loss of status that would visit a school making economically efficient choices (like cutting departments) both demonstrate the role an emotional factor (status) plays in higher-ed decision making. To the economic rationalist (like the economists behind the General Economics theory), emotion should take a back seat to cold, hard logic when it comes to making decisions regarding spending millions of dollars. But as anyone who has interacted with spendthrift or indebted private companies (all of whom should also be driven by economic rationality) can attest, expensive choices are frequently made at the gut (i.e., emotional) level, with elaborate arguments (usually accompanied by compelling PowerPoints presentations) demonstrating the economic logic of those emotional choices only constructed after the fact.

So perhaps the factor that allows us to synthesize the two competing theories of why college costs so darn much is that both the specific individuals making decisions leading to higher costs and the much large number of people making up the societies that approve or disapprove of those choices are all human beings, rather than robots or graphing calculators.