Wednesday, August 16, 2006

Innovation and Privatization

By Richard Vedder

For years, traditional universities have grumbled about the for-profit institutions that are rapidly growing (although enrollment growth is now slowing down) and have been taking market share from the not-for-profits. For example, the University of Phoenix has gone from something like 50,000 students in the late 1990s to around 300,000 today.

Rather than complain about them, B. Joseph White, president of the University of Illinois, has decided to join them. With campuses in Urbana-Champaign, Chicago and Springfield, Illinois is clearly the flagship university in the state. Now it wants to open a fourth campus, a virtual site that will be a "Global Campus." Most interestingly, the U of I wants to run this operation on a for-profit basis, and it is out to raise an initial $15 to $30 million to get the project going in a big way.

On the whole, I admire this effort. It plans to use modern technology to serve students not only in Illinois, but around the world. It plans to ask taxpayers for nothing to fund the effort. It is a recognition that the for-profit model can and does work well --often far more efficiently than the traditional, bureaucratic, less competitive, model that dominates American higher education. Joe White (who is an impressive man) is to be commended for this move, as are the Trustees of the University who no doubt had to approve this major departure from current practice.

Are there potential pitfalls? Of course. Whenever you commingle for-profit and not-for-profit missions under the same umbrella, you have some potential problems. Is this new venture going to be largely or completely owned by the U of I, is it merely going to be a major stockholder, or is it simply going to share in the revenues (in return for providing instructional services)? How can an institution supported by taxpayers and designed to serve a broader public purpose also serve individual stockholders interested in private gain? Is their some implicit public subsidization of this private venture? Can individuals on public salaries be working for private companies at the same time?These are all good questions that will be answered, hopefully in a manner that does not embroil the university in scandal or controversy.

The U. of I. is taking a step already well advanced among the flagship state universities: privatization. Already, parts of the University of Virginia have, in effect, gone private. It has been openly talked about in other states. The University of Colorado, for example, once discussed the option of moving away from being a state supported institution. As state support as a percent of budgets declines, major universities might well consider going private --sacrificing some income in the short run in order to gain complete freedom to pursue whatever policies they want. An idea that both President James Garland of Miami University and I have supported is to accelerate this process by converting state appropriations to institutions into vouchers for residents to use at the college of their choice.

While Joe White is not yet ready to give up public support for his fine university, his new initiaitve is a bold innovation that moves traditional universities more into the hurly burly -- and efficiency --of the competitive marketplace.


superhiker said...

Privatization of public universities is an interesting idea, but one fraught with risk of unintended consequences.

Public university expenditures per student are on average much less than those of private institutions, even counting the public subsidy.

If public institutions were really private, they would have the ability to set their tuition to whatever level the market would bear.

In many cases -- Virginia and Colorado being good examples, Illinois another -- the optimal tuition rate (from the point of view of the privatized institutions) would probably be a good deal higher than the artificially controlled current in-state rate (again, taking into account current subsidies, and whatever future subsidies that might exist in the form of vouchers).

In the case of the public university I know best, various persons have thought about what the tuition rate would be for in-state students if the institutions were allowed complete freedom.

The answer seems to be that it would go up several thousand dollars, even with an appropriate discount for the value of the physical facilities contributed by the state.

CNote said...

I'm interested in your comment about public vs. private expenditures per student - upon what do you base this information? I concur with your general comment about unintended consequences, but I think the effect would be that the market forces would drive down prices over time as student-shoppers used their vouchers at a much braoder range of institutions than are currently present. Public institution students now have a limited range of alternatives to maximize their consumption of education because the current subsidy is providing by the state owning the factors of production. If the state instead decided to continue to subsidize higher ed but through a voucher system, these students would see a vast new arrary of options open to them including a number of additional 'for profit' entities not yet in existence. My guess is that most now-public universities over the long haul would either shrink to emphasize their core areas of proficiency or cease to exist at all.