Friday, April 04, 2008

The Lumina Foundation's Productivity Initiative

By Richard Vedder

I am playing with fire with this blog, but my trademark is to "tell it as it is." I am asking the Lumina Foundation for Education for money (soon), so commenting on projects that it is funding is probably imprudent. But Abraham Lincoln, George Washington, General George Patton Joan of Arc and thousands of other great humans were often imprudent; indeed, imprudent frankness is a mark of American exceptionalism.

Lumina has a great idea, and is putting its money where its mouth is. Lumina is concerned about college affordability, and has decided a major focus in making college more affordable is to examine productivity. Increasing productivity should lower the pressures to raise prices that students pay, and increases the effectiveness of legislative appropriations. It is a win-win situation when productivity rises for both consumers and producers like.

While chatting with a couple of the good folks at Lumina in Indianapolis yesterday, they casually gave me a draft copy of a "report of the Delta Cost Project," The Growing Imbalance. The senior author, Jane Wellman, is soliciting comments from economists and other observers of the higher education scene.The authors have done a lot of useful things using IPEDS (Integrated Postsecondary Education Data System) data over a long time frame. They have put together a good data base, which we at CCAP hope to use in the future. Kudos are in order for that.

They note several things I have observed for years: the share of university budgets going to instruction is falling, for example, and private school spending is rising faster than public institutional spending at the four year level. All of this is good.

But they ignore the root causes of spending increases (third party payments, the not-for-profit nature of the system), say little about the huge differences between the for-profit and not-for-profit sectors in terms of costs, etc., and they say some maddening things about productivity that would probably seem nonsensical to any economist worth his or her salt.

Here is my favorite quote (p. 40): "Except for the private research sector, the share of spending going to instruction has merely kept pace with inflation, and has actually been reduced at public two year institutions. This suggests that labor force productivity is increasing in higher education..."

First of all, you can say NOTHING substantial about productivity based merely on spending data. Productivity relates outcomes to inputs (spending). Since we have absolutely no good information on "value added" output of universities (which the authors elsewhere acknowledge), any statements about productivity rising are totally conjectural, a dubious thing to do in a study purporting to report facts.

Second, even if outcomes per student were remaining constant (an assumption), constancy in real costs of providing services is certainly no proof of rising productivity. Indeed, it might be interpreted as a sign that the real inputs into higher education are remaining constant per unit of output. Constancy in productivity is hardly success in a society in which productivity is rising roughly 2 per cent a year over the long run. Moreover, while costs per unit of instruction are falling in real terms at two year schools, they are rising at the four year private research universities, which absorb more resources. However, since we are uncertain what is happening over time to outcomes per student, and since universities produce many "products" (new inventions, student learning, football entertainment, etc.), it is tricky business even "guessimating" university productivity.

Moreover, if in fact the "share...going for instruction" is falling, that means a larger share (of the whole budget "pie") is going for non-instructional expenses. How could that clearly be productivity-enhancing, particularly if the instructional component is the core academic mission? If instead of "share' the authors mean the absolute amount going for instruction, the picture is somewhat different, but even here it is impossible to conclude based on any available data that productivity is rising in higher education.

None of the authors are professional economists with a Ph.D. (Indeed, one appears to be a public relations specialist). However, Jane Wellman has been doing studies for a variety of pro-higher education for years. If the Delta Project is going to do a big productivity project, it should involve people with premier reputations for work on educational productivity --persons like Carolyn M. Hoxby of Harvard or Eric Hanushek of Stanford. I understand they are calling on economists for comments, and that is good. I think they (the Delta Project) should not in the conclusions section of a report make unsupported claims about productivity trends based on limited data. If the Delta Project (and, perhaps, its financial supporters) wants people to take its work seriously, it needs to be very, very careful in the claims it makes, given the inherent difficulty of assessing productivity change in higher education.

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