Saturday, November 15, 2008

Plato on the Financial Crisis

By Richard Vedder

Plato allegedly said that "necessity is the mother of invention" a bon mot that fits in perfectly with the current financial situation facing American universities. Financial pressures are going to force universities to do some things that they have been reluctant to do. Desperation is going to break down some resistance to change. In some sense, the current financial turmoil can be an agent of opportunity and innovation.

The indications are that some states are in for deep cuts. New York, center of the financial services industry, is particularly hard hit, but so is its counterpart on the West Coast, California. The industrial Midwest was already suffering going into the crisis, especially Michigan, but also Ohio and Illinois. These states almost certainly will see actual and material dollar reductions in state subsidies --at a time when inflation is picking up, meaning inflation-adjusted subsidies will fall rather sharply. These states alone enroll 25-30 percent of our nation's college students. And other states hard hit by the subprime mess (Florida comes quickly to mine) are also in serious straits.

Some of the things schools will do are tried and true measures, although they in some cases may have negative qualitative implications. Increase class sizes. Use more low cost adjuncts and grad students to teach. But, as I repeatedly have said, the instruction component of the budget is typically less than one-third of the total. Schools are going to have to start cutting administrative staffs. Who knows, in some cases I suspect this will RAISE productivity, as more decision-making will become decentralized, and there will be less time for costly committee meetings leading to timid, compromise decision-making.

Obsessions with expensive sports facilities and high payments to university presidents, senior administrators, and coaches will be heavily scrutinized. The citizens of states that face the prospects of having workers go without unemployment insurance benefits are not going to take kindly to big raises for university presidents and coaches. And universities may find it harder to sell football tickets for $60 or, more importantly, sky boxes for closer to $1,000 a seat. And a Congress that is now on a spending spree might show its anger towards the rich (which it generally views as a bad group of people) by disallowing tax deductions for such sky boxes.

Already I read that Clemson University is furloughing its entire staff for a week to partially deal with a cash problem. These short-term desperation measures need to be supplanted by more thoughtful, far-ranging efforts to conserve resources. At Indiana University, rental charges are been enacted for use of facilities by all departments, a move, if properly done, can vastly increase utilization of existing space, reducing rising capital costs long term. Schools should consider radically shedding their non-core mission activities, like housing, food service, and the like, contracting these services out to specialists in a way that provides the colleges with small amounts of added income and does not lead to deteriorated quality of services for students. In many cases that is doable. My own school has failed to do it for fear of offending a labor union. That is a luxury it no longer can afford. Schools like my own that lose millions annually on intercollegiate athletics should say "enough is enough," perhaps meeting with other like minded schools and agreeing on ways to athletically partially disarm without taking the fun and excitement out of sports. Better yet, the NCAA should lead the effort, but it will not, as the jocks not the faculty control the system.

Of course, some schools will push to raise tuition fees rather than engage in the needed cost cutting. That solution is full of peril for them, however, thank God. Political anger over big tuition increases in the midst of national hardship would be substantial and cause huge damage to schools dependent on the public purse. It would lead to rigid and unproductive price controls. And, given rising sensitivity of students to prices, it might have adverse enrollment effects as well.

Let's turn adversity into opportunity! Stay tuned.


Cowboy said...

Richard - Your points are well taken. But I believe the Treasury Secretary, Bernanke, and both houses of congress have absolutely lost their damned minds. 535 dumbasses in one building.

With that said, I believe that our "government gone wild" will just throw more money that we do not have at higher education financing. I hope I am wrong.

Meanwhile; where is the outrage from higher ed consumers?? Maybe I'm just not listening very well.

Forgive my off-color linguistics, but I just cannot believe what is going on and it really ticks me off.

capeman said...

Some people seem to be licking their chops at the prospect that the financial crisis will hammer higher education (where they have failed so far to persuade much of anyone but themselves.)

All those laid-off college employees. What an opportunity! Perhaps the Doc can persuade somebody in politics that this is good for the whole country. 25% reductions in employment, GDP, and the like. If it's good for higher education, why not the local car dealership?

The Republicans are looking for good ideas now, maybe they should listen up to the Doc. After all, lately they've had a good instinct for what moves the country.