Friday, December 08, 2006

Bridget Long and College Financing

By Richard Vedder

In evaluating the appropriateness of a policy, it is a given that it is best not to have the analysis done by persons who have some conflict of interest -- some potential gain or loss arising from the implications of the analysis. Yet who is doing the analysis of the economic effects of federal policies towards higher education? Almost entirely academics who have directly benefited from those policies, including me. In defense of myself, I am largely retired, and the nominal portion of my income (less than 10 percent of the total) coming from being a college professor is contractually fixed in terms of salary until the time of my full retirement, hence I cannot really gain or lose much from any given policy change.

Private companies help the Department of Education administer and evaluate the various college financial aid programs. One such company, for example, is Accenture. Would it be appropriate to ask Acccenture to evaluate the program that it largely administers? Of course not. If Secretary of Educaiton Spellings and/or Congress create a Financial Aid Commission as an outgrowth of the Spellings Commission, I would hope that they insist that the research on existing programs be done by persons without a potential conflict of interest. Hire professors from foreign universities (e.g, Cambridge University or the University of Toronto), or think tank individuals with scholarly credentials but no academic affiliation.

This came to mind when CCAP's friend Anne Neal sent Bryan O'Keefe sent me a copy of Professor Bridget Long's testimony on Tuesday before the Senate Finance Committee. Most of what Prof. Long said was a recital of the party line of the Academic Establishment. Bryan (who was there) tells me that Prof. Long spoke with great assureness and she rather airily dismissed any study not agreeing with her view that "financial aid does not matter (much)" in explaining the tuition explosion. She santimoniously proclaims that she more or less ignores research that has not been peer reviewed by other academics (with similar conflicts of interest). She is oh so sure of herself.

To be sure, I agree with much of what Prof. Long says. I agree, for example that all assistance is not equal in terms of economic effects. In my own empirical investigation, I find that grants have a more direct tuition effect than loans, for example. I share her concerns about tax credits as a way of aiding students. I am with her in showing skepticism about expanding government loan programs (relative to grants). I strongly agree with her on the need for aid simplification. The FAFSA form can be dramatically simplified, for example, as people in the know tell me that the bulk of the data provided on the forms the government already collects elsewhere.

Increased financial aid should enhance the demand for higher ed --if it doesn't, it is not doing its job --making more students wanting to attend college at the sticker price that is quoted in the catalogues. The PURPOSE of financial aid, I think, is to increase demand --or "access" in the language of university presidents. If not offset by supply increases, tuition will rise (the precise amount depending on the elasticity of supply). Also total revenues (price times quantity) will rise. Given rigidity in supply at many schools, including Prof. Long's, there is a very strong presumption in economic theory that tuition should go up if third party payments rise (certainly, no one denies that has happened in health care). My own research shows that there seems to be a clear positive tuition fee/federal aid relationship with respect to grants, although far less clearly so with loans (which, after all, have to be repaid).

When Prof. Long starts spouting the party line of the Higher Education Establishment on the true causes of tuition hikes, my suspicions grow that she is an apologist for perpetuating the higher ed gravy train that has led to extremely large salary increases for senior professors at private research extensive universities, including Harvard (a position to which Prof. Long no doubt aspires)over the past decade or two. While she is right that stagnant state appropriations have contributed to rising public school tuitions in the past, that says nothing about tuition increases of double the inflation rate at private colleges, nor does it explain the same phenomenon at state schools in the last year or two amidst rising state appropriations (see today's INSIDE HIGHER ED). She notes salaries are rising as if that is exogenously determined, claiming that is significantly explainable(without any empirical evidence)by the fact that the average experience and seniority levels of faculty are rising --never mind exploding salaries within the senior ranks over time at research extensive universities. With a straight face she notes technology is adding to costs, never talking about WHY in virtually every other area of human economic endeavor, it lowers costs. She is silent on the lack of incentives to contain costs when someone else is paying the bills. She does not discuss problems arising from resource rigidities, the under use of facilities (empty buildings in summer), restrictions on competition imposed by university refusal to transfer credits fully, the fall in teaching loads and its impact, etc., etc. I repeat: if you want objective analysis of financial dimensions of higher education, professional ethics demands that you go outside the academy for an evalaution. I want to make it clear that I am not saying that Prof. Long is ethically challenged (I don't even know her). But I am saying that it is very difficult for people, however well intended and morally upright, to speak objectively about the sector of the economy that feeds them.

This blog is running too long. The notion of Prof. Long that the "sticker price does not matter (much)" and that we should look only at the net tuition charge is also a dubious notion worthy of another blog --suffice it to say here that we should be interested in the true cost of higher education to society (including taxpayers), and that the total cost per student or some such measure is better than any tuition metric for measuring that. Also, the use of college fees as an income redistribution device (implicit in the growing disparity between gross and net tuition charges) has all sorts of other unintended consequences, including a decline in the national savings rate. More later about those concerns.


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