Monday, March 24, 2008

Will A Recession Hurt Higher Education?

By Richard Vedder

Conventional wisdom is that higher education is relatively less battered by economic downturns than the rest of the economy. Indeed, a colleague of mine, Rajindar Koshal, found in his statistical analyses decades ago that enrollment demand for public universities in Ohio was actually anti-cyclical --recessions meant some people lost jobs so they went to school to improve their education --the opportunity cost of college (in terms of income foregone) fell sharply during recessionary periods. Nothing like a good recession to increase enrollment at Last Resort U., if not Harvard.

There are a lot of reasons, however, why the current downturn, if it becomes moderately severe, will have a large adverse impact on the financial condition of colleges and universities. It will not lead to massive layoffs, I suspect, but hiring will be down, retired people will be replaced less, etc.

1. As income growth stagnates, tax revenues fall and welfare spending rises, squeezing public funding for higher education, which is often viewed as a nice but non-essential form of spending that gets the residual after core needs (K-12 education, public assistance, corrections, public safety) are met. Empirical evidence is clear that real state appropriations fall in periods of economic downturn.

2. Shaky financial markets mean large endowments gains for the wealthy schools almost certainly will not be achieved this year. Indeed, given the high risk strategy of some schools, some may take a real pasting.

3. On top of this, we have reached the peak in the size of the college age pool of Americans, meaning the natural increase in demand for college associated with population growth has ended (in some low growth areas such as the industrial Midwest, the population pool is already falling).

4. The policy actions causing the bubble in housing were initiated by excessive Fed monetary policy after 2001 accompanied by highly expansionary fiscal policy of the Feds as well. The people who got us into this mess are trying to get us out, dropping money out of airplanes over investment banks, muting the powerful warning signals of markets, and, above all, threatening inflation. $1000 gold and a dollar that is declining in value by the minute are signs that inflationary expectations are rising. Inflation hurts universities big time in the short run, because their funding mechanism cannot quickly respond. Tuition fees are raised only once a year, for example.

5. The demand for higher education has been propped up by student loans. Private funding of student loans is declining sharply as lenders become more aware and wary of credit risks and the Congress radically reduces incentives for private players to participate in the student loan business.

6. The demand for college will decline somewhat as the perceived gains in terms of greater income fall (fewer good jobs available) relative to the still rising costs.

The upshot of all of this may be a bit of belt-tightening. This is good, of course, since the amount of waste and bloat in higher education is legendary. Unfortunately, however, the temporary nature of business cycle downturns means that colleges will soon return to their free spending old ways, unless more far reaching reforms come.


Jenna McWilliams said...

As a current university employee and soon-to-be-graduate student, I worry intensely about how the recession will affect higher education. I think this analysis is dead-on, and I think the recession will also contribute to a weaker education at state colleges. Actually, I've written about this on my own blog at I'd love for you to check it out!

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