By Richard Vedder
My friend Douglass North won the Nobel Prize arguing for half a century that transactions costs matter. If you lower the cost of going from A to B, or of buying a good from C, you are likely to bring about a more efficient use of resources and ultimately a rise in the material quality of life.
One mammoth transaction cost in higher education that impedes competition and reduces the optimal use of resources is the cost of students migrating from college A to college B. Just as nations impose tariffs on imported goods, so universities "tax" incoming students by only giving them partial credit for work already completed at another institution. College A, an accredited two year institution, says Joan College has 50 percent of the work for a bachelor's degree completed, but College B says, "No, if you want your degree here, we will only give you 25 percent credit towards your degree for work done at College A." "Your freshman English course does not count, since it is a composition course, and we at Last Resort U want our freshman to study American literature" --and other such nonsense.
Enter the New Jersey legislature, hardly a group that I would expect to favor positive educational reform (although New Jersey was a pioneer in alternative certification of public school teachers). They passed a law decreeing that New Jersey four year universities (presumably public schools; institutions like Princeton or Fairleigh Dickinson are excluded) must accept as a full two years credit (50 percent of a four year degree) any transfer student who has an Associate's degree from a community college. The college has some choice -- it does not have to accept the student. But if it accepts her, it must give her credit for two full years. Part of the reasoning may be that it does not want to subsidize instruction twice for transfer students (which is the case when little prior credit is accepted).
New Jersey is responding to a key Spellings Commission concern -- the costly nature of the transfer process, impeding access for some students to good four year institutions, adding to costs, and restricting competition. It should be applauded. At the same time, I usually do not like legislatures mandating academic policy. There are mediocre two year schools whose credit perhaps should not fully transfer. There are, in short, some quality control issues. And a "one size fits all" approach is usually bad. But perhaps the Theory of the Second Best applies here. What we are doing now is unacceptably costly and self-serving, so this reform, imperfect as it may be at the margin, is an improvement over the status quo. Heavy handed legislative efforts are to be expected when colleges do not respond to public concerns. There is widespread agreement that we need to remove barriers to both entry and transfer, and this is a welcome development on balance.
The libertarian side of me (which is a big side) is always worried about coercive laws, but the fact that colleges can reject potential transfers still leaves the four year schools with a choice in the matter. And the measure is taxpayer friendly, maybe reducing, albeit very modestly, the incidence of five and six year college students, a national disgrace.