Re: TownHall.com – 4/22/2008 thru 4/23/2008 – “The Economics of College, Parts I. II, and III” – Thomas Sowell

Part I

Sowell either does not understand capitalism or does not understand the social benefit (to every individual in our society) in insuring that those young people who will best benefit from college are able to afford college.

Sowell sees deciding to go to college like deciding to buy cosmetics --- if the price is cheap enough, why not; but if it’s too expensive, pass. Surely enhancing the ability of individuals to buy cosmetics by granting “cosmeticships” brings little benefit to the rest of us (unless perhaps the cosmetics are deodorants). Let the market have its way with cosmetics.

But getting a college education is not like getting cosmetics. College trains scientists, teachers, health care providers, engineers, accountants, business executives, and even future military officers. A college education, in spite of much of what you read in the conservative press, makes for better informed citizens, and the better informed our citizens, the better democracy and our economic system performs. In reality, the more educated our workforce, the better our economy can perform --- each of us benefits by every incremental college education (note I am not talking about college diplomas that are hardly worth the paper they’re printed on to society, but about a college education).

So here’s the model I think Sowell should be using. When society grants academic scholarships to college (and graduate school) students it providing market incentives for students to get an education and/or “employs” students to go to school, just as industry finances the training of their employees (especially new employees).

Why should scholarships be considered market incentives? Because scholarships are voluntary, and no student can be forced by the granting of a scholarship to go to school (they can always turn the scholarship down), nor are they forced to use the scholarship even if they choose to continue their education. A scholarship is thus clearly nothing more than a market incentive --- something that makes one economic option open to a student relatively more attractive than other options.

Why should scholarships be compared to employing students to go to school? First because much “scholarship” money is in fact compensation for services the scholarship students provide, such as are required of graduate teaching and research assistants. And second, because college students can be considered as citizens in training, and what society invests in student’s education has the expectation of financial payback to society in the future with no more guarantee of the payback than business who train their employees.

Sowell seems to be asking “what’s in it for me?” and “why should I pay (thru taxes) for someone else’s benefit?”. My answer is: if you don’t provide scholarships to induce students to continue their education, then students who are as shortsighted as you will not go to college, and the automobiles you drive, the healthcare get, the food you eat wont be as good as they would be otherwise, and you’ll not have anything constructive to do with the money you saved by not paying taxes. Not to mentioned being outvoted in elections by an ignorant electorate.

While it is hard to argue in general with Sowell’s conservative preference for individual responsibility, there are times when this argument fails. Sowell thinks that granting scholarships will lead people to squander their educational opportunities because they won’t have to pay for them. But scholarships are generally offered term by term, and those who squander their opportunities loose their scholarships. In my experience as a student thru the 60’s and as a faculty member thru the 80’s, scholarship holders (and mature working students paying their own way) are the most serious students, and it is the upper-income family-financed students that have the greatest feeling of entitlement and the greatest propensity to squander their family’s investment in their education. I should also like to point out that in my experience working students have a far larger dropout rate than scholarship students, not because of academic failure rates but because they could not afford the money or the time that was required of them in school.

Sowell’s rather theoretical prediction about scholarship incentives is in direct conflict with reality.

Part II

Sowell is 100% correct when he says that “education is not a Good Thing categorically in unlimited amounts, for people of all levels of ability, interest and willingness to work”. Scholarships should be granted only to those who show some evidence that the educational opportunities made available will be productively utilized and should finance only those educational costs that the recipient student could not reasonably be expected to provide by themselves at some reasonable level of personal sacrifice.

Back in the 60’s, Cornell University (where I did my undergraduate work) had a policy that anyone who could get into Cornell got exactly as much scholarship aid as a standard formula (based mostly on family income) projected they would need to get to afford school. That policy was an effective standard for limiting amounts of aid only to those qualified to get in and only in amounts required for them to attend. As for interest and willingness to work, Cornell is sufficiently difficult that anyone uninterested in (or unwilling to) work doesn’t keep their scholarship for long! Unfortunately, that way of allocating funds was weakened by racial quota issues and, as best I can recall, an absurd anti-trust lawsuit by an athlete who claimed that the policy interfered with his right to negotiate (based on his athletic prowess) a larger scholarship than the policy allowed. Believe it or not, he won!

Sowell suggests that “Another option would be to allow students to sign enforceable contracts by which lenders [which Sowell later describes as stock-holders] would pay their college or university expenses in exchange for a given percentage of their future earnings”. Unfortunately, the risk of such a contract to commercial loaners (or equity investors) would be very high because of the possibility of death or other default over the life of the loan, a loan life that must be very long because educational expenses are so high compared with starting salaries for all but the most well paying jobs, and that the incremental projected earnings a college degree earns are recovered slowly over the years. High payback risk and high interest rate risk (over a long loan) would require very high interest rates, making most loans unaffordable, especially to the most financially needy --- the cost of their education would in effect make them sort of long-term indentured servants to their loan owners (or shareholders). Lenders have made it clear that they will not make student loans to the most needy (who presumably would have the highest default rate) without government subsidy and/or guarantee, and in fact, government programs to provide such subsidies and/or guarantees do exist. But they are not a reasonable or efficient way of providing all student aid. And by transferring some of the financial benefit of getting an education to lenders, they serve as a relative economic disincentive to get an education. As for suggestions that the interest rate and risk issues could be avoided by pooling the risk of individual default into marketable securities, let’s not go there just now while the same stupid pooling of risk in the residential mortgage market has brought our financial system to the brink of chaos.

Part III

Sowell asks “Why does college cost so much?” and then answers his own question with “There are two basic reasons. The first is that people will pay what the colleges charge. The second is that there is little incentive for colleges to reduce the tuition they charge”. Certainly, these are two (but not the two) reasons. Sowell actually ignores the main reason why college tuition is so high --- colleges are large and complex business that are expensive to run, and high expenses requires high revenues.

People do seem willing to pay what colleges charge, at least what colleges charge after adjustment for appreciable school and government tuition reductions for those who are unable to pay the full nominal cost. And if people are willing (and able) to pay the costs, there is little reason for colleges to lower costs. For colleges that are serving as many people as their business model will support, there is never any economic reason to reduce what they charge. For the best and most prestigious colleges, charging as much as the market will bear provides benefits beyond profitability (as incentive denied to non-profits). Increased revenue from those who can afford it provides scholarship funds to attract top students who might otherwise be unable to attend but may become rich and famous and donate huge amounts of money and bring glory to the name of the university in the future, and provides funds to reinvest in faculty and university facilities that hopefully will also bring glory to the name of the university in the future. Second tier (and lower) academic institutions face a slightly more complex market situation. Unless they can establish a market niche, it’s hard for them to keep tuition high, and the scholarship students they might otherwise attract and the education they offer suffers as a result.

Colleges (and especially universities) have high costs because they are large, complex, multi-function businesses.

Obviously educating undergraduate students and teaching graduate level courses is the first function that comes to mind, and the costs of this function involves faculty teaching salary (only a fraction of faculty members compensated responsibilities), physical plant investment in classrooms, administrative overhead, etc. Like some high tech businesses, there is the huge cost of technological infrastructure including computer networks and expensive scientific laboratory equipment. Colleges finances are also burdened by extensive library facilities.

Graduate education and faculty research is another issue. Beyond graduate level courses, graduate education focuses on research and at most universities the research activity of faculty constitutes the majority of faculty responsibility. And research, especially in science and engineering is very expensive. To some extent that research cost can be recouped by grant money, but academic research need be focused on publishable (non-proprietary) basic (not specific product directed) research, for which industrial support is very weak. But it is primarily the success of the faculty in the research field on which the reputation of major universities is based, and even in fields where grant money is not widely available, faculty responsibilities in research is not diminished. And government support to basic research is not really that different in government subsidization of college tuition --- it’s just the same amount of money in the same pot.

Besides reputation, there is a real link between the quality of higher education and academic research --- those engaged in the best research efforts are usually those most knowledgeable in their field, and unlike lower education, subject matter expertise is really very, very important..

There are also many factors that make academic institutions expensive and difficult to manage, but I’ll mention just one here. Knowledge increases over time and as the amount of knowledge grows, so does the size of the faculty necessary to teach it. Some areas like computer science and bioengineering are growing much more rapidly than universities can finance by talking in more students, meeting new academic demands increases costs faster than revenues. Allocating faculty to cover changing teaching needs is a rather inefficient process, with faculty members with specialization in areas of decreased academic importance protected from change by academic freedom and tenure. Academic freedom is the single most important attribute (after faculty and student competence) of the academic environment and can’t be reduced in the name of efficiency without significant harm to academic quality. Tenure, on the other hand, is a contractual provision that some have attacked. But the fact is that without tenure, faculty salaries would have to be increased --- tenure is a job benefit that has real monetary value to faculty --- and the additional cost of faculty salary would exceed the probable efficiency savings. Even with the promise of tenure, universities have a hard time hiring and keeping faculty in disciplines of very high market value. Besides, the test of tenure is effective in finding dedicated competent faculty and is a huge motivator to get superhuman effort out of young faculty, an effort that very few faculty members could hope to achieve over an academic lifetime. And stability of faculty makes many positive contributions to academic quality.

So college education is expensive because it is a difficult commodity to produce well, and thus is expensive to deliver, and its value to society (that is, all of us as individuals) is such that if each of us does not contribute in some way (thru taxes, thru donations to the colleges of our choice) the number of people getting an education will be insufficient to meet our (individuals in the society) future needs for the scientists, doctors, lawyers, engineers, and producers of the products we all desire to consume. Leave education to the free market and you’ll get the free market result --- a lowering of the standard of living of future generations and of us (as we age) because the free market maximizes current well being while discounting future benefits.