Bounty Hunting, University Style

By Richard Vedder

A few days ago, the New York Times had a story featuring my own university and, indeed, a friend of mine (Josep Rota). The story pointed out that more and more American universities are using recruiters in Asia to get them students --paying the recruiters an amount, say 10 percent of tuition, for each student enrolled. My university started using the practice a couple of years ago, and undergraduate foreign enrollments are soaring.

Actually, there are some very good aspects of this phenomenon. Students who completely lack knowledge of foreign universities get help, albeit sometimes rather biased help. The universities often get students who are qualitatively the equal or superior of the average undergraduate, and they gain some diversity in the student body. Moreover, economically, for many state schools it is a good deal. Ohio University charges about $18,000 out of state tuition for undergraduates --which probably exceeds the marginal cost of educating an undergraduate, particularly the first two years. Even after paying a thousands dollars or so to an agent, the students are actually more an asset than a liability to the university.

Yet there can be serious ethical problems. Many agents collect twice --once from the university, and a second time from the student. The agent is not a dispassionate, objective dispenser of information.

Moreover, some of the schools using agents are at least moderately selective in their admission practices. My university turns downs thousands of Ohio students annually prepared to pay the $9,000 or so in state tuition --and in part replaces them with out of state (and nation) students paying far more. The university claims it promotes diversity and excellence, but taxpayers subsidizing my university might claim that the practice discriminates against students from the place where taxpayers are footing perhaps one third or more of the bills.

In principle, I see nothing terribly wrong in using recruiters. They help make transactions occur. They provide information. They are compensated for their services. Instead of universities using their own employees, they use agents, which is often more cost effective. Schools out source part of admissions recruiting, consistent with pleas I have made for years about universities concentrating on those things they do well and relatively efficiently. At the same time, the agent taking payment from both the consumer and the provider is engaging in what Americans, but not Asians, view as dubious behavior. But compared with other problems facing universities, I think this is a relatively trivial one, at least at this point in time.

Caesar's Gaul and the Modern Research University

By Richard Vedder

Like the Gaul of Julius Caesar, the modern research university is divided into three parts, often of roughly equal size. Universities are in the business of disseminating knowledge (teaching), creating knowledge (research), and public service and a variety of business activities ("auxiliary enterprises"). The proportions vary somewhat --at M.I.T., for example, the research component is, no doubt the largest, whereas as many medium quality state institutions (my own Ohio University is a good example), the instructional or auxiliary enterprise components are the largest. Auxiliary enterprises include feeding and housing people, caring for the sick (at university hospitals and clinics), entertaining (games where balls are thrown around, theatrical productions),etc.

The financing of these myriad activities is complex, and usually the public has no idea about the relative importance of the components of this trinity of functions or the amount of cross-subsidization that goes on between them. When university presidents tell parents "your tuition payments cover only 30 percent of the cost of running this institution," they neglect to tell them that the school may be only using 30 percent of the budget directly or indirectly on the dissemination of knowledge and that, in fact, they are paying 100 percent of the cost of educating their kids (in some cases, even more than 100 percent). At my university, the athletic department routinely overruns its budget and runs, in effect, a $12 million plus annual loss which is subsidized elsewhere --about 3 percent of the total university budget. While this is higher than average, it is not extraordinary. Rather than lower tuition by 6 percent and eliminating the subsidy, it continues to keep it to make alumni (who give trivial amounts to the institution) and a few noisy wannabe jocks happy. The students would vote resoundingly, I think, to lower the tuition and give up Division I football if given the opportunity.

I think we should have greater transparency about financing (I have a piece coming out shortly in the Chronicle of Higher Education on this point). The ratio of tuition payments to instructional costs, academic support, and a pro rata proportion of general administrative expenses is needed for every school --and it should be posted on a national web site. The issue arises: where do third party payments REALLY go --for the purpose for which they are intended, or elsewhere? I suspect most third party payments go for instructional or research purposes. But some money intended for "instruction" goes for "research." Does research pay for itself or is it heavily cross subsidized? Do state appropriations, probably designed mainly to improve student access, in reality promote very expensive graduate programs and esoteric research? Does 10 percent or so of my university's state appropriation in reality go to finance intercollegiate athletics instead of, say, creating lower tuition for students that would improve access to college?

CCAP is working on two ways to control costs. First, we are trying to offer alternatives to the cost-enhancing US News & World Report rankings, evaluating schools more on outcomes than inputs (resources used). We are also continuously promoting competition and transparency --both things that can only lead to some moderation in the excessive rise in college costs.

Senator Grassley' s Queer Quixotic Quest

By Richard Vedder

I have known Senator Chuck Grassley, albeit not intimately, for many years. He is the quintessential Senator who has "grown" on the job, to use liberal parlance --meaning he makes most decisions based on trendy politically correct ideas of the moment and less based on bedrock principles. In short, he has moved to the left politically more than his pal Max Baucus (chair of the Finance Committee) has moved to the right.

The Wall Street Journal reports Grassley still is pushing colleges to spend five percent out of their endowment annually. It is an idea that I once thought had some merit, but, like the Journal, I increasingly think is a turkey of a proposal. I was convinced of that in part at an AEI conference that I presided over, where Charles Miller (former head of the Spellings Commission) and Terry Hartle (of the American Council of Education) made compelling arguments.

The irony of it is that the proposal to increase spending from endowments is coming as endowment returns are sharply declining. My guess is some endowment funds showed low single digit or even negative growth over the 10 month period in the current fiscal year (beginning for many colleges on July 1), after adjusting for inflation (which is increasing because of bad public policy). In other words, some of these schools are actually eating into principal after adjusting for inflation. Compelling higher spending in such an environment is not prudent financially.

However, this is not my major objection to this idea, which is articulated in a dialogue between Charles Miller and Lynne Munson in a study that CCAP is soon releasing. Universities are severely constrained by donor intent on the use of endowment funds, and an automatic payout rule in some cases is inconsistent with donor intent.

It is probably true that during the great endowment run-up between, say, 1982 and 2007, schools on average spent less out of endowment than necessary if the goal of treating different generations alike is accepted. Put differently, returns were so high that real endowments grew, benefiting future generations at the expense of current ones, and arguably in some cases violating donor intent to serve various missions now as well as in the future. But the reasons for this conservatism are understandable if one looks at the period from, say, 1960 to 1982, a period in which real per student endowments fell at many institutions during a period of very low returns on endowment investments (in large part a consequence of a crazy Keynesian-style macroeconomic policy that may be returning in this era of the Bernanke Fed and a Congress/President that believes in runaway spending).

The most frightening statements come from the IRS, which is talking about what kinds of spending IT will permit with tax exempt funds. I do think a very good case can be made for not allowing tax exempt contributions to essentially nonacademic purposes of universities --stadium sky boxes, luxury dormitories, etc. But that determination needs to be made by the Gang of 535 (Congress) and the president, following the provisions of the U.S. Constitution, not by power hungry tax collecting bureaucrats.

More International Perspectives on the High Cost of College

By Richard Vedder and Jonathan Robe

Yesterday in this space the point was made that even if you believe the Baumol thesis that college is inherently highly costly because of the difficulty of improving productivity, why would that lead to much higher costs in the U.S. than in other roughly comparable industrial nations. Today we want to bolster that argument a bit.

Some relevant OECD data on college costs, etc. are in the table below. They show that the U.S. spends roughly double as much per student as such peer nations as Britain, Germany, France, Japan and Australia and considerably more than neighboring Canada.

Table 1



You might say, "Professional workers make more in the U.S. than in these other countries," thereby explaining the differences. Not so. We obtained data on senior secondary (high school) teacher salaries for some of these countries. Table 2 looks at the number of college students than can be educated for the equivalent of one year's employment of a long-time (15 year) high school teacher.

TABLE 2



For the non-U.S. nations you could educate three or four college students for what it cost to hire a high school teacher --whereas, in the U.S., the number is less than two.

As indicated in the earlier blog, all of this cries for explanation. If it is all explained by greater research efforts in the U.S., the cost of this research is greater than the costs of instruction --meaning it is an extremely expensive proposition. I suspect the socialization dimensions of higher education --the football teams, elaborate student services, etc., are a big contributing factor. But all of this bears more investigation.

The Baumol Effect and Rising College Costs

By Richard Vedder

The Greentree Gazette has reprinted an article by William Baumol and an associate from 1995 that points out that the service nature of higher education makes it difficult to replace humans with capital equipment unlike in many goods producing industries. In this respect, higher education is just like the performing arts and health care services. Hence productivity growth lags behind other sectors, meaning over time the costs of inputs rise more in higher education per unit of output than in the overall economy.

Will Baumol is a world-class economist who should someday receive the Nobel Prize. I admire his work immensely. And his theory has more than a grain of truth to it. There are limits to the use of computerized or interactive television instruction, for example. Efforts to substitute capital (e.g., computerized instruction) for labor run the risk of lowering quality, as students respond better to direct interpersonal contact with live professors in most situations.

But the argument has a huge limitation --instructional costs are typically a small proportion of the cost of going to college. The ratio of faculty salaries to tuition payments is typically well below one, and as a percent of total academic expenditures, it is typically less than 25 percent. And there is nothing in the Baumol thesis that would explain, for example, the doubling in the number of professional non-instructional personnel per student over the past three decades.

Moreover, a look at international data is instructive. The ratio of college to high school costs per students is about 1.6 for the entire OECD (about 30 top industrial nations), but it is about 50 percent higher, 2.4, for the U.S. Why does it cost more than 20 percent more to educate a college student in the U.S. than in Canada, or nearly twice as much in the U.S. relative to Britain, France, or Germany? Not all of that is explained simply in terms of the Baumol effect (these are all high wage countries and professorial wages are not that dramatically different between those nations and the U.S.) (I am indebted to Jonathan Robe for this insight).

Of course, much of the explanation for these differentials may reflect research spending, and part of it may reflect genuine qualitative superiority of American universities. Nonetheless, the evidence is clear that some other nations with high quality higher education, such as Britain, seem to operate at dramatically lower costs. A closer examination of these international differences seems warranted.

Two Follies

By Andrew Gillen

I recently stumbled across an old management classic: On the Folly of Rewarding A, While Hoping for B by Steven Kerr. It originally appeared in The Academy of Management Journal, Vol. 18, No. 4 (Dec., 1975), but an updated and ungated version is available here.

The title is a nice summary of the main point, but the section on universities caught my eye, especially two of the examples he gives. The first relates to how professors are rewarded.

Society hopes that professors will not neglect their teaching responsibilities but rewards them almost entirely for research and publications.

The second relates to students.

[G]rades themselves have become much more important for entrance to graduate school, successful employment, tuition refunds, and parental respect, than the knowledge or lack of knowledge they are supposed to signify.

It therefore should come as no surprise that we find fraternity files for examinations, term paper writing services, and plagiarism. Such activities constitute a personally rational response to a reward system which pays off for grades rather than knowledge.

I had been under the impression that these problems weren't as big back then as they are today. Of course, I didn't have much personal experience with higher ed in the last millennium (I was born after the article was written), but I'm curious as to what our readers think on this. Have these problems been getting better or worse?

Giving Presidents Tenure

By Richard Vedder

Increasingly, universities are treating presidents as untouchable icons that must be kept in office no matter how egregious their behavior. In short, they are being given something close to tenure. That may be good for faculty, although even that is a very debatable, dubious proposition. But it makes zero sense for university presidents. I deplore the trend to long term contracts for presidents, thinking that agreements of more than three years in duration involve enormous financial commitments and lead to "imperial presidents" who may exercise leadership --but often at the expense of disastrous policies and poor morale.

West Virginia University's Faculty Senate has asked for the removal of their president in light of the granting of a degree to a relative of the governor. The Provost and business school dean were removed, but somehow the Trustees feel the President does not share responsibility, despite the fact that he apparently knew all about the incident (as an ex-lobbyist, I would not be surprised that he prompted giving her the degree).

At my university, the Board of Trustees ignored strong no confidence votes in the president from both the student body and faculty --and gave him a long term contract this year that extends until he reaches retirement age. At a community college up the road, a whole litany of scandals including dubiously awarded degrees, financial improprieties, etc., has led to no action on the part of the board to remove a president in his 40th year of leadership.

Where is the accountability? Where are the accreditation associations who are supposedly our protection from mediocrity and inappropriate conduct?