Thursday, July 05, 2007

A Pet Peeve: The Higher Education Price Index

By Richard Vedder

Reports indicate that in the past year, the Higher Education Price Index rose less than in the previous year. But is this a valid indicator to use to correct for inflationary tendencies in the economy?

I despise this index. I think it should be a felony to make public policy decisions based on it. Schools that use it in grant applications should be denied funding unceremoniously. It is an abomination. I hope there is no ambiguity as to my feelings about this issue.

This index looks at costs of doing business in colleges, and tries to measure changes in them over time. There are the usual problems of weighting, shifting patterns of spending, qualitative changes, etc., that face any price index, including the venerable Consumer Price Index. These technical issues could lead to significant distortions of price changes from their true pattern. But this is not my beef with the index.

If institutions hire a lot of new administrators, pay bigger salaries, or expand fringe benefits, it raises the value of the index. "College costs are rising." Colleges then can go to legislators and other unsuspecting policymakers and say "We need a X Percent increase to keep up with inflation as measured by the Higher Education Price Index." In other words, by spending more, colleges increase the funding required to meet their definition of inflation. Since this index has risen more than the CPI over time, statistics on inflation-adjusted spending on higher ed using this index show less increase (or bigger decrease) than is the case using the inflation adjustments used by everyone else in our society --the CPI, the GDP price deflator, or the Producer Price Index. Big spending increases the index, which in turn increases the purported "needs" of schools to stay even with inflation.

This index is a con game to induce added governmental funding. At the very minimum, the Department of Education should ban its use in any publications they issue. I will testify any time, any where, before any legislative body wishing to rid itself of this statistical travesty. It is an instrument that ratifies and supports the peculiar tendencies of colleges and universities to engage in productivity reducing behavior designed to make life easier for people on campus.

1 comment:

Saxon said...

At one time, I was a member of a United Way evaluation committee looking at the requests of charities seeking funding for their operations. To an organization, those with missions based on perceived need always had rising costs which the taxpayers were asked to cover in case "somebody committed suicide" or some other truly awful outcome. They never wasted an opportunity to predict dire consequences. In fact, their stats never supported their claims. The truth was that the people who really knew the clientele had migrated to the better hours and jobs and the newcomers were burning out at a rate that necessitated the increased funding. Their response to suggestions that they change the service model? - anger, indignation, insults etc. responses that revealed how little the claims were based on fact and how much they were based on self-interest disguised as do-goodism. I see no difference between them and the universities.