Monday, November 14, 2011

The Fallacy of Higher Education's Cost Rise

In the New Yorker there is an article purportedly explaining the high costs of college education. The author uses the Baumol argument which we discussed a few years ago regarding its application to health care. Simply in the services business such as health care, law and education there are no productivity increases so that justifies the cost rise.

The author states:

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. And the Baumol problem is exacerbated by the arms-race problem: colleges compete to lure students by investing in expensive things, like high-profile faculty members, fancy facilities, and a low student-to-teacher ratio. 

Now the fallacy of this argument is that faculty salaries have not increased at the rates of college tuition. The basis of the comment is missing and is wrong. The real reason is that universities have perforce of Government mandates added Deans of everything to the Administration. It is he Administration which has exploded. Highly competitive schools have seen their endowments explode at the same time, and one would think this would reduce tuition, but to the contrary. Instead we have explosions of new facilities. With new facilities come explosive maintenance costs. Then there are the costs to "feed" the Deans with more administrative help.

If the Presidents of colleges could say No once in a while then that would be much better, but there is always the new facility. Perhaps even simpler new facilities would help but the Administration always cajoles the givers into ever so more complex a structure at ever so greater a cost. Building the beast is cheap relative to feeding the beast.

Thus the Baumol argument is without merit. The true driver in a perverse way is the increasing endowment and its abuse in being used to construct more monuments with no regards to life cycle costs. When I was first teaching at MIT my office was in WW II wooden shacks. The largest cost of overhead was the steam heating, there was no AC and there were no computers. Now in its places is the Stata center, leaky windows, massive HVAC expenses, and even elevators. Feeding that beast is truly a heavy burden.

Thus do the increases in such infrastructure lead to better education? Oftentimes not. It would be helpful if people were to write articles of this type if they would first analyze the flow of funds into and out of the universities.