Tuesday, November 04, 2008

Are Taxpayers Being Deceived or Ripped Off?

By Richard Vedder

The one word answer to the question posed in the headline is: yes. The more complicated answer follows.

At several prominent flagship public universities, state appropriations make up only 10-15 percent of the budget. At a school like the University of Michigan, University of Virginia, or even the University of Colorado, the average student tuition fee (including out-of-state students), net of scholarships, probably exceeds the marginal cost of educating freshman students, particularly given the widespread use of graduate students and part-time low paid adjuncts in teaching, along with the use of large lecture classes. In addition, at UVA or Michigan, there is probably $2,000 or more endowment income coming in per student (far more at the University of Texas) as well, not to mention several hundred dollars per student in new donations. My guess is that, roughly speaking, these schools make money off freshman and sophomores (after allocating some of the endowment income to their education as intended by donors), lose a bit on juniors and seniors, and, roughly speaking again, break even on all undergraduate education --without use of state subsidies.

If I am right, the entire state appropriations for these schools goes for research, graduate and professional education and non-academic activities. A large part of the graduate student funding helps students from out of state and often even outside the U.S. There is nothing inherently unethical or illegal about this, but it certainly violates the original concept of state universities, envisioned as places to provide, at public expense, low cost education to undergraduates. It also is not what taxpayers today THINK their money is going for, nor is it what university presidents talk about when they ask for greater appropriations --they talk, for example, about greater student access, even though these schools have selective admission policies, accept mainly rich kids, and use incremental monies largely to fund research, added administrative positions, and, occasionally, a little in the way of R and R facilities for the generally well-to-do students.

At less research intensive schools, this is less the case. In these instances, perhaps 25 to 35 percent of budgets still come from state appropriations, graduate enrollments are fairly modest, average tuition fees are a bit lower, and some of the state money actually goes to subsidize student education. That is clearly the case for community colleges.

What bothers me is the disconnect with respect to public funding of the prestige institutions (that typically get far more per student state funding than the lower ranked schools) between what actually happens and what legislators and the public think is happening. Would the public fund hundreds of millions for research at the University of Michigan annually at the expense of nothing for student subsidies? I rather doubt it. I think honesty and transparency requires that the taxpayers know where there dollars go.

All of this, of course, is just another reason why I believe that a superior funding model would be to give funds to students themselves rather than to universities, giving the universities only a limited amount for explicit subsidization of research. Not only would this scholarship or voucher approach stimulate inter-institutional competition, it would assure that funds are being given more in accord with the wishes of the people for whom government is meant to serve.

Giving money to institutions also promotes inefficiencies, such as the hiring of massive administrative staffs, or excessive payments of economic rents, as manifested in huge salaries for university presidents who a few years ago did the same jobs just as well for far less money. So taxpayers are being both deceived AND ripped off. The ultimate solution, of course, is to concede that higher education is largely a private good and gradually withdraw public funding altogether. In the interim, however, student-based funding is an idea whose time has come.


capeman said...

"My guess is that these schools ... roughly speaking ... break even on all undergraduate education --without use of state subsidies."

This is another example of the Doc's incompetence at economics. I know a fair bit about the budget at the state university where I work. It is simply not the case that the place breaks even on undergraduate education without the state subsidy. It is not even close. The Doc's "guess" is completely out to lunch.

Frank said...

It's true that almost all of our graduate students are out-of-state or are from foreign countries. The problem with your analysis is that our program is expected to be self-sufficient in terms of overhead from grants. To those unfamiliar with overhead it's the part of the grant that goes to the U and does not end up in the lab. Typically it's 40-60% of the grant. Without these students these grants would be impossible. Our U did an analysis, when the Ph.D. was dropped there was a net loss. Also consider that product, the newly minted Ph.D. and the research. Our Ph.D.'s go on to start at $75-90k and at least my research has evolved into tangible products. And who knows where it leads anyway. No one has the collective wisdom to predict this. Some of the esoteric research done on that 'useless' element silicon in the 1950's put the US in the lead for wafer production and chip fab in the 1960’s.

capeman said...

On second thought -- and this perhaps dovetails with what Frank says -- why should one think that the legislatures are unware that research is being partly subsidized by the public? Are the legislatures of such states as California, Michigan, Illinois, Wisconsin so stupid that they have historically been unaware that their great state universities are great centers of research? Is it not possible, is it not in fact in all probability, by design?