“What explains the boom in commercial colleges, given the difficulties in competing against highly subsidized taxpayer-financed institutions, and private non-profit institutions with considerable endowments, and exemption from property and income taxes? To me, the obvious answer is that commercial colleges are meeting a need not met by these other institutions. For-profits generally enroll lower income and older students who are disproportionately African-American and from other minority backgrounds. They offer specialized programs with classes that often meet in the evening and at other convenient times. Such opportunities are usually less available at cheaper government-run colleges and non-profit institutions”. –Gary Becker, Nobel Prize Economist blogging over at the Becker-Posner blog on a post about For Profit Colleges
Archive for the 'University' Category
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Recently here in California Governor Arnold Schwarzenegger was taken to task for reducing government subsidies to California Universities. The argument went that government subsidies help reduce University costs, which in turn helps reduce tuition, and since the poor would have a hard time paying higher University tuition, government subsidies are a boom for the poor.
While I can understand the motivation behind this argument, frankly, the argument was never very persuasive to me. For one, the majority of people that attend these Universities, especially the elite ones like the UC system, Stanford, and USC, are not poor people, but the upper and middle class. Yet since the subsidies come from tax revenue, tax revenue that can be used to help all citizens, very poor, poor, and middle class, subsidizing Universities is a method that takes from everybody but primarily helps the upper class and middle class. In the end, becoming a very inefficient way to decrease income inequality.
Second, there is no guarantee that subsidizing Universities will result in cheaper tuition for the poor. For example, Harvard, probably the highest subsidized University in the country, either by government subsidies or by direct gifts from former students, has one of the worse records of cheaper tuition for the poor. Hispanic Business writes:
Until recently, Harvard University has been perhaps the most glaring example of an elite college’s failure to welcome low-income students. With an endowment of $25.9 billion — far larger than that of any other university in the U.S. or abroad — Harvard clearly has the resources to educate the poor.
Yet only about 10% of its undergraduates are eligible to receive federal Pell Grants, which are usually awarded to students from families earning less than $40,000 a year. At Amherst, 15% of the students get Pells, and President Anthony Marx is aiming to boost that to 25% of future classes.
But now, Harvard’s controversial president, Lawrence Summers, is on a campaign to give low-income students far greater representation at America’s most prestigious university. “If Harvard is only for the children of those who have been successful, we will lose the social mobility that has always been America’s strength,” argues the former U.S. Treasury Secretary. “I’d like Harvard to look as much like America as possible.”
How far has this program gone? Hispanic Business continues:
GUARDED OPTIMISM. Harvard’s program has only been in place for one full admissions cycle — for the class that entered Harvard in September, 2005 — but Summers and Fitzsimmons are encouraged. Last fall’s entering class had 299 students from families earning less than $60,000 a year vs. 246 the year before — an increase of 22%.
Imagine that, with a school as rich as Harvard, with a school with as many resources as Harvard, and more importantly, with a school that gets so much free money from government subsidies and private donors, Harvard could only find 299 students – and that an increase of 22% from the following year – from families earning less than $60,000/year. In addition, since the hard left at Harvard has run out Larry Summers, the founder of the program, the problem might get worse not better.
Subsidizing Universities to help the poor is analogous to having the government subsidies upper end department stores like Nordstroms and Bloomingdales in an effort to make products cheaper for the poor. A method that not only doesn’t accomplish its goal very efficiently, but when it does help make products cheaper, it does so primarily for the benefit of the rich and middle class, not the poor.
Shawna Rasul, a student at the UCLA School of Law, learned this lesson the hard way, in a letter to the editor of the Daily Bruin she wrote:
I got an e-mail from the chancellor Thursday morning that gleefully described how UCLA has managed to raise $3 billion – more money than any other institution of higher education ever!
That’s truly impressive, and from now on, I will hear “$3 billion” every time I walk into the lobby of my UCLA apartment building that looks like an abandoned home-improvement project.
Every time I look at the holes in the drywall and the 1970s renaissance carpeting, I’ll think about the $3 billion.
When I cautiously take the elevator up to my floor and notice that the permit expired 14 months ago, I will wonder about those $3 billion. When I pay my $24,000 in student fees (which recently went up another $1,500), the $3 billion will be on my mind. While I’m pounding the pavement looking for a full-time job because the mid-year tuition increase has left me without the ability to pay my rent and bills this semester, I will reflect on the $3 billion.
But excuse me if I don’t pop open a bottle of champagne and throw a party – I can’t afford it.
This is why you won’t find me on the picket lines asking for more funding for Universities, and instead find me squarely on the side of those who reduce University funding and instead find efficient means to help the poor pay for college tuition.
Update: Harvard economist Jeffrey Alan Miron writes on the same thing and seems to agree with my conclusion as well, his post here.
Update: Richard Vedder of the Center For College Affordability And Productivity has more.
Universities all throughout the country are complaining about University cut backs, students are protesting, and everybody is worried about the increased cost of higher education, especially for the poor.
Writing in the Washington Post, James C. Garland, president of Miami University in Ohio, identifies the problem and recommends how to fix it: replace inefficient subsidies with efficient subsidies,
Part of the problem is that state higher-education budgets are not targeted efficiently. By way of comparison, consider the food stamp program, which in 2004 paid out $27 billion directly to 24 million low-income Americans. Imagine if there were, in its place, a food subsidy program by which the government paid that $27 billion directly to supermarkets. Under such a program needy families would benefit little, because most of the savings would be passed on to customers who didn’t need help. That would be an inefficient use of public money.
But this is precisely what happens in public higher education. When states pay their universities to hold down tuition charges, they are indirectly subsidizing wealthy and poor students alike.
So how do you fix such inefficient subsidies? Replace them with efficient subsidies:
First, turn all or part of each public four-year university into a private, nonprofit corporation, with legislation to protect research grants and centers and to honor personnel and pension obligations.
Second, phase out each school’s subsidy over, say, six years, to enable campuses to grandfather in current students and adjust to the new environment.
Finally, reallocate the freed-up subsidy dollars to scholarships for new undergraduate and graduate students. The scholarships, valid at any accredited four-year college in the state, would go primarily to middle- and low-income students, with some reserved for engineering majors, math teachers and other groups that meet state needs.(emphasis added)
What would this accomplish, you ask?
Consider the consequences of this change:
Middle- and low-income students’ degree costs would significantly decrease; others would pay a larger share of their college costs.
Universities and colleges would scramble to attract scholarship-holding students. Students would choose schools that offered them the highest-quality programs, the most value and a competitive tuition. Colleges that lost market share would either improve their offerings, lower their prices or risk going out of business.
Lacking an automatic pricing advantage, formerly public colleges would raise tuition to make up their revenue shortfall, but no more than the market would allow.
Competition would force campuses to become increasingly lean, efficient and strategic.
With social forces driving higher education irreversibly toward privatization, Secretary Spellings’s commission should focus on smoothing the transition. Doing so creatively would not only ameliorate the college affordability problem but would also advance the fairness and social good that lie at the heart of a stable democracy.
The San Diego Union Tribune writes:
SAN FRANCISCO – Despite complaints from University of California officials that the system has suffered severe cuts in state funding, prompting tuition and fee increases, many faculty members and administrators get paid thousands more than is publicly reported.
In addition to salaries and overtime, university employees received a total of $871 million in bonuses, stipends, relocation packages and other cash compensation last fiscal year, according to payroll records reviewed by the San Francisco Chronicle.
More than 8,500 employees each received at least $20,000 over their regular salaries, the newspaper reported in Sunday’s edition.
However, none of those figures were included in a consultant’s report released by the university in September that said UC executives’ salaries are 15 percent below those of their peers at other major universities. The report, by Mercer Human Resource Consulting, sought management, faculty and staff pay raises from UC’s Board of Regents.
How much money are we talking about? The article continues with,
However, UC officials couldn’t say how much of the compensation came from tax dollars or other sources. The university’s payroll database lists employees’ base salaries and total compensation, but does not show what the extra compensation was for.
When UC hired David Kessler as dean of the UCSF School of Medicine two years ago, the university announced he would receive “total compensation” of $540,000 a year. But in addition to his salary, he received a one-time relocation allowance of $125,000, $30,000 for six months’ rent and a low-interest home loan.
He was reimbursed for his actual moving costs from Connecticut, and his family received round-trip airline tickets to seek housing in the Bay Area.
Meanwhile, student fees over the last four years have jumped from $3,429 a year to $6,141. The UC Regents are expected to vote Wednesday on a proposal to raise fees an additional 8 percent.
“It’s ludicrous to increase student fees … when you’re talking about executive officers making this much money, and no one knowing about it,” said Anu Joshi, a UC Berkeley graduate student and president of the systemwide UC Student Association.
Conservative New York Times columnist David Brooks wrote in the New York Times:
Especially in these days after Katrina, everybody laments poverty and inequality. But what are you doing about it? For example, let’s say you work at a university or a college. You are a cog in the one of the great inequality producing machines this country has known. What are you doing to change that?
Economist Mark Thoma takes issue with this comment and responds with:
Let me defend universities against the implied notion that colleges aren’t doing anything to address these problems…I chaired the University’s Scholarship Committee, the committee responsible for allocating the entire pool of University scholarship money. As Chair, I had the committee reexamine each step in our process to try and identify hidden bias in the award of scholarship money…I resent the implication that we do not care, are not sensitive to, or are not taking action to address these problems. We are.
To which economist Arnold Kling responds:
In my view, the issue is larger than universities’ policies concerning admissions and financial aid. It concerns how universities are financed, and how this affects the distribution of income.
First, consider state subsidies for universities. These are almost certainly regressive. Much of the subsidy goes to raise the rents earned by administrators and professors. Much of the rest goes to affluent students. The taxes that pay for the subsidies come from all economic classes.
Second, consider university endowments. Again, they serve to increase rents of employees and to subsidize those students who attend the most elite institutions–a student population that is disproportionately affluent.
Imagine instead what might happen if state funds and alumni donations funded vouchers for student tuition.
Compared with reforming university finances, tinkering with admissions and scholarship policies is beside the point. It may “show that you care,” but has little practical significance.
The complete exchange, along with Mark Toma’s final response, can be found here.
Richard Vedder, Professor of Economics, Ohio University, explains:
While many factors are at work, much of the explanation can be summarized in two words: “privatization” and “markets.” About a third of four-year college students attend private institutions, and the proportion is growing. By contrast, only one-eighth of K-12 kids attend private schools.
Moreover, even public universities are far more independent of the political process than K-12 schools. Public universities have greater ability to hire and fire staff, pay people on the basis of merit, change curricula, and face far less interference from obstructionist labor unions.
These organizational differences are important. Countless academic studies show that kids learn better in private schools or in public schools that manage to remain independent of central bureaucracies. While there are exceptions, universities are more decentralized, more innovative, and less constrained by mindless rules and regulations like teacher certification requirements and class-size restrictions.
More important, however, is the fact that universities are far more subject to the discipline of the market, meaning they face financial consequences for displeasing students or parents. Nearly every American college student has to pay tuition covering a significant percentage of the cost. If colleges fail to serve the students well, they may lose tuition revenues or fall in rankings issued by organizations. Top spots in the US News & World Report list are particularly coveted.
By contrast, very few public schools charge anything for attendance. Because parents “pay” for schools only indirectly through property taxes, they demand expensive but inefficient features like small classes. While classes of over 30 are rare for high school seniors, many college kids learn quite well a year later as college freshman in lectures of 200 — and the parents rarely complain because they are now paying the bill.
Rising tuition charges at colleges and universities have increased opportunities for profit-making private schools like the University of Phoenix that have great promise both as educational institutions and as businesses. This competition forces traditional not-for-profit schools to improve quality, reduce costs, or implement other innovations to attract students. By contrast, for-profit K-12 schools tend to be financially weak since they face a huge price disadvantage relative to “free” public schools.
So how to fix the problem? Read the rest to find out (hint: Voucher related).
Richard Vedder, professor of economics at Ohio University, writes:
Colleges have devoted relatively little new funding over the past generation to the core mission of instruction (spending only 21 cents of each new inflation-adjusted dollar per student on it), preferring instead to assist research, hire more nonacademic staff, give generous pay increases, support athletics and build luxurious facilities. And while in the private sector companies have learned to get more work out of fewer employees, the opposite appears to have happened in higher education. In 1976 American education employed three nonfaculty professional workers (administrators, counselors, librarians, computer experts) for every 100 students; by 2001 that number had doubled.
Another piece of the puzzle: Only the weakest of positive correlations links funding level and enrollment. Even if students enroll, they don’t necessarily finish school. Nearly 40% fail to graduate within five or even six years, suggesting that many who attend universities don’t much benefit from them.
Yet another explanation is one Forbes readers know all too well. Taxes reduce private-sector activity. People who must pay high taxes tend to work and invest less and also tend to migrate to lower-tax areas. In other words, increasing funding to universities means transferring resources from the relatively productive private sector to higher education, which tends to be less productive and efficient.
So what should we do? College is still a decent individual investment, certifying that the graduate meets minimum standards (often missing in high school) for competence, intelligence, maturity and literacy. But we should rethink the nature and magnitude of public support for universities. State governments, facing rising Medicaid bills and demands for primary and secondary education funding, are already slashing their support. I hope and expect this trend to continue. Big changes are coming to higher education. They are overdue.
Aside from sheltering universities from failure and increasing the overall cost of education, subsidies have another negative side effect.
A new paper claims:
This paper uses a game-theoretic model to analyze the disincentive effects of low-tuition policies on student effort. The model of parent and student responses to tuition subsidies is then calibrated using information from the National Longitudinal Survey of Youth 1979 and the High School and Beyond Sophomore Cohort: 1980-92. I find that although subsidizing tuition increases enrollment rates, it reduces student effort. This follows from the fact that a high-subsidy, low-tuition policy causes an increase in the percentage of less able and less highly motivated college graduates. Additionally—and potentially more important—all students, even the more highly motivated ones, respond to lower tuition levels by decreasing their effort levels. This study adds to the literature on the enrollment effects of low-tuition policies by demonstrating how high-subsidy, low-tuition policies have both disincentive effects on students’ study time and adverse effects on human capital accumulation.
More can be found here.
HatTip: Division of Labor.
Only a crazy right winger, or libertarian could possibly believe that, you say? A proposal that favors the rich at the expense of the poor, you say?
If you do, you would be wrong on both counts. That is precisely the latest topic by one of the most respected living economists Gary S. Becker, Professor Of Economics At The University Of Chicago and winner of the Nobel Prize in Economic Sciences in 1992, over at the Becker-Posner blog. More importantly, he makes a compelling case for doing just that primarily because of poor people.
Countries typically help students by paying most of the direct costs of higher education, and also sometimes by providing scholarships to help pay for the cost of living while in school. Though the stated reason for this is to allow poorer students access to higher education, the beneficiaries are mainly children from the middle and upper classes since they are the ones who attend these mainly state-run colleges and universities. Even in the Unites States, about 80% of all students are enrolled in subsidized state-run institutions. This system penalizes less prosperous families who do not have children at universities and colleges, but are nevertheless taxed to help support the education of children from richer families. Even children from modest backgrounds who do manage to get a university education tend to become part of the economic elite.
A blog well worth your attention.
Btw, question for those more economically in tune than I, Becker states, Put differently, lenders cannot take ownership of the human capital they finance since that means taking ownership of the individuals receiving the education, and no modern country allows people or institutions to own other individuals.
That’s odd. One of my favorite Economist Milton Friedman, in his book Capitalism and Freedom, argues for precisely that. Saying that student loan lenders should be allowed to take ownership in part of the salary of their customers, provided the customer accepts those terms. Am I missing something? Did something change since the 60′s and 70′s when Friedman wrote his book to now or might this just be a difference in opinion? Comments appreciated.
Update: Arnold Kling has more.
Update2: Even more.
Update3: Becker responds to comments.
Update4: Posner responds to comments.