By Richard Vedder
With the death in the last year of both Milton Friedman and Bill Buckley, I cannot think of anyone of a conservative/libertarian bent who writes as articulately and persuasively as Thomas Sowell of the Hoover Institution at Stanford University.
Tom is a good friend and a great economist, but he also had a long interest in higher education. His book Inside Higher Education is an important critique of universities and what they do. In a new video series sponsored by the National Review, Sowell says universities are run by and for their employees more than for their students. See his video.
Tom also shows skepticism about the elite universities claiming great benefits for their students, and shows doubt about claims that students are paying only a modest portion of the educational costs. See his National Review analysis here.
Tom is one of those rare academics (including yours truly) who does not believe all the propaganda of the colleges at face value. I commend you to his new television presentations, just as I have to his many great books.
Friday, February 29, 2008
King Canute (c.985-1035) on Student Loans
By Richard Vedder
Rep. George Miller and Sen. Teddy Kennedy have written a letter to Education Secretary Spellings lecturing her on the need to keep student loan money flowing if those nasty lenders (like state-sponsored providers in Michigan and Pennsylvania) decide to curtail lending.
For some reason, this reminds me of King Canute the Great, the Danish king who conquered England a half century before the Normans (if you think the 20th century was bloody, take a look at the 11th). Almost precisely one thousand years ago, or so legend has it, King Canute ordered the waves to stop rolling. His order was only slightly less silly than the Miller-Kennedy proclamation. His Serene Danish Majesty found he could not countermand laws of physical science any more than Miller-Kennedy-Spellings can countermand laws of economic science.
To be sure, that is not entirely true. With various subsidy schemes, the cost of borrowed funds can be artificially lowered to borrowers --but only at a real cost to society, if not to the borrower of the money. While Fed Chairman Ben Bernanke continues his suicide mission that may well culminate in stagflation if not reversed, in a true sense risk premiums on loans are rising, meaning interest rates are going up for this type of lending. Given the nervousness of bankers who have suffered billions in losses on imprudent lending in the past year, the supply of loanable funds to immature 18-22 year old kids wanting to borrow several times their net worth is understandably drying up. As supply falls relative to demand, the price of borrowing --interest rates -- will rise.
While part of the reason for the current credit problems relate to bad decisions by private lending entrepreneurs (the Bob Rubins of the world), it is noteworthy that the ultimate villain is central bank monetary manipulation. The Austrian economists Ludwig von Mises and Fredrich Hayek taught us, correctly in my view, that when the price of loanable funds (the interest rate) to borrowers falls below its true sustainable rate dictated by human time preferences this will inevitably lead to a temporary boom, but ultimately brings about a bust. Low interest rates lure too many people into borrowing, and, in this case, too many expensive houses were built for too high prices --and too much money was borrowed by sub-marginal students with dubious job prospects. Engaging in Latin American financial manipulation to solve the problem is not sustainable. Drinking can provide a high for a while --but then it produces physical discomfort manifested in vomiting and hangovers. We are in that phase of the monetary binge of this decade, and rather than taking Aspirin or Alka Seltzer and toughening it out, the Fed wants us to start drinking again.
Although mandarins of DuPont Circle like Terry Hartle of the American Council of Education (a fine and very able person, by the way) or fellow travelers of the Establishment like Sandy Baum can tell people college is not overly expensive and a hugely profitable investment, many borrowers are starting to wonder (and for very good reason, in my opinion). As I kept saying on the Diane Rehm show yesterday, the rise in college costs relative to income levels is ultimately non-sustainable, and the current student loan crisis is merely a manifestation of this. Had college costs risen at only the rate of inflation over the past generation, student loan debt today would be a small fraction of what it actually is, and the student loan crisis would not exist. And the crisis will not go away because two politicians tell a bureaucrat to make it happen --any more than the waves did not stop when a mighty monarch ordered them to.
Rep. George Miller and Sen. Teddy Kennedy have written a letter to Education Secretary Spellings lecturing her on the need to keep student loan money flowing if those nasty lenders (like state-sponsored providers in Michigan and Pennsylvania) decide to curtail lending.
For some reason, this reminds me of King Canute the Great, the Danish king who conquered England a half century before the Normans (if you think the 20th century was bloody, take a look at the 11th). Almost precisely one thousand years ago, or so legend has it, King Canute ordered the waves to stop rolling. His order was only slightly less silly than the Miller-Kennedy proclamation. His Serene Danish Majesty found he could not countermand laws of physical science any more than Miller-Kennedy-Spellings can countermand laws of economic science.
To be sure, that is not entirely true. With various subsidy schemes, the cost of borrowed funds can be artificially lowered to borrowers --but only at a real cost to society, if not to the borrower of the money. While Fed Chairman Ben Bernanke continues his suicide mission that may well culminate in stagflation if not reversed, in a true sense risk premiums on loans are rising, meaning interest rates are going up for this type of lending. Given the nervousness of bankers who have suffered billions in losses on imprudent lending in the past year, the supply of loanable funds to immature 18-22 year old kids wanting to borrow several times their net worth is understandably drying up. As supply falls relative to demand, the price of borrowing --interest rates -- will rise.
While part of the reason for the current credit problems relate to bad decisions by private lending entrepreneurs (the Bob Rubins of the world), it is noteworthy that the ultimate villain is central bank monetary manipulation. The Austrian economists Ludwig von Mises and Fredrich Hayek taught us, correctly in my view, that when the price of loanable funds (the interest rate) to borrowers falls below its true sustainable rate dictated by human time preferences this will inevitably lead to a temporary boom, but ultimately brings about a bust. Low interest rates lure too many people into borrowing, and, in this case, too many expensive houses were built for too high prices --and too much money was borrowed by sub-marginal students with dubious job prospects. Engaging in Latin American financial manipulation to solve the problem is not sustainable. Drinking can provide a high for a while --but then it produces physical discomfort manifested in vomiting and hangovers. We are in that phase of the monetary binge of this decade, and rather than taking Aspirin or Alka Seltzer and toughening it out, the Fed wants us to start drinking again.
Although mandarins of DuPont Circle like Terry Hartle of the American Council of Education (a fine and very able person, by the way) or fellow travelers of the Establishment like Sandy Baum can tell people college is not overly expensive and a hugely profitable investment, many borrowers are starting to wonder (and for very good reason, in my opinion). As I kept saying on the Diane Rehm show yesterday, the rise in college costs relative to income levels is ultimately non-sustainable, and the current student loan crisis is merely a manifestation of this. Had college costs risen at only the rate of inflation over the past generation, student loan debt today would be a small fraction of what it actually is, and the student loan crisis would not exist. And the crisis will not go away because two politicians tell a bureaucrat to make it happen --any more than the waves did not stop when a mighty monarch ordered them to.
Thursday, February 28, 2008
CCAP on NPR
For those of you who missed CCAP's director, Dr. Ricahrd Vedder, on The Diane Rehm Show this morning, you can listen to the entire segment by following the link below.
The Cost of Higher Education
The Cost of Higher Education
A Dilemma: Legacies
By Richard Vedder
Shikha Daimia has written a fascinating story in the February issue of Reason magazine about college legacies. The author finds it perplexing that scholars who crusade against affirmative action like Stephen Thernstrom are ambivalent about attacking preferential legacy admissions. Children of alumni get an edge and are more likely to be let in than non alums at most elite private schools (exception: Cal Tech). Daimia considers this form of discrimination no less invidious than discrimination based on race or gender.
Legacies reduce intergenerational mobility, perpetuate the status quo, favor whites (who dominated student bodies in previous generations) over non-whites, and native-born Americans over immigrants. They are not in keeping with the notion that America has a merit-driven, egalitarian society. They also reveal the hypocrisy of many universities who profess to be looking for the best and brightest, when, in some cases, they are truly looking for the richest and most loyal future alums.
Should we have an anti-legacy rule imposed nationally? This is where it becomes sticky. The last thing America needs is for the federal government to dictate how universities operate. The strength of the American system is in its diversity, and in the lack of central control. This adds to the intellectual vitality, the richness of educational offerings, etc., of American higher education. Why should the federal government tell private organizations like Harvard and Yale who they should or should not accept?
However, there is a counterargument to that. So-called private universities receive tons of public monies, and one can argue that the government should not provide grants to institutions that discriminate on the basis of one's parents association to the school --the government is, in effect, subsidizing behavior that is not widely accepted amongst the general population.
On balance, I don't want government getting involved in college admissions any more than it already is. But I think I would in general support policies that lead colleges to reach their decisions strictly based on the merit of those seeking admission.
Shikha Daimia has written a fascinating story in the February issue of Reason magazine about college legacies. The author finds it perplexing that scholars who crusade against affirmative action like Stephen Thernstrom are ambivalent about attacking preferential legacy admissions. Children of alumni get an edge and are more likely to be let in than non alums at most elite private schools (exception: Cal Tech). Daimia considers this form of discrimination no less invidious than discrimination based on race or gender.
Legacies reduce intergenerational mobility, perpetuate the status quo, favor whites (who dominated student bodies in previous generations) over non-whites, and native-born Americans over immigrants. They are not in keeping with the notion that America has a merit-driven, egalitarian society. They also reveal the hypocrisy of many universities who profess to be looking for the best and brightest, when, in some cases, they are truly looking for the richest and most loyal future alums.
Should we have an anti-legacy rule imposed nationally? This is where it becomes sticky. The last thing America needs is for the federal government to dictate how universities operate. The strength of the American system is in its diversity, and in the lack of central control. This adds to the intellectual vitality, the richness of educational offerings, etc., of American higher education. Why should the federal government tell private organizations like Harvard and Yale who they should or should not accept?
However, there is a counterargument to that. So-called private universities receive tons of public monies, and one can argue that the government should not provide grants to institutions that discriminate on the basis of one's parents association to the school --the government is, in effect, subsidizing behavior that is not widely accepted amongst the general population.
On balance, I don't want government getting involved in college admissions any more than it already is. But I think I would in general support policies that lead colleges to reach their decisions strictly based on the merit of those seeking admission.
William F. Buckley, Jr.:An Intellectual's Intellectual
By Richard Vedder
I was greatly saddened to read yesterday of the death of Bill Buckley, the founder of modern American conservatism and a person of extraordinary intellectual powers and achievement. Mr. Buckley was a raconteur without peer, a great debater, first rate novelist, superlative commentator on public policy, a competent harpsichordist, sailor, bon vivant, and a wordsmith extraordinare. In short, he was the modern Renaissance Man, an erudite and witty person of great civility and cultural refinement.
It is worth noting that Mr. Buckley's rise to prominence came at an extraordinarily young age when he wrote about the sins and problems of higher education in God and Man at Yale. At the time of his emergence as a prominent intellectual, American conservatism was very small in magnitude and thoroughly discredited in the academy. The welfare state was both a cause and consequence of modern left-wing intellectualism as manifested in the growth of a largely government funded academic cadre that viewed conservatives as ignorant, prejudiced Neanderthals with no vision and little consequence.
Buckley changed all of that. He could outwit the cleverest left wing English professor, outfox the smartest liberal provocateur. And he did it with grace and enormous humor. Asked during his quixotic campaign for mayor of New York what he would do if elected, he replied "demand a recount." After Bill Buckley came on the scene, left wing academics had a much harder time dismissing persons of ideas on the right as insensitive dull morons. He made conservatism somewhat respectable, stimulating both men of action like Ronald Reagan as well as other academics. His conservatism was of the traditional, religious type, but he stimulated young scholars who were more empirical, analytical and libertarian.
A few years ago, I had the task of introducing Mr. Buckley to a lecture audience of a couple of thousand of persons. Usually I pride myself on my short introductions that include a bit of humor. But next to Bill Buckley, I was a rank amateur, and I simply did not try to be cute or witty. You could not out debate or out wit Willam F. Buckley. He had many reservations about the direction modern higher education was taking but, strangely, never returned vigorously to the theme that brought him to prominence. Milton Friedman was the analytical genius of the modern intellectual movement on the right, but Buckley was the original poet and polemicist. We mourn his loss --may he Rest in Peace.
I was greatly saddened to read yesterday of the death of Bill Buckley, the founder of modern American conservatism and a person of extraordinary intellectual powers and achievement. Mr. Buckley was a raconteur without peer, a great debater, first rate novelist, superlative commentator on public policy, a competent harpsichordist, sailor, bon vivant, and a wordsmith extraordinare. In short, he was the modern Renaissance Man, an erudite and witty person of great civility and cultural refinement.
It is worth noting that Mr. Buckley's rise to prominence came at an extraordinarily young age when he wrote about the sins and problems of higher education in God and Man at Yale. At the time of his emergence as a prominent intellectual, American conservatism was very small in magnitude and thoroughly discredited in the academy. The welfare state was both a cause and consequence of modern left-wing intellectualism as manifested in the growth of a largely government funded academic cadre that viewed conservatives as ignorant, prejudiced Neanderthals with no vision and little consequence.
Buckley changed all of that. He could outwit the cleverest left wing English professor, outfox the smartest liberal provocateur. And he did it with grace and enormous humor. Asked during his quixotic campaign for mayor of New York what he would do if elected, he replied "demand a recount." After Bill Buckley came on the scene, left wing academics had a much harder time dismissing persons of ideas on the right as insensitive dull morons. He made conservatism somewhat respectable, stimulating both men of action like Ronald Reagan as well as other academics. His conservatism was of the traditional, religious type, but he stimulated young scholars who were more empirical, analytical and libertarian.
A few years ago, I had the task of introducing Mr. Buckley to a lecture audience of a couple of thousand of persons. Usually I pride myself on my short introductions that include a bit of humor. But next to Bill Buckley, I was a rank amateur, and I simply did not try to be cute or witty. You could not out debate or out wit Willam F. Buckley. He had many reservations about the direction modern higher education was taking but, strangely, never returned vigorously to the theme that brought him to prominence. Milton Friedman was the analytical genius of the modern intellectual movement on the right, but Buckley was the original poet and polemicist. We mourn his loss --may he Rest in Peace.
A Dialogue on College Affordability This Morning
By Richard Vedder
At 11:00 EDT a potentially interesting hour long dialogue on college costs and affordability will take place on the Diane Rehm show, a nationally syndicated radio presentation of National Public Radio. Appearing will be INSIDE HIGHER EDUCATION co-editor Scott Jaschik, the executive vice president of the American Council of Education, Terry Hartle, and, last and, perhaps least --me.
Is the soaring cost of college a function of inadequate public funding --an argument I expect Dr. Hartle to make in his usual articulate and almost convincing way. Let us expand Pell Grants further, reform state financing systems to allow continued growth in higher education funding, etc., etc. Or, as I maintain, are rising costs inherent in the nature of the higher education delivery system based on third party payments, non-profit providers, a lack of a bottom line to measure performance, and other consideration of that nature?
I expect the discussion will be civilized, interesting, and sometimes provocative. Host Steve Roberts (Diane Rehm is literally moving houses today, I understand) is a veteran journalist as is Scott Jaschik, and I understand at least one community college prez will be weighing in. Should be fun and informative. Go to NPR later this morning.
At 11:00 EDT a potentially interesting hour long dialogue on college costs and affordability will take place on the Diane Rehm show, a nationally syndicated radio presentation of National Public Radio. Appearing will be INSIDE HIGHER EDUCATION co-editor Scott Jaschik, the executive vice president of the American Council of Education, Terry Hartle, and, last and, perhaps least --me.
Is the soaring cost of college a function of inadequate public funding --an argument I expect Dr. Hartle to make in his usual articulate and almost convincing way. Let us expand Pell Grants further, reform state financing systems to allow continued growth in higher education funding, etc., etc. Or, as I maintain, are rising costs inherent in the nature of the higher education delivery system based on third party payments, non-profit providers, a lack of a bottom line to measure performance, and other consideration of that nature?
I expect the discussion will be civilized, interesting, and sometimes provocative. Host Steve Roberts (Diane Rehm is literally moving houses today, I understand) is a veteran journalist as is Scott Jaschik, and I understand at least one community college prez will be weighing in. Should be fun and informative. Go to NPR later this morning.
Wednesday, February 27, 2008
Labor Unions: The Past or the Future for Colleges?
By Richard Vedder
While labor unions in general have stagnated in modern times, that is not true with unions of governmental employees, that have often thrived. There are a number of reasons to believe that unions might gain in popularity on college campuses in the coming years as budget cuts from state governments limit the ability of some colleges to expand spending.
Yet this view might be wrong. The faculty at Michigan Technological University have just voted to decertify the AAUP group selected as the collective bargaining agent. Looking at the Web site of anti-union faculty (who prevailed in the election), several reasons stand out for the probable loss of the union:
1) Union dues are several hundred dollars a year, and some faculty believe the benefits are less than the considerable cost;
2) Some faculty, correctly in my judgment, consider unionization somewhat incompatible with greatness as a research and teaching institution, since the great universities are exclusively non-union (with respect to the faculty), and unionization downplays the role of individual merit and accomplishment;
3) Unions tend to regulate faculty behavior in a costly and bureaucratic way relative to the more informal governance mechanism implicit in Faculty Senates with considerable clout but little formal power.
I suspect the Michigan Tech decertifying move is a relatively isolated event, but the move to promote unionization in U.S. universities seems to have stalled or have little traction in recent years.
While labor unions in general have stagnated in modern times, that is not true with unions of governmental employees, that have often thrived. There are a number of reasons to believe that unions might gain in popularity on college campuses in the coming years as budget cuts from state governments limit the ability of some colleges to expand spending.
Yet this view might be wrong. The faculty at Michigan Technological University have just voted to decertify the AAUP group selected as the collective bargaining agent. Looking at the Web site of anti-union faculty (who prevailed in the election), several reasons stand out for the probable loss of the union:
1) Union dues are several hundred dollars a year, and some faculty believe the benefits are less than the considerable cost;
2) Some faculty, correctly in my judgment, consider unionization somewhat incompatible with greatness as a research and teaching institution, since the great universities are exclusively non-union (with respect to the faculty), and unionization downplays the role of individual merit and accomplishment;
3) Unions tend to regulate faculty behavior in a costly and bureaucratic way relative to the more informal governance mechanism implicit in Faculty Senates with considerable clout but little formal power.
I suspect the Michigan Tech decertifying move is a relatively isolated event, but the move to promote unionization in U.S. universities seems to have stalled or have little traction in recent years.
Tuesday, February 26, 2008
Good or Bad for the American Dream:Do Colleges Expand or Retard Income Mobility?
By Richard Vedder
One of the main justifications for state support of higher education is that college training helps strengthen a great American tradition --the notion that anyone, regardless of his or her station in life, can succeed --economically, socially, even politically. Since a college education, rightly or wrongly, is viewed as a necessary ticket for success, we want to make it easy for anyone who wishes to attend.
Wanting to promote intergenerational income mobility (where poor kids can become rich adults --and vice versa) seems to mean supporting higher education. After all, college grads usually make vastly more income than high school ones. Spend more money on colleges and we will increase college access, opening the path to the American Dream --or so it is argued.
Actually, the facts suggest otherwise. Many of the states in the Union that have least supported higher education -- Massachusetts, New Hampshire and Colorado come to mind -- have amongst the highest proportion of college educated adults. The relationship between government higher education spending and educational attainment or even college attendance is very modest or even non-existent.
Actually, there is growing evidence that higher education may retard, not promote economic mobility. The headline on a February 20 New York Times story was "Higher Education Gap May Slow Economic Mobility." The evidence is clear that poor, relatively less educated folks are far, far less likely to have kids graduating from college than more prosperous and educated parents. Thus, since higher education is an expensive ticket for admission to the pool of those eligible for economic success, the failure of most kids from poor families to buy that ticket is retarding the historic movement of Americans from one income class to another over time. In reality, there has been relatively little change in intergenerational income mobility in recent decades, scholars at the Brookings Institution show, despite rising spending on colleges and increased enrollments. It is argued that 53 percent of children from the top fifth of the income distribution graduate from college, compared with a paltry 11 percent for those from the bottom fifth. Rather than furthering economic opportunity, college (or the lack thereof) is arguably retarding it.
If this is so, one of the main intellectual pillars supporting public support of higher education is removed. Adding to this has been the general tepid interest of the colleges themselves in this issue. Belatedly, the Ivies are playing catch up, but the Pell Grant proportion of the student body at the elite private schools is generally about one-third of that of the national average, and at the state flagship universities, only about one-half the proportion.
Why doesn't Harvard show its interest in this issue by opening Harvard West or Harvard South, giving tuition free education to kids from low income families in a setting that is far less elitist than in Cambridge? Rather than building a luxury facility (Whitman College) at a cost of $377,000 a bed to allow 400 more COY (Children of Yuppies) to go to school, why didn't Princeton open a no nonsense replica of Berea College somewhere in the rural South --a school for perhaps 500-1000 kids from low income families? Just a thought.
To be sure, kids from low income families are largely underrepresented for non-financial reasons --they do poorly in high school, in large part because they attend publicly funded cesspools of so-called learning that are a national disgrace. They also get less encouragement from their parents to excel in school. Given the disinterest in the colleges in furthering the American Dream, however, why should we continue to give them more public monies? Why don't states give colleges funds ONLY for students from low income families? Or, give vouchers to the kids themselves, with bigger amounts to those more economically disadvantaged? These would be ways that might lead to colleges being more supportive of the American Dream than of a new aristocracy.
One of the main justifications for state support of higher education is that college training helps strengthen a great American tradition --the notion that anyone, regardless of his or her station in life, can succeed --economically, socially, even politically. Since a college education, rightly or wrongly, is viewed as a necessary ticket for success, we want to make it easy for anyone who wishes to attend.
Wanting to promote intergenerational income mobility (where poor kids can become rich adults --and vice versa) seems to mean supporting higher education. After all, college grads usually make vastly more income than high school ones. Spend more money on colleges and we will increase college access, opening the path to the American Dream --or so it is argued.
Actually, the facts suggest otherwise. Many of the states in the Union that have least supported higher education -- Massachusetts, New Hampshire and Colorado come to mind -- have amongst the highest proportion of college educated adults. The relationship between government higher education spending and educational attainment or even college attendance is very modest or even non-existent.
Actually, there is growing evidence that higher education may retard, not promote economic mobility. The headline on a February 20 New York Times story was "Higher Education Gap May Slow Economic Mobility." The evidence is clear that poor, relatively less educated folks are far, far less likely to have kids graduating from college than more prosperous and educated parents. Thus, since higher education is an expensive ticket for admission to the pool of those eligible for economic success, the failure of most kids from poor families to buy that ticket is retarding the historic movement of Americans from one income class to another over time. In reality, there has been relatively little change in intergenerational income mobility in recent decades, scholars at the Brookings Institution show, despite rising spending on colleges and increased enrollments. It is argued that 53 percent of children from the top fifth of the income distribution graduate from college, compared with a paltry 11 percent for those from the bottom fifth. Rather than furthering economic opportunity, college (or the lack thereof) is arguably retarding it.
If this is so, one of the main intellectual pillars supporting public support of higher education is removed. Adding to this has been the general tepid interest of the colleges themselves in this issue. Belatedly, the Ivies are playing catch up, but the Pell Grant proportion of the student body at the elite private schools is generally about one-third of that of the national average, and at the state flagship universities, only about one-half the proportion.
Why doesn't Harvard show its interest in this issue by opening Harvard West or Harvard South, giving tuition free education to kids from low income families in a setting that is far less elitist than in Cambridge? Rather than building a luxury facility (Whitman College) at a cost of $377,000 a bed to allow 400 more COY (Children of Yuppies) to go to school, why didn't Princeton open a no nonsense replica of Berea College somewhere in the rural South --a school for perhaps 500-1000 kids from low income families? Just a thought.
To be sure, kids from low income families are largely underrepresented for non-financial reasons --they do poorly in high school, in large part because they attend publicly funded cesspools of so-called learning that are a national disgrace. They also get less encouragement from their parents to excel in school. Given the disinterest in the colleges in furthering the American Dream, however, why should we continue to give them more public monies? Why don't states give colleges funds ONLY for students from low income families? Or, give vouchers to the kids themselves, with bigger amounts to those more economically disadvantaged? These would be ways that might lead to colleges being more supportive of the American Dream than of a new aristocracy.
Saturday, February 23, 2008
Coming Fiscal Problems for Colleges: Stagnation Returns
By Richard Vedder
Economic downturns probably have less real impact on universities (e.g., on output --enrollment, research activity) than they do on the private business sector. But they do hurt --state appropriations fall, private donations turn down, etc. We may be going into a recession --who knows? No one, however, believes 2008 will be an average or above year for the economy. In other words, the short-term fiscal prospects for American colleges are not particularly good. The dazzling endowment returns of the last few years are over for a while, for example.
However, I am worried that funny money monetary and fiscal policy of a quasi-Latin American variety is about to cause longer term damage to the economy. Ben Bernanke is no Paul Volcker; and George Bush, Nancy Pelosi and company are not the match of the typical political leader of either party of even 20 years ago. We are forgetting the lessons of the past, engaging in reckless and self-defeating economic policies that typically result in stagflation --remember the 1970s?
To stimulate the economy, we are dropping dollars out of airplanes (tax rebates), financed by borrowing funds and/or printing money. On the monetary side, Ben Bernanke panics every time Bob Rubin or others of his ilk plead that the New York financial center is in precarious shape. Bumbling Ben's solution is to turn on the monetary spigot, ordering the fed to buy bonds to lower the federal funds interest rate. This will allegedly help those poor speculators who bought million dollar houses with a nickel's down payment, those stupid bankers (e.g., Rubin) who promoted go-go banking practices at places like Citigroup, etc. But it will also raise inflationary expectations, interfere in market processes, lead to malinvestment (to use the Austrian economists' favorite term), ultimately lead to greater uncertainty, higher interest rates, and stagflation. Already, the inflation rate is creeping up as an academic (Bernanke) disregards the real world wisdom of his predecessors (Volcker and Greenspan). Unemployment is also creeping up. The Phillips Curve is shifting rightward, a sign of stagflation. The Fed's and Administration's answer so far is vintage Juan Peron --cut interest rates more, drop more dollars from airplanes, and turn the world's leading economy into the economic equivalent of a Banana Republic. Is it any wonder that the dollar is tanking worldwide?
Stagflation hurts colleges in numerous ways. Of course, real resources decline (which does not probably impact proportionately on quality, but leads to anguish on the part of the campus communities used to continuing rising opulence). During the 1970s unanticipated inflation actually muted the real increase in tuition prices because colleges did not move fast enough to keep up with rising prices (partly because they only change their prices once a year). Real faculty salaries actually fell for a while. Contributions tanked. Real university endowments fell as the decrease in the value and increase in uncertainty about the future led bond and then equity prices to tank. The go-go endowments managers at Yale, who thrived on multiplying the increments of growth, may have vital body parts removed (figuratively) in coming years as the nation moves into an unanticipated downward spiral.
Am I being too pessimistic? Maybe --probably, even. But I am rapidly becoming pessimistic, not because of the stupidity of our private business leaders or the alleged imperfections of markets, but because of deterioration in our macroeconomic policy in the direction of the failed Keynesian policies of a generation ago.
Economic downturns probably have less real impact on universities (e.g., on output --enrollment, research activity) than they do on the private business sector. But they do hurt --state appropriations fall, private donations turn down, etc. We may be going into a recession --who knows? No one, however, believes 2008 will be an average or above year for the economy. In other words, the short-term fiscal prospects for American colleges are not particularly good. The dazzling endowment returns of the last few years are over for a while, for example.
However, I am worried that funny money monetary and fiscal policy of a quasi-Latin American variety is about to cause longer term damage to the economy. Ben Bernanke is no Paul Volcker; and George Bush, Nancy Pelosi and company are not the match of the typical political leader of either party of even 20 years ago. We are forgetting the lessons of the past, engaging in reckless and self-defeating economic policies that typically result in stagflation --remember the 1970s?
To stimulate the economy, we are dropping dollars out of airplanes (tax rebates), financed by borrowing funds and/or printing money. On the monetary side, Ben Bernanke panics every time Bob Rubin or others of his ilk plead that the New York financial center is in precarious shape. Bumbling Ben's solution is to turn on the monetary spigot, ordering the fed to buy bonds to lower the federal funds interest rate. This will allegedly help those poor speculators who bought million dollar houses with a nickel's down payment, those stupid bankers (e.g., Rubin) who promoted go-go banking practices at places like Citigroup, etc. But it will also raise inflationary expectations, interfere in market processes, lead to malinvestment (to use the Austrian economists' favorite term), ultimately lead to greater uncertainty, higher interest rates, and stagflation. Already, the inflation rate is creeping up as an academic (Bernanke) disregards the real world wisdom of his predecessors (Volcker and Greenspan). Unemployment is also creeping up. The Phillips Curve is shifting rightward, a sign of stagflation. The Fed's and Administration's answer so far is vintage Juan Peron --cut interest rates more, drop more dollars from airplanes, and turn the world's leading economy into the economic equivalent of a Banana Republic. Is it any wonder that the dollar is tanking worldwide?
Stagflation hurts colleges in numerous ways. Of course, real resources decline (which does not probably impact proportionately on quality, but leads to anguish on the part of the campus communities used to continuing rising opulence). During the 1970s unanticipated inflation actually muted the real increase in tuition prices because colleges did not move fast enough to keep up with rising prices (partly because they only change their prices once a year). Real faculty salaries actually fell for a while. Contributions tanked. Real university endowments fell as the decrease in the value and increase in uncertainty about the future led bond and then equity prices to tank. The go-go endowments managers at Yale, who thrived on multiplying the increments of growth, may have vital body parts removed (figuratively) in coming years as the nation moves into an unanticipated downward spiral.
Am I being too pessimistic? Maybe --probably, even. But I am rapidly becoming pessimistic, not because of the stupidity of our private business leaders or the alleged imperfections of markets, but because of deterioration in our macroeconomic policy in the direction of the failed Keynesian policies of a generation ago.
Thursday, February 21, 2008
Dysfunctionality of Student Aid Once More
By Richard Vedder
When I was on the Spellings Commission, I offered what was no doubt viewed as a naive perspective: we have 17 programs to help students --why not collapse them to one, the Pell Grant program? We would then give them to more students in larger grants than previously, and at the same time exit various targeted aid programs and the student loan business. I argued it would be vastly simpler, easier to understand, save some money, and help the kids we wanted to assist the most. My suggestion was met with complete silence. I was told that the revision of student aid programs, while needed, was a task too complex for the Spellings Commission to take on.
Along comes yet another study that confirms my hunches. Susan Dynarski and Judith Scott-Clayton have written an excellent paper, "Complexity and Targeting in Federal Student Aid: A Quantitative Analysis," for the National Bureau of Economic Research, America's premier independent economic research organization. The authors conclude that all the elaborate targeting of beneficiaries in many of the programs is done in a costly and inefficient manner. Compliance costs to meet all the regulations and administrative burdens of the multiplicity of programs adds, very conservatively, $4 billion in burden to users of the aid, colleges, etc. In short, the system does not work well and it is costly. A simpler system can be devised that is less costly but still works to serve national educational policy objectives as determined by the political process.
What keeps Congress from simplifying the process? While there are several possible answers, I think the major one is special interest lobbying. Various groups like certain provisions of current law, and will fight efforts to eliminate program A or B or C, even if part of a comprehensive reform.
Ideally, the federal government should move to a modified Pell Grant system where vouchers are given out on the basis of need and educational potential, with the amount of the grant increasing with need and the probability of educational success. Money should never be given to schools or their financial aid offices, but rather directly by the federal government to students who then would pick the school of their choice, and the school that a student enrolls in could then redeem the voucher for cash. This would:
1) Make colleges more student-centered, as they vie for money that they, the students, control
2) Reduce the power of financial aids offices to negate the intended effects of federal student aid policy by varying the amount of institutional support with changing federal aid
3) Greatly simplify our student aid system, saving the billions annually mentioned in the aforementioned study;
4) Tie aid more clearly not only to need --the number one consideration -- but also to the probability of success, probably increasingly modestly the graduation rate of entering students
5) Lower the ability of schools to raise tuition and fees knowing that student loans would simply increase to make up the differential --modified Pell grants would only rise with the general rate of inflation, no more.
The fiddling with interest rates and fees on federally subsidized loans does nothing to deal with the confusion and high cost of our complex federal system of assistance. The Feds should get out of the loan business period, and stop assisting relatively prosperous middle income kids wanting to go to school. They should stop enabling schools to charge whatever the traffic will bear. They should get smart, and put the interests of the public above the narrow interests of those persons wanting to maintain some semblance of today's dysfunctional status quo.
When I was on the Spellings Commission, I offered what was no doubt viewed as a naive perspective: we have 17 programs to help students --why not collapse them to one, the Pell Grant program? We would then give them to more students in larger grants than previously, and at the same time exit various targeted aid programs and the student loan business. I argued it would be vastly simpler, easier to understand, save some money, and help the kids we wanted to assist the most. My suggestion was met with complete silence. I was told that the revision of student aid programs, while needed, was a task too complex for the Spellings Commission to take on.
Along comes yet another study that confirms my hunches. Susan Dynarski and Judith Scott-Clayton have written an excellent paper, "Complexity and Targeting in Federal Student Aid: A Quantitative Analysis," for the National Bureau of Economic Research, America's premier independent economic research organization. The authors conclude that all the elaborate targeting of beneficiaries in many of the programs is done in a costly and inefficient manner. Compliance costs to meet all the regulations and administrative burdens of the multiplicity of programs adds, very conservatively, $4 billion in burden to users of the aid, colleges, etc. In short, the system does not work well and it is costly. A simpler system can be devised that is less costly but still works to serve national educational policy objectives as determined by the political process.
What keeps Congress from simplifying the process? While there are several possible answers, I think the major one is special interest lobbying. Various groups like certain provisions of current law, and will fight efforts to eliminate program A or B or C, even if part of a comprehensive reform.
Ideally, the federal government should move to a modified Pell Grant system where vouchers are given out on the basis of need and educational potential, with the amount of the grant increasing with need and the probability of educational success. Money should never be given to schools or their financial aid offices, but rather directly by the federal government to students who then would pick the school of their choice, and the school that a student enrolls in could then redeem the voucher for cash. This would:
1) Make colleges more student-centered, as they vie for money that they, the students, control
2) Reduce the power of financial aids offices to negate the intended effects of federal student aid policy by varying the amount of institutional support with changing federal aid
3) Greatly simplify our student aid system, saving the billions annually mentioned in the aforementioned study;
4) Tie aid more clearly not only to need --the number one consideration -- but also to the probability of success, probably increasingly modestly the graduation rate of entering students
5) Lower the ability of schools to raise tuition and fees knowing that student loans would simply increase to make up the differential --modified Pell grants would only rise with the general rate of inflation, no more.
The fiddling with interest rates and fees on federally subsidized loans does nothing to deal with the confusion and high cost of our complex federal system of assistance. The Feds should get out of the loan business period, and stop assisting relatively prosperous middle income kids wanting to go to school. They should stop enabling schools to charge whatever the traffic will bear. They should get smart, and put the interests of the public above the narrow interests of those persons wanting to maintain some semblance of today's dysfunctional status quo.
Just Saying No to Colleges
By Richard Vedder
The news is out that private giving to universities rose a respectable 6 percent in 2007. But amidst the good news there was a sobering detail worth considering. Contributions from individuals --both alums and non-alums -- fell. While this was more than made up by corporate and foundation giving, it might be an indicator of increased disaffection by alums and "friends" towards universities. People are sometimes turned off by million dollar college presidents, excessively luxurious facilities, huge increases in tuition charges occurring despite rising private contributions, etc.
The colleges are saying "we have more young alums, and they typically give little" (some actually have negative net worth because of student loan debt). As an empirical matter, I suspect the average age of alums today is GREATER than it was, say, a decade ago. Enrollments are rising, but slowly --slower than in earlier decades when new alums were a larger portion of the alumni population. Moreover, contributions from non-alumni (very few who are young) were down slightly last year. The colleges don't want to admit it, but possibly some people are "just saying no" to what is increasingly perceived as an arrogant, elitist, wasteful and inefficient system.
Another trend worth noting --geography matters. The shift in population southward and westward over time has led to schools in growing regions gaining financially relative to the older bastions of college wealth. There are four California schools among the top 20 in contributions in 2007, while several Ivy League schools were missing from the list (Princeton, Dartmouth and Brown). While California is actually now a source of out-migration among native born Americans, a lot of big donors are probably graduates from the 1950s, 1960s, and 1970s, when the Golden State was a magnet for migrants. Hence it is perhaps only a matter of time before Stanford goes ahead of Princeton and Yale on the list of most endowed schools. The Ivies are helped, of course, since they are truly national universities, but people still, other things equal, prefer to give locally to institutions whose positive influence can be observed first hand.
By the way, all of this, in my way of thinking, adds to the case for more transparency by colleges. People don't give to schools sometimes because they really don't know how the money is going to be used -- and colleges are not terribly forthcoming on how they use the vast amounts of money they receive. And, in my opinion, some donations are spent in ways that would be highly displeasing to donors (that is probably why colleges try to keep finances secret). But the aura of secrecy around university finances may lead some donors to actually believe monies are wasted even more than what is truly the case. Let the light shine in.
The news is out that private giving to universities rose a respectable 6 percent in 2007. But amidst the good news there was a sobering detail worth considering. Contributions from individuals --both alums and non-alums -- fell. While this was more than made up by corporate and foundation giving, it might be an indicator of increased disaffection by alums and "friends" towards universities. People are sometimes turned off by million dollar college presidents, excessively luxurious facilities, huge increases in tuition charges occurring despite rising private contributions, etc.
The colleges are saying "we have more young alums, and they typically give little" (some actually have negative net worth because of student loan debt). As an empirical matter, I suspect the average age of alums today is GREATER than it was, say, a decade ago. Enrollments are rising, but slowly --slower than in earlier decades when new alums were a larger portion of the alumni population. Moreover, contributions from non-alumni (very few who are young) were down slightly last year. The colleges don't want to admit it, but possibly some people are "just saying no" to what is increasingly perceived as an arrogant, elitist, wasteful and inefficient system.
Another trend worth noting --geography matters. The shift in population southward and westward over time has led to schools in growing regions gaining financially relative to the older bastions of college wealth. There are four California schools among the top 20 in contributions in 2007, while several Ivy League schools were missing from the list (Princeton, Dartmouth and Brown). While California is actually now a source of out-migration among native born Americans, a lot of big donors are probably graduates from the 1950s, 1960s, and 1970s, when the Golden State was a magnet for migrants. Hence it is perhaps only a matter of time before Stanford goes ahead of Princeton and Yale on the list of most endowed schools. The Ivies are helped, of course, since they are truly national universities, but people still, other things equal, prefer to give locally to institutions whose positive influence can be observed first hand.
By the way, all of this, in my way of thinking, adds to the case for more transparency by colleges. People don't give to schools sometimes because they really don't know how the money is going to be used -- and colleges are not terribly forthcoming on how they use the vast amounts of money they receive. And, in my opinion, some donations are spent in ways that would be highly displeasing to donors (that is probably why colleges try to keep finances secret). But the aura of secrecy around university finances may lead some donors to actually believe monies are wasted even more than what is truly the case. Let the light shine in.
Sunday, February 17, 2008
A Dysfunctional College Financial System: Another Dimension
By Richard Vedder
My friend and former Spellings Commission colleague Charles Miller and I compete with one another over who can say the most times that the American system of financing student higher education is dysfunctional. We often talk about it in terms of its excessive complexity, the contradictions between various loan programs, the fact that the loan system gives schools carte blanche to raise prices, etc., etc. All true, all damning.
But that is not the half of it. Let me repeat an example I used a few months ago, but illustrate it even more vividly. Let us take two kids who are virtually identical --same grades, same SAT scores, from families with identical incomes. Let us suppose one kid has fiscally conservative prudent parents while the other comes from a go-go family of socially pretentious people who engage in conspicuous consumption.
Patrick Prudent's parents make $120,000 a year, the father $60,000 as a veteran high school teacher, his mom $55,000 a year as a senior nurse, and they earn $5,000 annually from $150,000 in carefully accumulated investments in stocks and CDs. They live in a nice, but unpretentious $200,000 house that is all paid for. They both drive sensible cars, like Toyota Camrys or Nissan Altimas. They have no debt. Total net worth is about $400,000.
Stephen Spender's parents also make $120,000 a year, the father making all the income in his job as an insurance salesman. The Mom does not work, preferring to spend a lot of time at the country club or at the Florida condo. They have a $300,000 house in an upscale neighborhood with a $200,000 mortgage, a small $200,000 condo in Florida with a $150,000 mortgage, no savings, a $40,000 car loan on the wife's Porsche Boxer sports car (the husband leases his Lexus), and a $15,000 loan on their boat that they keep at the Florida condo and $$10,000 in credit card debt-- big spenders, fiscally irresponsible. The family net worth is about $175,000 --far less than the Prudent's who saved for their son's education and did not join country clubs, buy fancy sports cars, or a condo in Florida. Suppose both sets of parents are the same age, have the same retirement schemes, and have no other children.
The federal tax system slightly favors the Spenders over the Prudents --they have more deductions for mortgage interest. The federal government says "we give you benefits if you borrow to finance your consumption, but take them away if you save for your or your children's future." But that is nothing compared with what the collegiate financial aid system does.
Suppose both boys are accepted at good quality private schools a notch below the elite Ivy League schools --maybe Boston College, George Washington University, or Carleton College. Because of robust savings revealed on their FAFSA form and non-existent monthly mortgage payments and credit card bills, the Prudent family likely will end up having to pay most of the $45,000 annual tuition, room and board charges --maybe a tuition discount of $5,000, leaving $40,000 to be taken from savings and cash contributions. After four years, the family will have very little savings. The Spenders will get a significantly larger tuition discount --say $15,000 a year, borrow $25,000 a year (a good portion federally subsidized), and get the remaining $5,000 from a small family cash contribution and some small work earnings by Stephen.
This system punishes the savers, rewards the spenders. It rewards parents who are so self-centered that they put their own interests ahead of their children, and punishes parents who believe their first obligation in life is to nurture and support their kids. The system sends all the wrong signals. It is bad for the Nation, contributing to our low savings rate, the need to borrow investment funds from abroad, etc. It raises interest rates, other things equal. The damage done by government through tax and spending policies is aggravated by the privately imposed "tax" on savings levied by the colleges and universities. That is why I think a decent case can be made to abolish the FAFSA form.
The new Harvard (and most likely Yale) financial aid system is a boon to the Prudents, who would only have to pay $12,000 if Patrick were accepted there --the same as the Spenders would pay. It is a step in the right direction, moving to a less perverse incentive system. But if college itself were less expensive, the problem for both families would decline. The root cause of the problem is the inefficient system of higher education delivery in the United States which third party payments, the non-profit nature of university organization, and other factors combine to create.
My friend and former Spellings Commission colleague Charles Miller and I compete with one another over who can say the most times that the American system of financing student higher education is dysfunctional. We often talk about it in terms of its excessive complexity, the contradictions between various loan programs, the fact that the loan system gives schools carte blanche to raise prices, etc., etc. All true, all damning.
But that is not the half of it. Let me repeat an example I used a few months ago, but illustrate it even more vividly. Let us take two kids who are virtually identical --same grades, same SAT scores, from families with identical incomes. Let us suppose one kid has fiscally conservative prudent parents while the other comes from a go-go family of socially pretentious people who engage in conspicuous consumption.
Patrick Prudent's parents make $120,000 a year, the father $60,000 as a veteran high school teacher, his mom $55,000 a year as a senior nurse, and they earn $5,000 annually from $150,000 in carefully accumulated investments in stocks and CDs. They live in a nice, but unpretentious $200,000 house that is all paid for. They both drive sensible cars, like Toyota Camrys or Nissan Altimas. They have no debt. Total net worth is about $400,000.
Stephen Spender's parents also make $120,000 a year, the father making all the income in his job as an insurance salesman. The Mom does not work, preferring to spend a lot of time at the country club or at the Florida condo. They have a $300,000 house in an upscale neighborhood with a $200,000 mortgage, a small $200,000 condo in Florida with a $150,000 mortgage, no savings, a $40,000 car loan on the wife's Porsche Boxer sports car (the husband leases his Lexus), and a $15,000 loan on their boat that they keep at the Florida condo and $$10,000 in credit card debt-- big spenders, fiscally irresponsible. The family net worth is about $175,000 --far less than the Prudent's who saved for their son's education and did not join country clubs, buy fancy sports cars, or a condo in Florida. Suppose both sets of parents are the same age, have the same retirement schemes, and have no other children.
The federal tax system slightly favors the Spenders over the Prudents --they have more deductions for mortgage interest. The federal government says "we give you benefits if you borrow to finance your consumption, but take them away if you save for your or your children's future." But that is nothing compared with what the collegiate financial aid system does.
Suppose both boys are accepted at good quality private schools a notch below the elite Ivy League schools --maybe Boston College, George Washington University, or Carleton College. Because of robust savings revealed on their FAFSA form and non-existent monthly mortgage payments and credit card bills, the Prudent family likely will end up having to pay most of the $45,000 annual tuition, room and board charges --maybe a tuition discount of $5,000, leaving $40,000 to be taken from savings and cash contributions. After four years, the family will have very little savings. The Spenders will get a significantly larger tuition discount --say $15,000 a year, borrow $25,000 a year (a good portion federally subsidized), and get the remaining $5,000 from a small family cash contribution and some small work earnings by Stephen.
This system punishes the savers, rewards the spenders. It rewards parents who are so self-centered that they put their own interests ahead of their children, and punishes parents who believe their first obligation in life is to nurture and support their kids. The system sends all the wrong signals. It is bad for the Nation, contributing to our low savings rate, the need to borrow investment funds from abroad, etc. It raises interest rates, other things equal. The damage done by government through tax and spending policies is aggravated by the privately imposed "tax" on savings levied by the colleges and universities. That is why I think a decent case can be made to abolish the FAFSA form.
The new Harvard (and most likely Yale) financial aid system is a boon to the Prudents, who would only have to pay $12,000 if Patrick were accepted there --the same as the Spenders would pay. It is a step in the right direction, moving to a less perverse incentive system. But if college itself were less expensive, the problem for both families would decline. The root cause of the problem is the inefficient system of higher education delivery in the United States which third party payments, the non-profit nature of university organization, and other factors combine to create.
Easy Ways to Reduce College Costs
By Richard Vedder
I know of two related ways America could reduce the costs of educating postsecondary students very significantly that do not involve any major changes in the ways colleges do business.
First, increase the proportion of undergraduate students enrolled in community colleges or in on-line programs. Cost per pupil through these modes tend to be dramatically lower than at conventional four year schools with all their aspirations and pretensions of research leadership, with their high priced professors who teach modest amounts of undergraduates, their vast country club-like amenities, etc.
The case for increased emphasis on two year schools is compelling on other grounds as well. A huge portion of those entering four year schools do not make it through --at least within six years. If most students started at two year schools and got to move on to the major leagues (four year institutions) ONLY if they showed good academic potential in their two years of community college training, then perhaps we would have fewer students who ultimately fail to succeed while taking up high priced seats in the costly schools.
The other idea is to compress the time frame for the college experience. The Europeans are doing it with the three year bachelor's degree. Americans bemoan the loss of quality associated with a three year degree, but I have not seen any evidence documenting that point. At the margin, is the fourth year of study important? From personal experience, in some cases it is --this is when students get needed vocational training (e.g., in engineering or accounting) or start to use their book learning in real world situations that prepares them for the World of Work. But for many students, it is a vast wasteland --working 30 hours of week to earn a piece of paper rather than 40-50 hours a week doing productive things in the real economy.
Ohio Governor Ted Strickland in his State of the State address argued for a "Senior to Sophomore" program where high school students do the equivalent of their freshman college year while in high school --paid for by the state. The details are vague, and in some respects that state already does it, letting bright high school students take college classes free while in high school. But an expansion of that concept may well be warranted, although the devil is in the details. The AP programs that are so popular are another way kids can overcome the artificial and arbitrary barrier that says college must start at age 18.
To be sure, there are quality issues. My university is now offering liberalized transfer of two years credit from one of the state's leading two year schools --but faculty are saying "they teach rinky-dink courses in a non-rigorous manner, so all we are doing is cheapening the quality of our degree." Those concerns probably have validity. On the other hand, we have already been watering standards down within the collegiate world for decades. And, what is the optimal quality and quantity of learning needed before entering the adult world? If the CCAP empirical evidence on the college spending/economic growth relationship is even remotely correct, it may well be we are overinvested in higher education, and these efforts to shorten the process may be good for society.
I know of two related ways America could reduce the costs of educating postsecondary students very significantly that do not involve any major changes in the ways colleges do business.
First, increase the proportion of undergraduate students enrolled in community colleges or in on-line programs. Cost per pupil through these modes tend to be dramatically lower than at conventional four year schools with all their aspirations and pretensions of research leadership, with their high priced professors who teach modest amounts of undergraduates, their vast country club-like amenities, etc.
The case for increased emphasis on two year schools is compelling on other grounds as well. A huge portion of those entering four year schools do not make it through --at least within six years. If most students started at two year schools and got to move on to the major leagues (four year institutions) ONLY if they showed good academic potential in their two years of community college training, then perhaps we would have fewer students who ultimately fail to succeed while taking up high priced seats in the costly schools.
The other idea is to compress the time frame for the college experience. The Europeans are doing it with the three year bachelor's degree. Americans bemoan the loss of quality associated with a three year degree, but I have not seen any evidence documenting that point. At the margin, is the fourth year of study important? From personal experience, in some cases it is --this is when students get needed vocational training (e.g., in engineering or accounting) or start to use their book learning in real world situations that prepares them for the World of Work. But for many students, it is a vast wasteland --working 30 hours of week to earn a piece of paper rather than 40-50 hours a week doing productive things in the real economy.
Ohio Governor Ted Strickland in his State of the State address argued for a "Senior to Sophomore" program where high school students do the equivalent of their freshman college year while in high school --paid for by the state. The details are vague, and in some respects that state already does it, letting bright high school students take college classes free while in high school. But an expansion of that concept may well be warranted, although the devil is in the details. The AP programs that are so popular are another way kids can overcome the artificial and arbitrary barrier that says college must start at age 18.
To be sure, there are quality issues. My university is now offering liberalized transfer of two years credit from one of the state's leading two year schools --but faculty are saying "they teach rinky-dink courses in a non-rigorous manner, so all we are doing is cheapening the quality of our degree." Those concerns probably have validity. On the other hand, we have already been watering standards down within the collegiate world for decades. And, what is the optimal quality and quantity of learning needed before entering the adult world? If the CCAP empirical evidence on the college spending/economic growth relationship is even remotely correct, it may well be we are overinvested in higher education, and these efforts to shorten the process may be good for society.
Saturday, February 16, 2008
The Student Loan Crisis Revisited
By Richard Vedder
As I and my sidekick Bryan pointed out a couple of days ago, the world is waking up to a reality: lending to college kids with zero credit history and highly uncertain future earnings is a risky business --unless the feds guarantee repayment. As a consequence, those in the private student lending business are taking a bath, and Wall Street investors are looking at these companies roughly the same way that 14th century Europeans looked at plague victims during the Black Death --warily and with more fear than love.
We have heard of how our great banks have been seriously damaged by the subprime crisis and defaulting mortgages. However, it is interesting to compare the share prices of broader based financial services companies with those of companies mainly involved with student loans. Below we look at the prices of five big financial services companies, including the three largest commercial banks --Citigroup, JP Morgan Chase, Bank of America, Merrill Lynch, and Bear Stearns --and compare them with three student loan firms --SLM Corp. (Sallie Mae), Nelnet Corp., and Student Loan Corp. We calculate two stock market indices --a broad based index of the first five companies (using an unweighted average of prices), and a student loan index of the last three companies, all indexed around the closing stock prices last June 29 being set equal to 100.
Here are the two index values for various dates:
| Date | Financial Services Index | Student Loan Company Index |
| June 29, 2007 | 100 | 100 |
| September 30, 2007 | 93.02 | 83.60 |
| December 30, 2007 | 73.06 | 47.46 |
| Febuary 15, 2008 | 70.95 | 45.19 |
The point made here is that, on average, the bad home equity, subprime and mortgage loans made by mainline banks and other companies have hurt them far less (29 percent stock price decline on average) than the loan activity of the student lenders (55 percent average stock price decline). LENDING TO STUDENTS IS RISKY. The price of Citigroup stock has fallen less (49 percent) than that of Sallie Mae (62 percent). (Citigroup, by the way, also is in the student loan business, but it has been relatively less important than it is for Sallie Mae).
All of this realization is leading to the Great Student Loan Credit Crunch of 2008.
Congress, as usual, deserves part of the blame, with its stupid laws slashing administered fees (which should be set by market forces) on government guaranteed loans --so even that segment of the market is in some trouble as companies exit the business. The private market is in worse shape, as some of the lenders (including the Michigan Student loan authority) are unable to borrow money themselves at any reasonable interest rate. Where is junk bond king Michael Milken when we need him?
Will students be able to get loans this fall? In general, the answer is yes. Markets are innovative and responsive. People want to make a buck. The industry giant, SLM Corp. says it has lined up mega bucks worth of financing. But the costs will rise to students --at a time when the college-high school earnings differential may have stopped widening. If college and universities persist in raising tuition rates at double the rate of inflation something novel might happen: applications might start falling (demographics are pointing for that to happen anyhow in a couple of years). Will this lead to some real price competition in higher ed? I doubt it given the non-profit third party payment driven nature of the industry, but who knows? Out of crises and distress markets solve fundamentally unsustainable economic situations, and this appears to be the case here, although government involvement, the machinations of the Accreditation Cartel and other forces mute the ability of markets to work their magic. Watch for more from CCCAP on this topic: I expect my colleague Andy Gillen will soon finish an expanded and polished version of his "bubble" blogs that attracted some attention on this site earlier. They were insightful and spot on, as the world is finally realizing.
Friday, February 15, 2008
The Coming Student Loan Crisis?
By Bryan O'Keefe
By now, the daily stories about subprime mortgages and the credit crunch are old news to just about everyone. But there is a fresh angle on this problem, one that could tremendously influence students, families, colleges, and overall higher education costs.
The Wall Street Journal reported yesterday that a student loan crisis could be on the horizon this fall -- both for private loans and even government backed loans. The general problem is that the credit crisis has driven away investors from the types of securities that typically finance student loans. In some cases, the panic might be irrational, especially in the case of government backed student loans. As our friend Sandy Baum from the College Board points out in the WSJ article, these loans are very safe from an investor's standpoint. That's because these loans can not be discharged, have relatively low interest rates, low rates of default, etc. The situation is much more complicated for private student loans.
Nevertheless, it doesn't matter if Wall Street is being irrational or not -- sometimes markets don't behave rationally and you just have to deal with the cards you are dealt. The "cards" in this situation could be a very poor hand for students -- namely, they are just simply NOT able to obtain student loans. Period. Gone will be the days when a student walks into a financial aid office, signs a sheet of paper, and walks right back out with a ton of Stafford loans.
What happens then? It could be a very, very interesting time for the colleges and universities themselves. For years, they have denied that rising college costs are related to the greater availability of student loans. But if students can't get the loans, they simply will not be able to enroll. The price of college is beyond the means of most families, even relatively affluent middle class and upper middle class households. Parents and families simply don't have the money. We could be facing an unprecedented situation.
Chances, however, are likely that if student loans really do dry up that colleges and universities might start acting like all of the desperate home builders in Arizona and Florida. They might offer students their own incentives to still come to school -- i.e. scholarships or tuition discounts provided by the school (possibly even funded by the endowment; if this credit crunch isn't a "rainy day", I don't know what is). The other option is that they can just simply lower their cost. This is exactly what home builders have been forced to do. They now offer terrific incentives or they have slashed costs entirely. Sometimes they have done both. Of course, if that happens, our much larger point about college costs and student loans might be proven true.
For now, most of the higher education establishment is just crossing their fingers that this whole problem will go away. A lot of students considering school this fall (myself included) are probably praying for the same thing. But the stark reality is that student loans as we know them are in some jeopardy and the fallout could impact colleges and universities for years to come.
One possible scenario is explored in one of our working papers available here and outlined in previous blog postings here.
By now, the daily stories about subprime mortgages and the credit crunch are old news to just about everyone. But there is a fresh angle on this problem, one that could tremendously influence students, families, colleges, and overall higher education costs.
The Wall Street Journal reported yesterday that a student loan crisis could be on the horizon this fall -- both for private loans and even government backed loans. The general problem is that the credit crisis has driven away investors from the types of securities that typically finance student loans. In some cases, the panic might be irrational, especially in the case of government backed student loans. As our friend Sandy Baum from the College Board points out in the WSJ article, these loans are very safe from an investor's standpoint. That's because these loans can not be discharged, have relatively low interest rates, low rates of default, etc. The situation is much more complicated for private student loans.
Nevertheless, it doesn't matter if Wall Street is being irrational or not -- sometimes markets don't behave rationally and you just have to deal with the cards you are dealt. The "cards" in this situation could be a very poor hand for students -- namely, they are just simply NOT able to obtain student loans. Period. Gone will be the days when a student walks into a financial aid office, signs a sheet of paper, and walks right back out with a ton of Stafford loans.
What happens then? It could be a very, very interesting time for the colleges and universities themselves. For years, they have denied that rising college costs are related to the greater availability of student loans. But if students can't get the loans, they simply will not be able to enroll. The price of college is beyond the means of most families, even relatively affluent middle class and upper middle class households. Parents and families simply don't have the money. We could be facing an unprecedented situation.
Chances, however, are likely that if student loans really do dry up that colleges and universities might start acting like all of the desperate home builders in Arizona and Florida. They might offer students their own incentives to still come to school -- i.e. scholarships or tuition discounts provided by the school (possibly even funded by the endowment; if this credit crunch isn't a "rainy day", I don't know what is). The other option is that they can just simply lower their cost. This is exactly what home builders have been forced to do. They now offer terrific incentives or they have slashed costs entirely. Sometimes they have done both. Of course, if that happens, our much larger point about college costs and student loans might be proven true.
For now, most of the higher education establishment is just crossing their fingers that this whole problem will go away. A lot of students considering school this fall (myself included) are probably praying for the same thing. But the stark reality is that student loans as we know them are in some jeopardy and the fallout could impact colleges and universities for years to come.
One possible scenario is explored in one of our working papers available here and outlined in previous blog postings here.
Thursday, February 14, 2008
America's Best Colleges and Universities
By Richard Vedder
Our blog offering an alternative approach to evaluating colleges and universities brought about a couple of comments, one so good that we will return to it in a subsequent posting. One defiiciency in our ranking of schools by the number of Who's Who in America entries is we did not control for enrollment variations. Williams College had 26 entries in our sample, less than one-half the number of the University of Illinois --but after adjusting for the huge enrollment differences, the probability of getting into Who's Who is greater for a Williams grad than an Illinois one. Some might argue we should separate the public schools from the private ones, and the universities from the colleges --they are different types of institutions. Accordingly, today, we offer you the top 25 schools in America based on our sample of 5,207 Who's Who entries for 2008. We adjust for enrollment as it was in 1980 -- Who's Who listed persons typically attended college at least a generation ago. The lists follow.
TOP 25 PRIVATE UNIVERSITIES
1. Harvard
2. Yale
3. Princeton
4. Dartmouth
5. Columbia
6. Chicago
7. Stanford
8. Cornell
9. M.I.T.
10. Johns Hopkins
11. Cal Tech
12. Duke
13. U. of Pennsylvania
14. Notre Dame
15. Northwestern
16. Georgetown
17. Case Western Reserve
18. Brown
19. Colgate
20. Rochester
21. Rensselaer
22. Rice
23. George Washington U.
24. New York University
25. Washington U. in St. Louis
Some schools rank significant worse on this ranking than the US News one --Washington University in St. Louis is a good example, as is Penn. Others, however, fare far better --Dartmouth, Case Western Reserve, and Rensselaer are examples. Still the very top schools are similar to the US News list.
25 TOP PUBLIC UNIVERSITIES
1. U.S. Naval Academy
2. Cal -Berkeley
3. U. of Michigan
4. U. of Virginia
5. U. of Illinois
6. U. of Wisconsin
7. U. of Arkansas
8. UCLA
9. U. of North Carolina Chapel Hill
10. U. of Alabama
11. University of Texas (Austin)
12. Miami of Ohio
13. U. of Iowa
14. U. of Kansas
15. Ohio University
16. SUNY Buffalo
17. U. of Oregon
18. U. of Vermont
19. U. of Washington
20. U. of Colorado
21. U. of Oklahoma
22. U. of Florida
23. U. of Maryland
24. Purdue U.
25. Indiana U.
Here the variations from the U.S. News
25 TOP PRIVATE LIBERAL ARTS COLLEGES
1. Williams
2. Washington and Lee
3. Amherst
4. Haverford
5. Davidson
6. Bryn Mawr
7. Swarthmore
8. Oberlin
9. Reed
10. Bennington
11. Barnard
12. Vassar
13. Kenyon
14. Smith
15. Knox
16. Wellesley
17. Trinity (Conn)
18. Wesleyan
19. DePauw
20. Hamilton
21. Union
22. Bowdoin
23. Washington and Jefferson
23. Hobart and William Smith
25. Wheaton (MA)
Here the surprises are even more numerous --but sampling issues make the findings a bit more suspect as well. Is Washington and Lee as good or better than Amherst? Does Knox College rank above Wellesley? Is Kenyon truly in the top dozen schools? Or is Pomona truly way below DePauw, not even being in the top 25? Again, special caution should be taken in interpreting the liberal arts college list because the number of Who's Who entrants was often in the single digits (never less than four, however).
All of this shows that moving to a performance or outcomes based ratings system likely would lead to real changes in the way we perceive some colleges --the top schools --the Harvards, Princetons, the Michigans and Berkeleys, the Williams and Amhersts --will still rank high, but some schools which quietly have been turning out people of distinction might get deserved greater recognition.
Our blog offering an alternative approach to evaluating colleges and universities brought about a couple of comments, one so good that we will return to it in a subsequent posting. One defiiciency in our ranking of schools by the number of Who's Who in America entries is we did not control for enrollment variations. Williams College had 26 entries in our sample, less than one-half the number of the University of Illinois --but after adjusting for the huge enrollment differences, the probability of getting into Who's Who is greater for a Williams grad than an Illinois one. Some might argue we should separate the public schools from the private ones, and the universities from the colleges --they are different types of institutions. Accordingly, today, we offer you the top 25 schools in America based on our sample of 5,207 Who's Who entries for 2008. We adjust for enrollment as it was in 1980 -- Who's Who listed persons typically attended college at least a generation ago. The lists follow.
TOP 25 PRIVATE UNIVERSITIES
1. Harvard
2. Yale
3. Princeton
4. Dartmouth
5. Columbia
6. Chicago
7. Stanford
8. Cornell
9. M.I.T.
10. Johns Hopkins
11. Cal Tech
12. Duke
13. U. of Pennsylvania
14. Notre Dame
15. Northwestern
16. Georgetown
17. Case Western Reserve
18. Brown
19. Colgate
20. Rochester
21. Rensselaer
22. Rice
23. George Washington U.
24. New York University
25. Washington U. in St. Louis
Some schools rank significant worse on this ranking than the US News one --Washington University in St. Louis is a good example, as is Penn. Others, however, fare far better --Dartmouth, Case Western Reserve, and Rensselaer are examples. Still the very top schools are similar to the US News list.
25 TOP PUBLIC UNIVERSITIES
1. U.S. Naval Academy
2. Cal -Berkeley
3. U. of Michigan
4. U. of Virginia
5. U. of Illinois
6. U. of Wisconsin
7. U. of Arkansas
8. UCLA
9. U. of North Carolina Chapel Hill
10. U. of Alabama
11. University of Texas (Austin)
12. Miami of Ohio
13. U. of Iowa
14. U. of Kansas
15. Ohio University
16. SUNY Buffalo
17. U. of Oregon
18. U. of Vermont
19. U. of Washington
20. U. of Colorado
21. U. of Oklahoma
22. U. of Florida
23. U. of Maryland
24. Purdue U.
25. Indiana U.
Here the variations from the U.S. News
25 TOP PRIVATE LIBERAL ARTS COLLEGES
1. Williams
2. Washington and Lee
3. Amherst
4. Haverford
5. Davidson
6. Bryn Mawr
7. Swarthmore
8. Oberlin
9. Reed
10. Bennington
11. Barnard
12. Vassar
13. Kenyon
14. Smith
15. Knox
16. Wellesley
17. Trinity (Conn)
18. Wesleyan
19. DePauw
20. Hamilton
21. Union
22. Bowdoin
23. Washington and Jefferson
23. Hobart and William Smith
25. Wheaton (MA)
Here the surprises are even more numerous --but sampling issues make the findings a bit more suspect as well. Is Washington and Lee as good or better than Amherst? Does Knox College rank above Wellesley? Is Kenyon truly in the top dozen schools? Or is Pomona truly way below DePauw, not even being in the top 25? Again, special caution should be taken in interpreting the liberal arts college list because the number of Who's Who entrants was often in the single digits (never less than four, however).
All of this shows that moving to a performance or outcomes based ratings system likely would lead to real changes in the way we perceive some colleges --the top schools --the Harvards, Princetons, the Michigans and Berkeleys, the Williams and Amhersts --will still rank high, but some schools which quietly have been turning out people of distinction might get deserved greater recognition.
Wednesday, February 13, 2008
Goverance and Creative Destruction: The William and Mary Controversy
By Richard Vedder
In my opinion, there is not enough Schumpeterian "creative destruction" in American higher education. Colleges seldom fail --accreditation is largely a bad joke--and leaders of colleges are ousted a little less often than they should be for poor performance. The consequences of mediocrity or failure in higher education are too low. In part, this is because of the gutless behavior of most boards of trustees who look at their assignment as one of simply blessing the president's decisions (to be sure, there are some boards who go too far in the other direction --meddling in the daily operations of the institution).
The firing of Gene Nichol at America's oldest public university, William and Mary, thus was for me a pleasant surprise. I wonder if there is a special place in Hell for domineering left-wing presidents who are contemptuous of traditions, alumni, and of past decisions to define an institution's missions and identity. If there is, I suspect Mr. Nichol is headed there eventually.
Nichol started off on a bad foot by removing a much loved symbol of William and Mary's past --a cross from the Wren Chapel that had been there for several generations. There is a decent case that can be made for not having a symbol of Christianity in a public facility, but instead of engaging the University community on the issue and his concerns, Nichol just removed the cross, inflaming alums. He also generally was contemptuous of the passions and contributions of many loyal alums whose dedication to William and Mary span decades --long before Nichols was there.
Is William and Mary a bastion for WASP behavior, contemptuous of other groups and a relic of a not so glorious past? Hardly. The Rector (equivalent of trustee chair) who was so viciously attacked by Nichol in his less than gracious departure was one of this nation's most distinguished African-Americans, a decorated Army veteran, prominent lawyer, former head of a major government agency (FCC), and a man of moderate temperament and politics (Michael Powell, who seems to have many of the qualities of his distinguished father Colin). Jews and Muslims visiting to use the Wren Chapel for special events could have the cross temporarily removed or covered. If he had the power, Nichol would probably ban chaplains from the U.S. Senate, "In God We Trust" from our currency, and "under God" from the Pledge of Allegiance. Most Americans don't agree with that perspective. We are a nation tolerant of people of different colors, beliefs, sexual origins, etc. So is William and Mary. However, we are not tolerant of dictators who try to substitute their judgment for that of the broader community. For that, Gene Nichol lost his job.
William and Mary will carry on --as it has with great distinction for 312 years. I suspect its most famous graduate, Thomas Jefferson, would not have been displeased with the recent actions at his alma mater.
In my opinion, there is not enough Schumpeterian "creative destruction" in American higher education. Colleges seldom fail --accreditation is largely a bad joke--and leaders of colleges are ousted a little less often than they should be for poor performance. The consequences of mediocrity or failure in higher education are too low. In part, this is because of the gutless behavior of most boards of trustees who look at their assignment as one of simply blessing the president's decisions (to be sure, there are some boards who go too far in the other direction --meddling in the daily operations of the institution).
The firing of Gene Nichol at America's oldest public university, William and Mary, thus was for me a pleasant surprise. I wonder if there is a special place in Hell for domineering left-wing presidents who are contemptuous of traditions, alumni, and of past decisions to define an institution's missions and identity. If there is, I suspect Mr. Nichol is headed there eventually.
Nichol started off on a bad foot by removing a much loved symbol of William and Mary's past --a cross from the Wren Chapel that had been there for several generations. There is a decent case that can be made for not having a symbol of Christianity in a public facility, but instead of engaging the University community on the issue and his concerns, Nichol just removed the cross, inflaming alums. He also generally was contemptuous of the passions and contributions of many loyal alums whose dedication to William and Mary span decades --long before Nichols was there.
Is William and Mary a bastion for WASP behavior, contemptuous of other groups and a relic of a not so glorious past? Hardly. The Rector (equivalent of trustee chair) who was so viciously attacked by Nichol in his less than gracious departure was one of this nation's most distinguished African-Americans, a decorated Army veteran, prominent lawyer, former head of a major government agency (FCC), and a man of moderate temperament and politics (Michael Powell, who seems to have many of the qualities of his distinguished father Colin). Jews and Muslims visiting to use the Wren Chapel for special events could have the cross temporarily removed or covered. If he had the power, Nichol would probably ban chaplains from the U.S. Senate, "In God We Trust" from our currency, and "under God" from the Pledge of Allegiance. Most Americans don't agree with that perspective. We are a nation tolerant of people of different colors, beliefs, sexual origins, etc. So is William and Mary. However, we are not tolerant of dictators who try to substitute their judgment for that of the broader community. For that, Gene Nichol lost his job.
William and Mary will carry on --as it has with great distinction for 312 years. I suspect its most famous graduate, Thomas Jefferson, would not have been displeased with the recent actions at his alma mater.
Monday, February 11, 2008
A New Way To Evaluate Colleges
By Richard Vedder
Many people complain, correctly, that popular college rankings, especially that of US News & World Report (USNWR) are largely based on inputs into the process of producing educational services, not actual educational outcomes. The Spellings Commissions and others have called for "value added" measures of learning and indicators of student outcomes. The colleges, for the most part, are resisting. The solution: devising an externally generated measure of outcomes. Two variables that would work perfectly: data on the Social Security earnings history of recent (last 10-15 years) graduates, and indicators of distinction among graduates as measured by entries in Who's Who in America. We at CCAP do not have the ability to get the Social Security earnings history, but we can get Who's Who entries.
We have taken an unbiased sample of 5,207 entries from the 2008 edition of Who's Who. We will be discussing these results in a series of blogs and probably at least one report. This is the first of those findings. They are a consequent of many hours of laborious digging by my beloved Whiz Kids --especially Jim Coleman, Jonathan Robe, and Thomas Ruchti (with moral support from Senior Whiz Kid Matt Denhart).
The broadest statistic:
54.23% of entrants had undergraduate degrees from one of the top ranked USNWR national universities or liberal arts colleges --a listing of well over 200 schools.
38.49% have undergraduate degrees from unranked (in the top tier) universities and colleges.
7.28% have no undergraduate degree.
In short, graduation from a top tier school helps your chances of becoming vocationally successful, but almost as many such persons are NOT graduates of such schools.
57 schools had 15 or more entries in Who's Who among our sample. They are, in order:
1.Harvard -153
2.Yale -91
3.U. of California, Berkeley -82
4.U. of Michigan, Stanford U.-59
6. U. of Pennsylvania, Princeton U. - 58
8. Columbia U. -55
9. Cornell U. -54
10. U. of Illinois, Urbana -53
11. U. of Texas, Austin; U. of Wisconsin, Madison -51
13. Dartmouth College -43
14. UCLA, U. of Minnesota -39
16. Northwestern - 38
17. New York University -37
18. U. of Notre Dame - 34
19. Duke U. -32
20. M.I.T., Michigan State - 31
22. Brown University - 30
23. Ohio State, Syracuse -29
25. U. of Virginia, U. of Maryland -28
27. U. of Chicago - 27
28. Williams College, Penn State, U. of North Carolina - Chapel Hill, Purdue U.-26
32. U. of Florida, U. of Washington -25
34. Georgetown U. -24
35. Indiana U., Boston, U. George Washington U. -23
38. U. of Iowa, U. of Kansas -22
40. Johns Hopkins, U.S. Naval Academy -21
42. Oberlin College -20
43. Miami of Ohio -19
44. U. of Colorado, SUNY Buffalo, U. of Rochester, Fordham U. Amherst College -18
49. U. of Missouri, Columbia, Rutgers U. -17
51. Rensselaer Poly, Washington U. in Saint Louis, U. of Oklahoma, Texas A&M -16
55. Ohio University, U. of Tennessee, Washington and Lee -15
Based on this extensive (about 6 percent of all entries) sample, there are a few big deviations from expectations based on the USNWR lists (national universities and liberal arts colleges). Among the universities, for example, Notre Dame, Michigan and Illinois are seriously under ranked relative to Duke, the U. of Chicago, or Washington U. in St. Louis. Among liberal arts colleges, Oberlin is seriously under ranked relative to Amherst. More about this issue in future blogs.
While all eight Ivy League schools ranked in the top 25, the Big Ten conference did well too, getting six schools in that elite group It is interesting to note, for example, that Michigan State has a larger number than, say, Johns Hopkins. Of the top 25 schools 15 were private --but 10 publics made the list.
To be sure, there are problems with the index, the sample is less than 100 percent, and, most important we have not taken account of enrollment differences between schools. We will address that last point soon in a future blog.
Many people complain, correctly, that popular college rankings, especially that of US News & World Report (USNWR) are largely based on inputs into the process of producing educational services, not actual educational outcomes. The Spellings Commissions and others have called for "value added" measures of learning and indicators of student outcomes. The colleges, for the most part, are resisting. The solution: devising an externally generated measure of outcomes. Two variables that would work perfectly: data on the Social Security earnings history of recent (last 10-15 years) graduates, and indicators of distinction among graduates as measured by entries in Who's Who in America. We at CCAP do not have the ability to get the Social Security earnings history, but we can get Who's Who entries.
We have taken an unbiased sample of 5,207 entries from the 2008 edition of Who's Who. We will be discussing these results in a series of blogs and probably at least one report. This is the first of those findings. They are a consequent of many hours of laborious digging by my beloved Whiz Kids --especially Jim Coleman, Jonathan Robe, and Thomas Ruchti (with moral support from Senior Whiz Kid Matt Denhart).
The broadest statistic:
54.23% of entrants had undergraduate degrees from one of the top ranked USNWR national universities or liberal arts colleges --a listing of well over 200 schools.
38.49% have undergraduate degrees from unranked (in the top tier) universities and colleges.
7.28% have no undergraduate degree.
In short, graduation from a top tier school helps your chances of becoming vocationally successful, but almost as many such persons are NOT graduates of such schools.
57 schools had 15 or more entries in Who's Who among our sample. They are, in order:
1.Harvard -153
2.Yale -91
3.U. of California, Berkeley -82
4.U. of Michigan, Stanford U.-59
6. U. of Pennsylvania, Princeton U. - 58
8. Columbia U. -55
9. Cornell U. -54
10. U. of Illinois, Urbana -53
11. U. of Texas, Austin; U. of Wisconsin, Madison -51
13. Dartmouth College -43
14. UCLA, U. of Minnesota -39
16. Northwestern - 38
17. New York University -37
18. U. of Notre Dame - 34
19. Duke U. -32
20. M.I.T., Michigan State - 31
22. Brown University - 30
23. Ohio State, Syracuse -29
25. U. of Virginia, U. of Maryland -28
27. U. of Chicago - 27
28. Williams College, Penn State, U. of North Carolina - Chapel Hill, Purdue U.-26
32. U. of Florida, U. of Washington -25
34. Georgetown U. -24
35. Indiana U., Boston, U. George Washington U. -23
38. U. of Iowa, U. of Kansas -22
40. Johns Hopkins, U.S. Naval Academy -21
42. Oberlin College -20
43. Miami of Ohio -19
44. U. of Colorado, SUNY Buffalo, U. of Rochester, Fordham U. Amherst College -18
49. U. of Missouri, Columbia, Rutgers U. -17
51. Rensselaer Poly, Washington U. in Saint Louis, U. of Oklahoma, Texas A&M -16
55. Ohio University, U. of Tennessee, Washington and Lee -15
Based on this extensive (about 6 percent of all entries) sample, there are a few big deviations from expectations based on the USNWR lists (national universities and liberal arts colleges). Among the universities, for example, Notre Dame, Michigan and Illinois are seriously under ranked relative to Duke, the U. of Chicago, or Washington U. in St. Louis. Among liberal arts colleges, Oberlin is seriously under ranked relative to Amherst. More about this issue in future blogs.
While all eight Ivy League schools ranked in the top 25, the Big Ten conference did well too, getting six schools in that elite group It is interesting to note, for example, that Michigan State has a larger number than, say, Johns Hopkins. Of the top 25 schools 15 were private --but 10 publics made the list.
To be sure, there are problems with the index, the sample is less than 100 percent, and, most important we have not taken account of enrollment differences between schools. We will address that last point soon in a future blog.
Sunday, February 10, 2008
The Law of Demand Works at Harvard
By Richard Vedder
There are some persons who say that at private American universities, the demand for education varies POSITIVELY with price --when universities raise their fees, more, rather than fewer, apply. If true, this is one of the relatively few significant examples of what economists call a "Giffen good," or the "snob effect," where raising prices leads to higher demand as customers perceive an improvement in quality associated with higher price.
I have always thought the demand for elite colleges was relatively inelastic, but still negative --higher prices scare some customers off. The whole issue is clouded somewhat by the widespread tuition discounting followed by virtually all schools, so the sticker price is greater than the average price ("net tuition fee") paid by students.
I have a mole, so to speak, at Harvard, with an inside scoop on admissions applications. Last year, Harvard had roughly 23,000 applications and, given poorer economic times this year and a virtually unchanging sized senior high school class, one would expect applicants for fall 2008 to be similar to this school year, or perhaps up 1-2 percent. Harvard, however, announced several weeks ago its new pricing plan that very publicly drastically lowers tuition fees for huge numbers of Harvard students. Most important, applicants from families with incomes below $180,000 a year know now exactly what they will have to pay when they apply --unlike most applicants, who learn of the net price only much later. Hence sticker prices are relevant at most schools, since they indicate the amount students might have to pay if turned down for financial aid (and typically 40-50 percent of students in fact DO pay these prices at top schools).
In fact, Harvard had a huge surge in applicants --over 27,000 I understand --close to a 20 percent increase. A lot of middle class parents whose kids failed to apply to Harvard thinking "it will probably cost me $30,000 or even $40,000 a year," now are applying. If the family income is $150,000, they know the cost will be only $15,000 --less than costs at the best state schools. Hence Harvard applications are soaring, presumably mostly from kids from families with $60,000 to $180,000 income benefiting from the new plan. It appears among students in this financial situation, demand is pretty elastic -- price matters.
The interesting thing is: will this change the nature of the Harvard entering class in any way? While truly poor kids were already told they would pay nothing if they went to Harvard, now Harvard is appealing to more kids from prosperous middle class families relative to the elite.
All of this means Harvard will reject more kids then ever. Other schools are responding to the Harvard initiative --in part to win over some of the growing number of Harvard rejects who are still very good students by almost any criteria, and partly to try to up their own applicant pool that may actually be falling in the way of the Harvard (and Yale) initiative.
There are some persons who say that at private American universities, the demand for education varies POSITIVELY with price --when universities raise their fees, more, rather than fewer, apply. If true, this is one of the relatively few significant examples of what economists call a "Giffen good," or the "snob effect," where raising prices leads to higher demand as customers perceive an improvement in quality associated with higher price.
I have always thought the demand for elite colleges was relatively inelastic, but still negative --higher prices scare some customers off. The whole issue is clouded somewhat by the widespread tuition discounting followed by virtually all schools, so the sticker price is greater than the average price ("net tuition fee") paid by students.
I have a mole, so to speak, at Harvard, with an inside scoop on admissions applications. Last year, Harvard had roughly 23,000 applications and, given poorer economic times this year and a virtually unchanging sized senior high school class, one would expect applicants for fall 2008 to be similar to this school year, or perhaps up 1-2 percent. Harvard, however, announced several weeks ago its new pricing plan that very publicly drastically lowers tuition fees for huge numbers of Harvard students. Most important, applicants from families with incomes below $180,000 a year know now exactly what they will have to pay when they apply --unlike most applicants, who learn of the net price only much later. Hence sticker prices are relevant at most schools, since they indicate the amount students might have to pay if turned down for financial aid (and typically 40-50 percent of students in fact DO pay these prices at top schools).
In fact, Harvard had a huge surge in applicants --over 27,000 I understand --close to a 20 percent increase. A lot of middle class parents whose kids failed to apply to Harvard thinking "it will probably cost me $30,000 or even $40,000 a year," now are applying. If the family income is $150,000, they know the cost will be only $15,000 --less than costs at the best state schools. Hence Harvard applications are soaring, presumably mostly from kids from families with $60,000 to $180,000 income benefiting from the new plan. It appears among students in this financial situation, demand is pretty elastic -- price matters.
The interesting thing is: will this change the nature of the Harvard entering class in any way? While truly poor kids were already told they would pay nothing if they went to Harvard, now Harvard is appealing to more kids from prosperous middle class families relative to the elite.
All of this means Harvard will reject more kids then ever. Other schools are responding to the Harvard initiative --in part to win over some of the growing number of Harvard rejects who are still very good students by almost any criteria, and partly to try to up their own applicant pool that may actually be falling in the way of the Harvard (and Yale) initiative.
Saturday, February 09, 2008
Party Time At American Universities!!!!
By Richard Vedder
Fellow data freak Tom Mortensen reports some fascinating data from the American Time Use Survey from the respected U.S. Bureau of Labor Statistics that broadly confirms the findings of the National Survey of Student Engagement with respect to the question: what do college students do with their time?
While the BLS survey looks only at weekday time use --ignoring the 48 hours that is Saturday and Sunday --the results confirm the notion that American college kids spend more time partying than working. Looking at full-time college students from the ages of 18 to 24 --the core of the college student population --we learn that the average student spends less than three hours a day on "education" --attending classes and studying --but more than 50 percent more than that on "leisure and sports." Counting time spent "working," the typical student spends 5.5 hours a day in productive activities --studying, working, or going to class. That is 27.5 hours a week. Adding in another 10 hours on the weekend (which probably is generous), you have an average of 37.5 hours per week. That is remarkably consistent with the NESSIE findings and less than what adults in manufacturing work. These students should be working 45-50 hours a week or more as they transition from children to adults.
There are variations, of course. Asian students spend about 50 percent more time on academic activities than whites. Blacks and Hispanics, who on average have economic and educational deficiencies to overcome -- spend less time on education than whites or the overall average. Older students (e.g., college seniors) spend more time on these activities than younger ones (e.g., 18 and 19 year old students, who spend a paltry two hours a day on educational pursuits). Kids from poorer families, however, in general work more hours on educational pursuits than kids from more affluent families. However, and this is something my colleague Charlene Kalenkowski has told me before ---kids from lower income families actually work FEWER hours a week at income generating activities than those from more affluent families.
Some conclusions:
1) The notion that colleges are recreational facilities/country clubs for the relatively affluent is supported by the data; the notion that higher education spending is a major investment in the creation of human capital is not well supported by the data. Question, then: why do we subsidize the underutilization of the talents of kids who are on average pretty bright but comparatively unchallenged (lazy?)
2) Why is the professoriate, so worried about its economic status, etc., and not working its students harder?
3)The notion that low income families are denied access to college for economic reasons is not supported by the fact that these individuals are not working much to overcome the cost of college --another impact of student loan programs? Bob Zemsky has been saying something like this for years, and I think he is right.
4) Is the low educational effort by minorities an adverse consequence of affirmative action policies --if you are black or Hispanic, you can work less because you have a favored status?
The biggest public policy issue, I repeat, is why do we heavily subsidize our best and brightest young Americans working so little, and partying so much?
Fellow data freak Tom Mortensen reports some fascinating data from the American Time Use Survey from the respected U.S. Bureau of Labor Statistics that broadly confirms the findings of the National Survey of Student Engagement with respect to the question: what do college students do with their time?
While the BLS survey looks only at weekday time use --ignoring the 48 hours that is Saturday and Sunday --the results confirm the notion that American college kids spend more time partying than working. Looking at full-time college students from the ages of 18 to 24 --the core of the college student population --we learn that the average student spends less than three hours a day on "education" --attending classes and studying --but more than 50 percent more than that on "leisure and sports." Counting time spent "working," the typical student spends 5.5 hours a day in productive activities --studying, working, or going to class. That is 27.5 hours a week. Adding in another 10 hours on the weekend (which probably is generous), you have an average of 37.5 hours per week. That is remarkably consistent with the NESSIE findings and less than what adults in manufacturing work. These students should be working 45-50 hours a week or more as they transition from children to adults.
There are variations, of course. Asian students spend about 50 percent more time on academic activities than whites. Blacks and Hispanics, who on average have economic and educational deficiencies to overcome -- spend less time on education than whites or the overall average. Older students (e.g., college seniors) spend more time on these activities than younger ones (e.g., 18 and 19 year old students, who spend a paltry two hours a day on educational pursuits). Kids from poorer families, however, in general work more hours on educational pursuits than kids from more affluent families. However, and this is something my colleague Charlene Kalenkowski has told me before ---kids from lower income families actually work FEWER hours a week at income generating activities than those from more affluent families.
Some conclusions:
1) The notion that colleges are recreational facilities/country clubs for the relatively affluent is supported by the data; the notion that higher education spending is a major investment in the creation of human capital is not well supported by the data. Question, then: why do we subsidize the underutilization of the talents of kids who are on average pretty bright but comparatively unchallenged (lazy?)
2) Why is the professoriate, so worried about its economic status, etc., and not working its students harder?
3)The notion that low income families are denied access to college for economic reasons is not supported by the fact that these individuals are not working much to overcome the cost of college --another impact of student loan programs? Bob Zemsky has been saying something like this for years, and I think he is right.
4) Is the low educational effort by minorities an adverse consequence of affirmative action policies --if you are black or Hispanic, you can work less because you have a favored status?
The biggest public policy issue, I repeat, is why do we heavily subsidize our best and brightest young Americans working so little, and partying so much?
Friday, February 08, 2008
Endowments and Tax Policy
The House Higher Ed Bill: Mostly Bad
By Richard Vedder
The House has voted overwhelmingly to renew the Higher Education Act (under a jazzier name). There are lots of provisions the higher ed establishment did not like, and the fact that the bill passed with strong bipartisan support should give them pause. They should be asking: “Why are we losing so much clout on Capitol Hill?” (Short answer --we are elitist, condescending, always complaining and relatively oblivious to both our customers and our benefactors.)
There are tons of things in the bill, and this is not the final answer --the Senate will weigh in, maybe even the White House (which says it is against the House bill), and there will be a conference committee negotiation almost for sure. But here are a few noteworthy things.
Start with the bad:
1) I agree with Secretary Spellings that denuding the Department of Education's authority in the area of accreditation is disastrous in the extreme. I usually do not like government regulations, but this is an area about where we are defining the environment of standards. This move suggests we are turning regulation of the colleges over to the colleges themselves and the accreditation organizations which they dominate. This is terrible. I love Judith Eaton (Mother Superior of the Accreditation Establishment) and CHEA (her organization) is doing some good things these days. But accreditation has been more a barrier to entry than a preserver of quality and that must change.
2) The rule for measuring student loan defaults was set in the bill so as to understate true default rates (although it is a better rule than the current one), which is irresponsible, and will lead to greater uncertainty amongst private lenders --and a decline in lending over what would happen if accurate default rates were allowed. This was a sellout to lobbyists for for-profit schools, with whom I usually am in agreement. Moreover, the bill delays implementation of even this weak provision for several years --shame.
3) This bill sets, in effect, minimum spending levels for STATE governments. This is a gross violation of the basic federalist principles governing our nation, is of dubious constitutional validity, and is just plain dumb. Who is Congress to tell states what the optimal allocation of their state budgetary resources is? Indeed, this provision is designed to keep states dropping more dollars out of airplanes over campuses --exactly the wrong thing to do if we want to bring efficiency and cost control to this industry long term.
Some other provisions --on regulating private lenders by the Ed Department for example -- may be bad as well, but I have not had a chance to read the precise language in the bill.
Some of the reporting requirements, designed to increase transparency and consumer knowledge about university operations --are on balance probably pretty good.
On the whole, this does nothing to change fundamentally the way colleges operate, and probably is worse than nothing. Shame.
The House has voted overwhelmingly to renew the Higher Education Act (under a jazzier name). There are lots of provisions the higher ed establishment did not like, and the fact that the bill passed with strong bipartisan support should give them pause. They should be asking: “Why are we losing so much clout on Capitol Hill?” (Short answer --we are elitist, condescending, always complaining and relatively oblivious to both our customers and our benefactors.)
There are tons of things in the bill, and this is not the final answer --the Senate will weigh in, maybe even the White House (which says it is against the House bill), and there will be a conference committee negotiation almost for sure. But here are a few noteworthy things.
Start with the bad:
1) I agree with Secretary Spellings that denuding the Department of Education's authority in the area of accreditation is disastrous in the extreme. I usually do not like government regulations, but this is an area about where we are defining the environment of standards. This move suggests we are turning regulation of the colleges over to the colleges themselves and the accreditation organizations which they dominate. This is terrible. I love Judith Eaton (Mother Superior of the Accreditation Establishment) and CHEA (her organization) is doing some good things these days. But accreditation has been more a barrier to entry than a preserver of quality and that must change.
2) The rule for measuring student loan defaults was set in the bill so as to understate true default rates (although it is a better rule than the current one), which is irresponsible, and will lead to greater uncertainty amongst private lenders --and a decline in lending over what would happen if accurate default rates were allowed. This was a sellout to lobbyists for for-profit schools, with whom I usually am in agreement. Moreover, the bill delays implementation of even this weak provision for several years --shame.
3) This bill sets, in effect, minimum spending levels for STATE governments. This is a gross violation of the basic federalist principles governing our nation, is of dubious constitutional validity, and is just plain dumb. Who is Congress to tell states what the optimal allocation of their state budgetary resources is? Indeed, this provision is designed to keep states dropping more dollars out of airplanes over campuses --exactly the wrong thing to do if we want to bring efficiency and cost control to this industry long term.
Some other provisions --on regulating private lenders by the Ed Department for example -- may be bad as well, but I have not had a chance to read the precise language in the bill.
Some of the reporting requirements, designed to increase transparency and consumer knowledge about university operations --are on balance probably pretty good.
On the whole, this does nothing to change fundamentally the way colleges operate, and probably is worse than nothing. Shame.
Wednesday, February 06, 2008
Dumb Gets Dumber in the House of Representatives
By Richard Vedder
The Higher Education Act (HEA) reauthorization is a big deal in higher education, and this year's bill, roughly 800 times longer than the Gettysburg Address (my model for public policy clarity), is filled with good things, bad things, and some so-so things --too many to even comment about. Like most persons, I have not actually read the whole thing, having better things to do, like watching great Super Bowl contests, playing with my new grandson Corey, etc.
But first my friend Charles Miller, and then the press, alerted me to a couple of changes in this year's iteration of the HEA in the House of Representatives. First, just when we were thinking to ourselves we probably would get through the year without a big battle over an endowment spending rule, an amendment appears in the House bill that has a real chance of passage that is even wilder (dumber?) than what Chuck Grassley was proposing (and which, I predict, he is backing off from as his aide Dean Zerbe departs, Harvard and Yale respond, people consider the remarks made at the recent CCAP conference aired on CSPAN, and endowment returns plummet). Rep. Welch of Vermont is on the Rules Committee, and his amendment probably will advance to the floor. It would mandate a 5 percent spending rule --for all schools, even Last Resort U. a mythical but typical small school with a $20 million annual budget, with a $2 million endowment that spends $96,000 a year from endowment funds but now will have to spend $100,000 (5 percent) annually --and $10,000 a year complying with the law. Dumb. I haven't read the full text of the bill --but a cursory glance suggests other problems as well. Even the Grassley-Zerbe bill applied only to $500 million or larger endowments. This is a form of legislative harassment that the colleges don't need.
Dumb gets dumber. I love for-profit education. CCAP is dedicated to letting it flourish. But I am angry that the for-profits (or some of them) are trying to prevent honest, accurate reporting on student loan default rates. Default rates should be based on a fairly long period --say, four years -- after a student's graduation. Currently, the Ed Department reports two year default rates, missing a large portion of defaults and hugely understating the problem. The proposed law would require three year default rates --an improvement, but not perfect. The for-profits have successfully lobbied against early implementation of such laws. This explains why we often have financial crises in areas under federal regulation --the regulators are often captured by the regulatees. In this case, Congress is saying, "We don't want accurate information provided." In other words, let us continue to encourage a student loan debt meltdown and, in the long run, a removal of private investors from this market (that the Feds have no business in). If an endowment payoff rule is dumb, this is dumber.
The Higher Education Act (HEA) reauthorization is a big deal in higher education, and this year's bill, roughly 800 times longer than the Gettysburg Address (my model for public policy clarity), is filled with good things, bad things, and some so-so things --too many to even comment about. Like most persons, I have not actually read the whole thing, having better things to do, like watching great Super Bowl contests, playing with my new grandson Corey, etc.
But first my friend Charles Miller, and then the press, alerted me to a couple of changes in this year's iteration of the HEA in the House of Representatives. First, just when we were thinking to ourselves we probably would get through the year without a big battle over an endowment spending rule, an amendment appears in the House bill that has a real chance of passage that is even wilder (dumber?) than what Chuck Grassley was proposing (and which, I predict, he is backing off from as his aide Dean Zerbe departs, Harvard and Yale respond, people consider the remarks made at the recent CCAP conference aired on CSPAN, and endowment returns plummet). Rep. Welch of Vermont is on the Rules Committee, and his amendment probably will advance to the floor. It would mandate a 5 percent spending rule --for all schools, even Last Resort U. a mythical but typical small school with a $20 million annual budget, with a $2 million endowment that spends $96,000 a year from endowment funds but now will have to spend $100,000 (5 percent) annually --and $10,000 a year complying with the law. Dumb. I haven't read the full text of the bill --but a cursory glance suggests other problems as well. Even the Grassley-Zerbe bill applied only to $500 million or larger endowments. This is a form of legislative harassment that the colleges don't need.
Dumb gets dumber. I love for-profit education. CCAP is dedicated to letting it flourish. But I am angry that the for-profits (or some of them) are trying to prevent honest, accurate reporting on student loan default rates. Default rates should be based on a fairly long period --say, four years -- after a student's graduation. Currently, the Ed Department reports two year default rates, missing a large portion of defaults and hugely understating the problem. The proposed law would require three year default rates --an improvement, but not perfect. The for-profits have successfully lobbied against early implementation of such laws. This explains why we often have financial crises in areas under federal regulation --the regulators are often captured by the regulatees. In this case, Congress is saying, "We don't want accurate information provided." In other words, let us continue to encourage a student loan debt meltdown and, in the long run, a removal of private investors from this market (that the Feds have no business in). If an endowment payoff rule is dumb, this is dumber.
Tuesday, February 05, 2008
Creative Destruction in Higher Education
By Richard Vedder
Markets work by rewarding and punishing participants in exchanges. Those who produce quality products at low prices which people want to buy make good profits and get rich; those who try to sell something not desired, or too shoddy, etc., lose money, prestige, job security, etc. These incentives and punishments propel market economies to serve consumers well, promoting prosperity, even longer life expectancies. That is why Joseph Schumpeter extolled the virtues of "creative destruction."
Unfortunately, we see little of that in higher education. And the lack of strong incentives --of carrots and sticks --is an impediment to growth (the exception, of course, is the for profit higher education companies).
In the last twelve months, titans in charge of three top Wall Street firms --Citicorp, Merrill Lynch and Bear Stearns -- have all lost their jobs because they misjudged the subprime mortgage and private equity markets, getting caught up in an unsustainable and dangerous euphoria. They were punished --heavily --and their companies will get religion and become more conservative in their practices. Many companies in the Fortune 500 50 years ago are dead or merged today --and others, like US Steel and, dare I say, General Motors, are pale versions of their former selves. Many of the top companies of today --e.g., Microsoft, Intel, Apple --were non-existent even 30 years ago. Such is the dynamics of American capitalism.
Yet a list of the top 100 colleges or universities in American higher education would be far more stable --do you know of a major, large university that has closed its doors? The leaders of the 1950s or 1960s measured by prestige, enrollment, budget size, etc. are pretty much the leaders of today. There are few incentives to be too innovative, too bold, etc. --it just does not make much difference. There is no bottom line, no rewards for success and, above all, little or no creative destruction.
To be sure, occasionally a university president gets the bounce --but as often as not it is internal politics, not external market pressures, that does him in. Take Larry Summers at Harvard. Under his tenure the institution's reputation reached an all time high, endowment soared, the school added important new faculty, etc. Yet he was canned because he said the unspeakable -- things like men may have a greater aptitude and interest in math than women, and he did not kowtow to the liberal faculty elites. He told a black prima donna he should do more research and spend less time doing rap songs (or something of that nature). That is a big, big no no. Horrors --he asked a professor to do his job instead of pontificate on matters on which he knew little!!!
Cayne at Bear Stearns left more because the value of the company fell by roughly one-half in the last year. He hurt stockholders and directors of the company, and they no doubt encouraged him to ease out of the role of running the company. His firing was for objectively valid reasons. We need more creative destruction in higher education.
Markets work by rewarding and punishing participants in exchanges. Those who produce quality products at low prices which people want to buy make good profits and get rich; those who try to sell something not desired, or too shoddy, etc., lose money, prestige, job security, etc. These incentives and punishments propel market economies to serve consumers well, promoting prosperity, even longer life expectancies. That is why Joseph Schumpeter extolled the virtues of "creative destruction."
Unfortunately, we see little of that in higher education. And the lack of strong incentives --of carrots and sticks --is an impediment to growth (the exception, of course, is the for profit higher education companies).
In the last twelve months, titans in charge of three top Wall Street firms --Citicorp, Merrill Lynch and Bear Stearns -- have all lost their jobs because they misjudged the subprime mortgage and private equity markets, getting caught up in an unsustainable and dangerous euphoria. They were punished --heavily --and their companies will get religion and become more conservative in their practices. Many companies in the Fortune 500 50 years ago are dead or merged today --and others, like US Steel and, dare I say, General Motors, are pale versions of their former selves. Many of the top companies of today --e.g., Microsoft, Intel, Apple --were non-existent even 30 years ago. Such is the dynamics of American capitalism.
Yet a list of the top 100 colleges or universities in American higher education would be far more stable --do you know of a major, large university that has closed its doors? The leaders of the 1950s or 1960s measured by prestige, enrollment, budget size, etc. are pretty much the leaders of today. There are few incentives to be too innovative, too bold, etc. --it just does not make much difference. There is no bottom line, no rewards for success and, above all, little or no creative destruction.
To be sure, occasionally a university president gets the bounce --but as often as not it is internal politics, not external market pressures, that does him in. Take Larry Summers at Harvard. Under his tenure the institution's reputation reached an all time high, endowment soared, the school added important new faculty, etc. Yet he was canned because he said the unspeakable -- things like men may have a greater aptitude and interest in math than women, and he did not kowtow to the liberal faculty elites. He told a black prima donna he should do more research and spend less time doing rap songs (or something of that nature). That is a big, big no no. Horrors --he asked a professor to do his job instead of pontificate on matters on which he knew little!!!
Cayne at Bear Stearns left more because the value of the company fell by roughly one-half in the last year. He hurt stockholders and directors of the company, and they no doubt encouraged him to ease out of the role of running the company. His firing was for objectively valid reasons. We need more creative destruction in higher education.
Monday, February 04, 2008
The Dilemma of College Presidents
By Richard Vedder
Suppose you are made president of a top 20 (but barely in the top 20) US and News Report school. The board that hires you tells you: "Take us to a higher level --top 5 or at least top 10 school.” (That is what every board seems to be telling its presidents lately --therein lies a problem). Suppose also that you believe in the American Dream, and that you want to use higher education to help able but poor kids get ahead, and publicly announce that you want to commit the university to the furtherance of that goal.
You’ve got problems, as Tom Mortensen's last Postsecondary Education Opportunity (December 2007) points out. More than one-third of students nationally are on Pell Grants. Looking at all 100 or so of the "best" national universities (as measured by US News), the proportion of Pell grant recipients going to these schools is dramatically less. Indeed, the proportion of students getting Pells at the best schools is often less than 10 percent, and almost never greater than 20 percent. Pell Grant students are represented perhaps one-third as much at the "best" schools as at other institutions. From 2000 to 2007, the national number of Pell recipients rose sharply, yet the absolute number on Pell grant students fell at such great universities as Yale, Cornell, Northwestern, Chicago, Stanford, Pennsylvania, Virginia, Cal Tech, and Duke. While a few great schools had healthy growth in Pell Grants (most notably Harvard, but to a lesser extent Brown, Dartmouth, and North Carolina), at a typical school the gains in Pell Grants recipients was drastically lower than the national average.
Herein lies the dilemma. Poor students are less likely to have top SAT scores, less likely to go to high schools with good reputations and lots of AP classes, less likely to have two college educated parents to help and encourage them, etc. To rank high with US News, you need to get very good students, and that is extremely difficult to do while taking in more poor kids since, on average, poor kids are less good academically than rich kids. Do you sacrifice prestige or the egalitarian impulses of the American Dream? The people paying your salary want prestige -- or at least that is what past experience shows.
Maybe we should do a "Pell Grant-adjusted" ranking of schools --giving extra weight to schools for taking in lots of Pell recipients, and subtracting weight for those who shun those kids. Looking now at liberal arts colleges rather than national universities, Berea College (US News rank=75) has tons of kids on Pell Grants (the school actually discriminates against rich kids), whereas Claremont McKenna College (CMC; US News rank=11) and Kenyon College (US News Rank=32) are yuppie schools (with which I have had some prior association), with fewer than 10 percent of students on Pells. It may be, adjusted for socioeconomic status of students, Berea is doing a better job than CMC or Kenyon.
When my Whiz Kids read this, they will burst into my office with regression equations in their heads --ways of coming up with a Pell-adjusted index. I will tell them we are going to adjust the US News index for both socioeconomic status of students (as measured by Pells), and by postgraduate student success (as measured by Who's Who entries). I am curious what we will get. But that is another story for another day.
Suppose you are made president of a top 20 (but barely in the top 20) US and News Report school. The board that hires you tells you: "Take us to a higher level --top 5 or at least top 10 school.” (That is what every board seems to be telling its presidents lately --therein lies a problem). Suppose also that you believe in the American Dream, and that you want to use higher education to help able but poor kids get ahead, and publicly announce that you want to commit the university to the furtherance of that goal.
You’ve got problems, as Tom Mortensen's last Postsecondary Education Opportunity (December 2007) points out. More than one-third of students nationally are on Pell Grants. Looking at all 100 or so of the "best" national universities (as measured by US News), the proportion of Pell grant recipients going to these schools is dramatically less. Indeed, the proportion of students getting Pells at the best schools is often less than 10 percent, and almost never greater than 20 percent. Pell Grant students are represented perhaps one-third as much at the "best" schools as at other institutions. From 2000 to 2007, the national number of Pell recipients rose sharply, yet the absolute number on Pell grant students fell at such great universities as Yale, Cornell, Northwestern, Chicago, Stanford, Pennsylvania, Virginia, Cal Tech, and Duke. While a few great schools had healthy growth in Pell Grants (most notably Harvard, but to a lesser extent Brown, Dartmouth, and North Carolina), at a typical school the gains in Pell Grants recipients was drastically lower than the national average.
Herein lies the dilemma. Poor students are less likely to have top SAT scores, less likely to go to high schools with good reputations and lots of AP classes, less likely to have two college educated parents to help and encourage them, etc. To rank high with US News, you need to get very good students, and that is extremely difficult to do while taking in more poor kids since, on average, poor kids are less good academically than rich kids. Do you sacrifice prestige or the egalitarian impulses of the American Dream? The people paying your salary want prestige -- or at least that is what past experience shows.
Maybe we should do a "Pell Grant-adjusted" ranking of schools --giving extra weight to schools for taking in lots of Pell recipients, and subtracting weight for those who shun those kids. Looking now at liberal arts colleges rather than national universities, Berea College (US News rank=75) has tons of kids on Pell Grants (the school actually discriminates against rich kids), whereas Claremont McKenna College (CMC; US News rank=11) and Kenyon College (US News Rank=32) are yuppie schools (with which I have had some prior association), with fewer than 10 percent of students on Pells. It may be, adjusted for socioeconomic status of students, Berea is doing a better job than CMC or Kenyon.
When my Whiz Kids read this, they will burst into my office with regression equations in their heads --ways of coming up with a Pell-adjusted index. I will tell them we are going to adjust the US News index for both socioeconomic status of students (as measured by Pells), and by postgraduate student success (as measured by Who's Who entries). I am curious what we will get. But that is another story for another day.
Student Loans: Revisited, Again
By Richard Vedder
A lunch conversation Friday (to which I will return in a minute) reminded me of something. Throughout the 20th century, business and financial innovators were often viciously attacked --although the distance of history leads us now to conclude that many of these persons did great good. John D. Rockefeller was hounded by muckraking journalists like Ida Tarbell --but he brought affordable lighting to the masses of Americans, and, later, helped develop cheap gasoline to fuel our cars. The University of Chicago and Rockefeller University are great legacies to his benevolent, humanitarian streak. Samuel Insull was hounded as a financial manipulator of utilities of the 1920s and 1930s, yet, as Amity Shales points out in her great new book on the Depression, his methods of financing electrical power was rational and innovative --they worked. Nearer to the contemporary scene, Michael Milken went to prison for alleged financial improprieties, but he developed a great financial instrument, junk bonds, that helped many innovative but poor entrepreneurs.
Back to my lunch. I ate at the Hay-Adams Hotel in DC with Catherine Reynolds, a fellow Spellings Commission member, who has been hauled through the coals by the press and regulators of late. Allegedly, she did improper things while running her student loan company. But she did something good entrepreneurs do --she saw a need, for purely private loans to students, and she developed that market --brilliantly and successfully. Cathy (who knows everyone in the Solar System) no doubt is trying to soften me up with nice meals and fine wine (two of my weaknesses) so I will promote her causes. It won't even take that to encourage me, because I say what I believe, and have some principles (translation: I don't accept small bribes). Here is what I believe about student loans today:
1. Government should get out of the student loan business, period. Government does not make $40,000 car loans, so why should they make or subsidize $40,000 college loans? Where they have intervened in credit markets (e.g., Fannie Mae, Freddie Mac, Sallie Mae) they have typically messed things up royally. Cheap federally subsidized money helped fund the subprime mess, for example. By the way, I wrote about all of this in a study for the Joint Economic Committee of Congress more than 25 years ago while a staffer there. I was right then, and I am right now. By distorting interest rates to consumers, government credit involvement leads to malinvestment, unsafe investment, and to trouble. We are overinvested in student loans in this country, too many kids have borrowed imprudently, etc. The Feds are part of the problem, not the solution.
2. If the federal government feels it has to "do something," let it convert the Pell Grant program to a true voucher situation where the money goes to the kids, not to bureaucrats in college financial aid offices who then use that information and the Pell money to manipulate the institution's own discount policies to fits its designs. Give 7 million Pell Grants averaging $4,000 annually directly to students, and you will massively expand that program --the kids will be happy, competition will rise, student financial aid scandals probably will decline, etc. Tell the financial institutions doing subsidized loans who lobby against this to go to hell. Why don't we do this? We don't want to offend the Bob Rubins (co-architect of Citicorp's current downfall) of the world -- those who are politically powerful and drop money out of airplanes on political campaigns.
3. Subject private unsubsidized lenders to the same types of regulations -- no more, no less --that we place on other lenders. If the price of borrowing for college goes from an unjustifiably low 3.5 percent to, say, 10 percent, so be it. Investing in college kids has risks and uncertainties, and trying to sweep them under the rug leads ultimately to financial upheavals, a misallocation of resources, and a lower national income.
A lunch conversation Friday (to which I will return in a minute) reminded me of something. Throughout the 20th century, business and financial innovators were often viciously attacked --although the distance of history leads us now to conclude that many of these persons did great good. John D. Rockefeller was hounded by muckraking journalists like Ida Tarbell --but he brought affordable lighting to the masses of Americans, and, later, helped develop cheap gasoline to fuel our cars. The University of Chicago and Rockefeller University are great legacies to his benevolent, humanitarian streak. Samuel Insull was hounded as a financial manipulator of utilities of the 1920s and 1930s, yet, as Amity Shales points out in her great new book on the Depression, his methods of financing electrical power was rational and innovative --they worked. Nearer to the contemporary scene, Michael Milken went to prison for alleged financial improprieties, but he developed a great financial instrument, junk bonds, that helped many innovative but poor entrepreneurs.
Back to my lunch. I ate at the Hay-Adams Hotel in DC with Catherine Reynolds, a fellow Spellings Commission member, who has been hauled through the coals by the press and regulators of late. Allegedly, she did improper things while running her student loan company. But she did something good entrepreneurs do --she saw a need, for purely private loans to students, and she developed that market --brilliantly and successfully. Cathy (who knows everyone in the Solar System) no doubt is trying to soften me up with nice meals and fine wine (two of my weaknesses) so I will promote her causes. It won't even take that to encourage me, because I say what I believe, and have some principles (translation: I don't accept small bribes). Here is what I believe about student loans today:
1. Government should get out of the student loan business, period. Government does not make $40,000 car loans, so why should they make or subsidize $40,000 college loans? Where they have intervened in credit markets (e.g., Fannie Mae, Freddie Mac, Sallie Mae) they have typically messed things up royally. Cheap federally subsidized money helped fund the subprime mess, for example. By the way, I wrote about all of this in a study for the Joint Economic Committee of Congress more than 25 years ago while a staffer there. I was right then, and I am right now. By distorting interest rates to consumers, government credit involvement leads to malinvestment, unsafe investment, and to trouble. We are overinvested in student loans in this country, too many kids have borrowed imprudently, etc. The Feds are part of the problem, not the solution.
2. If the federal government feels it has to "do something," let it convert the Pell Grant program to a true voucher situation where the money goes to the kids, not to bureaucrats in college financial aid offices who then use that information and the Pell money to manipulate the institution's own discount policies to fits its designs. Give 7 million Pell Grants averaging $4,000 annually directly to students, and you will massively expand that program --the kids will be happy, competition will rise, student financial aid scandals probably will decline, etc. Tell the financial institutions doing subsidized loans who lobby against this to go to hell. Why don't we do this? We don't want to offend the Bob Rubins (co-architect of Citicorp's current downfall) of the world -- those who are politically powerful and drop money out of airplanes on political campaigns.
3. Subject private unsubsidized lenders to the same types of regulations -- no more, no less --that we place on other lenders. If the price of borrowing for college goes from an unjustifiably low 3.5 percent to, say, 10 percent, so be it. Investing in college kids has risks and uncertainties, and trying to sweep them under the rug leads ultimately to financial upheavals, a misallocation of resources, and a lower national income.
Endowment Payout Rules
By Richard Vedder
One panacea to the problem of rising college costs that gets great attention these days is: have the federal government require universities to expend a certain percentage of the endowments annually, under the assumption that some of the incremental spending will be used to lower student costs.
I chaired an American Enterprise Institute conference on this topic Friday, which also aired on C-SPAN. We had six articulate speakers, three in favor of the endowment payout rule approach, two strongly against it, and the sixth (me) a bit on the fence, although with some reservations about the idea. All did a marvelous job.
While the proponents of the rule were forceful, eloquent, and in fairly good command of the facts, I think the opponents on balance had the better argument. In fact, I have now concluded that a payout rule is probably a bad idea, and it certainly detracts from the more fundamental issues explaining rising costs of higher education -- problems of stagnant productivity, a lack of incentives for efficiency, dysfunctional ways we finance the enterprise, and so forth. Charles Miller (former Spellings Commission chair) and Terry Hartle (senior vice president of the American Council of Education) reinforced my thinking on the point. Below are a few reasons for my negative view on payout rules, such as proposed by Lynne Munson, who has an adjunct relationship with CCAP, and Dean Zerbe, who has been pushing Chuck Grassley and other senators on this issue in his soon ending role as a senior Senate Finance Committee staffer.
First, it is worth keeping in mind that even if spending out of endowment rose sharply --say 200 basis points (e.g., from 4 to 6 percent), the total amount involved is a bit over $8 billion --a little over 2 percent of what we spend on higher education, and barely 10 percent or so of what students spend. Most universities have small endowments, and higher payout rules are of s minor significance, even allowing for the fact that actions by the rich schools impact a least modestly down the line to the Slippery Rock colleges of the world.
Second, it seems to me a one-size-fits all rule is stupid. If college X has a long run rate of return on its investments of 7 percent, and college B has a return of 15 percent, to require them both to spend the same portion of endowment annually is fiscally imprudent. A compromise one-size-fits-all rule probably would lead to overspending by the low rate of return school and underspending by the high rate of return one. If a rule is to be implemented, it should take this into account (my new study on endowments for CCAP, Federal Tax Policy Regarding Universities: Endowments and Beyond outlines how a variable rate rule could be legislated.
Third, philosophically, I have less confidence in federal government bureaucrats to know what is best for universities than university officials themselves (a position Charles Miller forcefully took). In deciding payout rules, decision-makers are deciding on intergenerational equity and economic burdens. While I suspect for most situations the best decision is to show intergenerational neutrality --spending only so much that future generation spending per student in inflation adjusted terms remains the same as for this generation --that decision is best left to the Trustees of universities (as opposed to fund administrators). As several speakers noted, a problem would exist if there was a strong built-in bias to overspend ---presidents who want to go on a spending splurge to make constituents happy. But (somewhat to my surprise), that is very, very rare.
By the way, rates of return on college investments since July 1 have taken a huge nose-dive, I suspect, and, given the risky nature of some college investments, may well have turned negative in some cases. Collectively, U.S. endowments in 1980 were lower than 22 years earlier in inflation-adjusted terms, and as a veteran economic historian I simply don't believe those who say "it couldn't happen again." My guess is nothing is going to happen politically in this election year, and by this time next year no one will dare pushing higher endowment spending given the dramatically lower rate of return of schools. Terry Hartle made this point in a slightly different context, and I think he is correct.
Whatever one thinks, however, the debate has been worthwhile, and the moves by Harvard and Yale, on balance, have been beneficial. But nothing truly revolutionary has happened, and over-focusing on this issue can divert us from more important tasks.
One panacea to the problem of rising college costs that gets great attention these days is: have the federal government require universities to expend a certain percentage of the endowments annually, under the assumption that some of the incremental spending will be used to lower student costs.
I chaired an American Enterprise Institute conference on this topic Friday, which also aired on C-SPAN. We had six articulate speakers, three in favor of the endowment payout rule approach, two strongly against it, and the sixth (me) a bit on the fence, although with some reservations about the idea. All did a marvelous job.
While the proponents of the rule were forceful, eloquent, and in fairly good command of the facts, I think the opponents on balance had the better argument. In fact, I have now concluded that a payout rule is probably a bad idea, and it certainly detracts from the more fundamental issues explaining rising costs of higher education -- problems of stagnant productivity, a lack of incentives for efficiency, dysfunctional ways we finance the enterprise, and so forth. Charles Miller (former Spellings Commission chair) and Terry Hartle (senior vice president of the American Council of Education) reinforced my thinking on the point. Below are a few reasons for my negative view on payout rules, such as proposed by Lynne Munson, who has an adjunct relationship with CCAP, and Dean Zerbe, who has been pushing Chuck Grassley and other senators on this issue in his soon ending role as a senior Senate Finance Committee staffer.
First, it is worth keeping in mind that even if spending out of endowment rose sharply --say 200 basis points (e.g., from 4 to 6 percent), the total amount involved is a bit over $8 billion --a little over 2 percent of what we spend on higher education, and barely 10 percent or so of what students spend. Most universities have small endowments, and higher payout rules are of s minor significance, even allowing for the fact that actions by the rich schools impact a least modestly down the line to the Slippery Rock colleges of the world.
Second, it seems to me a one-size-fits all rule is stupid. If college X has a long run rate of return on its investments of 7 percent, and college B has a return of 15 percent, to require them both to spend the same portion of endowment annually is fiscally imprudent. A compromise one-size-fits-all rule probably would lead to overspending by the low rate of return school and underspending by the high rate of return one. If a rule is to be implemented, it should take this into account (my new study on endowments for CCAP, Federal Tax Policy Regarding Universities: Endowments and Beyond outlines how a variable rate rule could be legislated.
Third, philosophically, I have less confidence in federal government bureaucrats to know what is best for universities than university officials themselves (a position Charles Miller forcefully took). In deciding payout rules, decision-makers are deciding on intergenerational equity and economic burdens. While I suspect for most situations the best decision is to show intergenerational neutrality --spending only so much that future generation spending per student in inflation adjusted terms remains the same as for this generation --that decision is best left to the Trustees of universities (as opposed to fund administrators). As several speakers noted, a problem would exist if there was a strong built-in bias to overspend ---presidents who want to go on a spending splurge to make constituents happy. But (somewhat to my surprise), that is very, very rare.
By the way, rates of return on college investments since July 1 have taken a huge nose-dive, I suspect, and, given the risky nature of some college investments, may well have turned negative in some cases. Collectively, U.S. endowments in 1980 were lower than 22 years earlier in inflation-adjusted terms, and as a veteran economic historian I simply don't believe those who say "it couldn't happen again." My guess is nothing is going to happen politically in this election year, and by this time next year no one will dare pushing higher endowment spending given the dramatically lower rate of return of schools. Terry Hartle made this point in a slightly different context, and I think he is correct.
Whatever one thinks, however, the debate has been worthwhile, and the moves by Harvard and Yale, on balance, have been beneficial. But nothing truly revolutionary has happened, and over-focusing on this issue can divert us from more important tasks.
Friday, February 01, 2008
Endowments: Watch C-SPAN Friday AM
By Richard Vedder
On several occasions, I have plugged a conference at the American Enterprise Institute on college endowments, taking place this morning (Friday, February 1) at 9:30 EST. Registration for the conference has passed 120, and allowing for some no shows and last minute additions, we expect 100 or so in attendance at the conference, organized by yours truly for AEI, where I am a Visiting Scholar.
The good news is all America can see this event. CSPAN will be covering it live, and, if tradition holds, showing it again at various other times (to be sure, perhaps 3 in the morning).
Based on a dinner party that we put on last night for some participants and a few friends in the higher education press, I expect the conference will be very lively. Lynne Munson and Dean Zerbe have indicated they will make a spirited defense of the notion that endowments are meant to be spent, and that a federal rule mandating minimum spending, similar to that facing other charitable organizations, is highly warranted. They will get some support from Professor Donald Frey, an economist at Wake Forest University.
Yet there is a spirited opposition to this view. Charles Miller, chair of the Spellings Commission, feels governmental interference in college endowment policies of colleges and universities is totally unproductive, and, in my view, he makes a pretty spirited and defensible case. Charles is loaded for bear on this issue. Feeling at least as strong as Charles, I suspect, will be Terry Hartle, Senior Vice President of the American Council of Education, and one of the doyens of the higher education Establishment.
In addition, we are releasing today a study: Federal Tax Policy Regarding Universities: Endowments and Beyond that I authored. It takes a rather balanced (by my standards, at least) approach, presenting some fascinating new data on the growing inequality amongst college endowments, historical data on endowment growth and decline (real endowments fell at most big schools from 1958 to 1980, for example), etc.
Join us for this event. And contact Bryan O'Keefe at 202 375 7831 or at bokeefe@collegeaffordability.net if you would like a hard copy of my new magnum opus.
On several occasions, I have plugged a conference at the American Enterprise Institute on college endowments, taking place this morning (Friday, February 1) at 9:30 EST. Registration for the conference has passed 120, and allowing for some no shows and last minute additions, we expect 100 or so in attendance at the conference, organized by yours truly for AEI, where I am a Visiting Scholar.
The good news is all America can see this event. CSPAN will be covering it live, and, if tradition holds, showing it again at various other times (to be sure, perhaps 3 in the morning).
Based on a dinner party that we put on last night for some participants and a few friends in the higher education press, I expect the conference will be very lively. Lynne Munson and Dean Zerbe have indicated they will make a spirited defense of the notion that endowments are meant to be spent, and that a federal rule mandating minimum spending, similar to that facing other charitable organizations, is highly warranted. They will get some support from Professor Donald Frey, an economist at Wake Forest University.
Yet there is a spirited opposition to this view. Charles Miller, chair of the Spellings Commission, feels governmental interference in college endowment policies of colleges and universities is totally unproductive, and, in my view, he makes a pretty spirited and defensible case. Charles is loaded for bear on this issue. Feeling at least as strong as Charles, I suspect, will be Terry Hartle, Senior Vice President of the American Council of Education, and one of the doyens of the higher education Establishment.
In addition, we are releasing today a study: Federal Tax Policy Regarding Universities: Endowments and Beyond that I authored. It takes a rather balanced (by my standards, at least) approach, presenting some fascinating new data on the growing inequality amongst college endowments, historical data on endowment growth and decline (real endowments fell at most big schools from 1958 to 1980, for example), etc.
Join us for this event. And contact Bryan O'Keefe at 202 375 7831 or at bokeefe@collegeaffordability.net if you would like a hard copy of my new magnum opus.
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