College Affordability: Is It Declining?

August 2, 2006

By Richard Vedder

I am told that two stalwarts of the Higher Education Establishment (hereafter HEE), Michael McPherson and Morton Schapiro (hereafter M and S), have a new book coming out on higher education. Both men are economists and have written extensively on higher education. McPherson, a former college president, runs the Spencer Foundation, while Schapiro is president of Williams College.

From emails from some other leaders of the HEE, I understand that M and S present evidence that can be interpreted as suggesting that higher education spending has risen roughly at the same rate as national output in the past generation, so that the national burden imposed by colleges and universities has not grown, even though it has increased for the immediate users, current students (and their families). Thus, it follows that the notion that higher education is becoming more "unaffordable" is simply not true. All that has happened is the burden has been redistributed a bit, falling for taxpayers and rising for students.

We could expend a good bit of effort discussing the statistic itself, and whether the underlying claim is true. For example, M and S in their calculations exclude some university spending, such as auxiliary enterprises, as if they were not part of universities. They subtract financial aid spending. Whether these exclusions are appropriate is at least debatable, and whether the same results would exist with their inclusion is unknown. But I am concerned about the use of the statistic for other reasons, and would conclude that it is a near meaningless measure of the burden imposed by higher education on American society.

With economic growth, we produce more goods and services, so we would expect people to devote a smaller proportion of their resources to purchasing a given good or service over time, unless they decided to consume considerably more of it, and/or there were vast qualitative improvements in the good or service. For example, in 1980, we spent about 12 percent of GDP on food, while today, we spend less than 10 percent. Yet we certainly are not eating less, and indeed are eating more costly foods in more comfortable settings, for example, consuming more restaurant food and eating fewer leftovers at home. For clothing and shoes, spending went from 3.85 to 2.77 percent of GDP -- a 28 percent decline in the proportion of GDP spent. Even for furniture and appliances, the proportion of GDP declined modestly, despite the fact that we have bigger houses (and thus a good deal more furniture) and vastly more and better household gadgets than a generation ago.

In all of these cases, efficiency gains meant that prices of the goods, adjusting for inflation, did not rise, so the burden of consumption fell even though quality and/or quantity of the goods consumed per capita rose, precisely because of our rising real incomes. But in higher education, that did not happen. Inflation-adjusted prices for higher educational services have risen rather than fallen over long time horizons. The qualitative improvements observed in food and appliances is not so readily apparent in higher education, in large part because we don't have any good way of measuring the quantity or quality of the services we provide, either in the area of teaching or research. There is no "bottom line," except for the rapidly growing for-profit institutions. We do know, however, that it takes more labor to educate a college student today then it did a generation ago, while it takes fewer farmers to produce a bushel of wheat. Labor productivity is rising 2 per cent or so a year in the economy as a whole, but may be falling in an absolute sense in higher education. Certainly it is falling relative to the trend in the economy as a whole.

Sure, we can "afford" higher education in the sense that it only absorbs a small percentage of our income. But that is not the relevant question. Are we getting our money's worth? Are there inherent reasons why productivity in higher education cannot rise? I think not, although some seem to disagree (a subject for a later essay). I think the incentive systems in American higher education do not encourage cost containment. In the private sector, the key to financial success is cutting costs and enhancing revenues through offering better products. Qualitative improvements and cost reductions mean higher profits, which in turn mean higher stock prices and stockholder wealth, bigger bonuses for managers, etc. I have never heard of a single higher education administrator at a not-for-profit institution being given a bonus for cost reduction. To be sure, there probably are some examples of incentive payments for efficiency, but they are relatively rare.

Higher education is the peculiar institution of the 21st century. Where else do the employees (tenured faculty) often largely hire or fire their own bosses? Where else do the buildings used for operations remain largely empty several months a year? Where else do key employees show up for work only two or three days a week, maybe 35 or 40 weeks a year? Where else is an "hour" actually usually 50 minutes? Or, where else is a "year" nine months? Where else do the employees (faculty) decide on what they are going to do at work, and, for that matter, when they are going to go to work?? Where else is it almost impossible (or extremely costly) to get rid of unneeded or unproductive staff?

So demonstrating that higher education's share of GDP is staying roughly constant means relatively little, in and of itself. If that reality were accompanied by huge increases in the proportion of Americans in school, or by clear qualitiiative improvements in educational services offered, then perhaps I would be more impressed with the M and S statistic. That, however, does not seem to be the case. In short, the M and S statistic seems to be much ado about nothing. To be sure, I may be unfair towards M and S, and, if so, I will issue an apology after reading the whole book. Until then, however, I stand by my claim that the spending/GDP ratio has only very limited usefulness