Reinventing Universities: Out-Sourcing

By Richard Vedder

A number of years ago, David Osborne and Ted Gaebler wrote an interesting book, Reinventing Government. The most insightful thought in the book was that government had a role to see that certain functions got performed that it viewed as being socially useful, if not vital. However, that is not the same thing as government actually providing the services itself. Often, it is smart for government to contract out (out-source) the actual delivery of governmental services to private firms that are specialists in providing the desired service. This takes advantage of the efficiencies inherent in specialization, the division of labor, and the theory of comparative advantage.

The same thing can be said about universities. Their job is to certify that student X has achieved a certain level of competence, knowledge, critical learning skills, etc., to warrant the rewarding of a degree. It is relatively irrelevant WHO provides the services, as long as they are provided at an acceptable level of quality and at an affordable cost. Sometimes, this may involve online instruction, sometimes large lecture hall teaching, sometimes expensive but sometimes life-altering small group seminars. Why shouldn't universities concentrate more on seeing that high quality services get delivered at an affordable cost, and less on delivering the services themselves? The reason, of course, is that vested interests on campuses resist any attempt to break their monopoly on the provision of services.

This brings us to today's INSIDE HIGHER ED (I am indebted to our friend and for-profit educational entrepreneur Burck Smith for bringing this to my attention). We learn that students at Fort Hays College in Kansas are revolting against courses provided at a low cost online by private for-profit provider StraightLine, with credit readily transferable to Fort Hays to be applied for graduation. Students cannot have it both ways -- wanting low cost, affordable education, and at the same time insisting on traditional modes of delivery that are inherently costly.

Are there issues involved in offering out sourced courses? Of course -- but those same issues exist for courses taught internally. Is the course's quality high? Are students in fact doing the work for which they are getting credit? Is the cost of providing the services reasonable relative to the benefits? A university that allows a lot of credit to be provided by disreputable outside providers may find their reputation damaged, or even their accreditation threatened (however: have you ever known a major institution that lost accreditation for academic reasons?) There are risks for reputable universities that try to cut corners using disreputable providers, and most prudent universities will be aware of this and act accordingly.

I am not surprised this story involves Fort Hays. In my book GOING BROKE BY DEGREE, I praise Fort Hays and its veteran president Edward J. Hammond for the innovative approach he took to reducing costs during the last recession. Now in his third decade as president (itself a real novelty these days), Dr. Hammond apparently has not lost his penchant for trying new and innovative ideas. When I last talked to him several years ago, I found an unusual president --not afraid of controversy or a willingness to confront change, Dr. Hammond was very cost conscious. I liked him very much.

I am not here to hawk StraightLine or its courses, but rather to say more power to universities who embrace the position that "we want to offer quality degrees at a low cost -- no matter who does the teaching, be it a for-profit provider, the institution itself, or a series of different providers, each good at what it does."

Is Online Education Evil?

by Andrew Gillen

This article in Inside Higher Ed details some concerns raised about outsourcing courses to online providers.

One student raises a series of questions:

"If Straighter Line fails too many students or make courses too challenging, they run the risk of losing support from the schools that use their service."

To me, this seems a bit like being concerned that Consumer Reports will never give a low rating to a product. Remember that the key to their business is establishing and maintaining a reputation as providing quality educational services, so pay for an A schemes are unlikely to flourish.

"How do they maintain academic honesty in an entirely virtual class?"

I'm not sure, but is this really restricted to online classes?

"How do they anticipate the needs of a wide variety of students if their courses are pre-designed and generic?"

This may be a concern for higher level courses, but that's not the main focus of online providers. Right now, they specialize in remedial and introductory courses, where the needs of this years students are probably very close to the needs of past students. As such, pre-designed and generic courses are the standard, whether the course in online or not. Professors who haven't changed their courses in a decade are not uncommon.

"Can anyone actually tell me (with a straight face) that virtual general education classes offer the same quality as face-to-face instruction from passionate educators on the FHSU campus?"

With a completely straight face, I can say it depends on the instructor. Having been in classes where communication with the professor is next to impossible due to language issues, I would much rather have taken an online course. But an even better answer appears in today's Chronicle:

Some people will argue that the best traditional college courses are superior to any online offering, and they're often right. There is no substitute for a live teacher and student, meeting minds. But remember, that's far from the experience of the lower-division undergraduate sitting in the back row of a lecture hall. All she's getting is a live version of what iTunes University offers free, minus the ability to pause, rewind, and fast forward at a time and place of her choosing.

She's also increasingly paying through the nose for the privilege.

All this is not to say that there aren't real concerns with online education - there are. But the alternative is not some picture perfect world. The alternative is largely what we have now - high drop out rates, ever increasing tuition, and crushing debt for many students, whether they graduate or not. Online education won't be a panacea, but it does hold great potential for reducing the financial burden of college.

[UPDATE] Be sure to check out the lively discussion in the comments at IHE as well.

Whatever Happened to the Meritocracy?

by Andrew Gillen

More and more, I'm starting to see higher education playing a big role in the maintenance of an aristocracy. The deification of the Ivy League and other top schools is barely tolerable in principle (since I have yet to see credible details of their value added - scroll down for the money quote from Harvard's dean of admissions), and even less so with legacy admissions. And now the the New York Times reports that

Facing fallen endowments and needier students, many colleges are looking more favorably on wealthier applicants as they make their admissions decisions… the inevitable result is that needier students will be shifted down to the less expensive and less prestigious schools.

I do not damn all the colleges that cannot be need-blind, because realistically, it is not possible for many of them, a point made clear by Dr. Schapiro:

'You can’t say someone should be need-blind unless they have the resources to fund it... It sounds immoral to replace really talented low-income kids with less talented richer kids, but unless you’re a Williams or an Amherst, the alternative is, the quality of the education declines for everyone.'

But when a school is need aware, it needs to be loudly and publicly admitted (kudos to the schools that are upfront about this). Moreover, people should acknowledge that our system is not as meritorious as we often assume. As Kevin Carey said, "it’s not, strictly speaking, a case of screwing poor students by overcharging them. Instead, it’s a case of screwing poor students by not admitting them in the first place."

Student Loan Default Rate Up by 50% In Two Years!

By Andrew Gillen

The Department of Education reports that the default rate on student loans for the latest cohort is now 6.9%.

So 6.9% of students who began repayment between Oct 06 and Sept 07 were in default by Sept 08. That in and of itself is pretty distressing, but even more so is the fact that this is 50% higher than the rate just two years ago (4.6% in FY 2005, 6.9% in FY 2007). Be sure to check out Tim Ranzetta at Student Lending Analytics and this Quick Take at Inside Higher Ed for more discussion. Why this isn't getting more attention is beyond me, though perhaps it has to do with the fact that nothing gets a headline anymore unless it involves a trillion dollars.

I’m starting to get the feeling that we’re encouraging students to mimic the rest of the country in taking on unsustainable debt. (The upper right chart here shows the astronomical increase in our dept to GDP ratio).

That didn’t work out so well for the country. I hope the students fare better.

A Day of Reckoning is on the Horizon

by Daniel Bennett

Inside Higher Ed reported this morning that the University of Maryland shot down a proposal for an annual review of tenured faculty members. This story is just another example of college faculty grasping on to the tenure life boat for dear life. Now, I admit that the percentage of faculty who abuse the system is probably a small minority; however, those who do are ruining the party for everyone.

Rather than furthering the discussion of ways to fix a broken process, the attitude remains hostile towards imposing any sort of accountability for college faculty. The rest of America is subject to annual performance reviews and face consequences for failing to perform on the job, often without a landing net to soften the blow (such as the one year of additional employment as a parting gift afforded to the few and far between faculty that are dismissed). On college campuses, we often hear the term "the real world", referring to post graduation employment. While those of us who contributed to providing professors a job (via tuition and tax dollars) are faced with the reality of perform or hike, college professors continue with business as usual, with nearly zero accountability.

This issue has been rousing public sentiment and will continue to gain steam as outrage over inequities in our country come center stage. Continual resistance to change will inevitably lead to a day of reckoning in which faculty tenure is revered in history books as one of the most prolonged scams in contemporary society. The process has already begun, as evidenced by the percentage of college instructors with tenure continues to fall.

Prepaid Plan in Trouble

by Andrew Gillen

This Chronicle story notes that

Alabama's prepaid-tuition plan is hurting... the state's Prepaid Affordable College Tuition plan, or PACT, doesn't have enough money to meet its future obligations.

This is precisely the concern I was talking about on Monday.

Randy Best Is Shaking Them Up

By Richard Vedder

I give talks to alumni groups and other organizations about eight great men I have met in my lifetime. Some are famous politicians (Richard Nixon, Jimmy Carter, Vladimir Putin), others financial gurus (George Soros, Michael Milkin), and the rest business leaders and entrepreneurs. In the latter group I include Randy Best, who is beginning to shake up higher education like I thought he would. He is a remarkable man, an entrepreneur's entrepreneur, a person who has overcome adversity (he essentially cannot read because of a disability) to amass (and lose in some cases) many fortunes.

Randy is going to colleges and offering them a deal. “Let me (Higher Education Holdings, or HEH, his closely held company) run an aggressive, high quality on-line operation for you, and I will get you enrollments and give you a cut of the tuition revenue. You will get to keep state subsidies you generate from higher enrollment. You control curriculum and even the faculty, but we will use academic coaches to get students to do the work and succeed." Several have accepted, originally Lamar University, but more recently Arkansas State and my own university (Ohio University).

Randy has told me that accreditation barriers are perhaps the single most important impediment to offering quality on-line education nationally. I wonder now whether his mind has changed. The faculty at Toledo raised such a fuss that the administration backed down on an arrangement with HEH. Similar opposition has appeared elsewhere. The faculty say "we control curriculum." End of story.

This gets to the question: who owns (and governs) the university? The Trustees? The President? The faculty? The students? The alums? The taxpayers? All think they do, to a greater or lesser extent. These issues of ownership, never present in for profit capitalistic enterprise, are a major problem for those interested in innovation, reform, affordability, and positive change in American higher education.

Chart of the week: 03/24/09

New data from the Digest of Education Statistics shows that college tuition continues to rapidly outpace inflation.

View past chats of the week here.

Mark Bauerlein on Diminishing Returns to Research

By Richard Vedder

I don't know Mark Bauerlein, but I would like to meet him. He appears to be a rarity --an English professor who understands and appreciates economics, specifically the dominant fact of that dismal science (to borrow from Carlyle), the existence of scarcity.

My friend and American Enterprise Institute (AEI) colleague Rick Hess talked Prof. Bauerlein (formerly head of research at the National Endowment for the Arts) into writing a papers for AEI, entitled "Professors on the Production Line, Students on Their Own," that I think is marvelous. It precisely reflects my own thinking, but does so with a clarity and evidence that I do not possess.

The gist of the argument is that there has been an explosion in the number of scholarly publications in modern times --the number of publications is growing faster than the number of faculty, meaning faculty are spending their time more and more on publications and less on teaching. Moreover, the marginal benefit (my words) of publications is sinking to a new low as professors publish more and more obscure articles over ground already well plowed. Diminishing returns has set in big time in research in the humanities (and I would add the social sciences, and several other related disciplines).

From 1980 and 2006, 21,000 studies were done on Shakespeare. Supposed we had 100 articles offering different interpretations of each of Shakespeare's plays, another 1,000 articles on his sonnets and any other miscellaneous writings, and 1,000 articles on Shakespeare more generally (including whether he, the Duke of Oxford or some other dude in reality wrote his plays). We would have perhaps 6,000 articles offering a wide variety of interpretations of the greatest writer in the history of the English language. Yet the 1980-2006 period produced well over three times that number of articles --and that on top of a corpus of Shakespeare scholarship and interpretation stretching back for one-third of a millennium that already existed in 1980.

Moreover, who reads the stuff? University press sales are tanking, Bauerlein observes. A university press book in literary criticism that sells 1,000 copies is a best seller these days, and sales of fewer than 500 copies are commonplace. Take out libraries; I suspect many of these books have fewer than 100 sales to individuals. Heck, more persons than that will read this blog. Yet professors neglect their students to get their book out that assures them (or nearly assures them) tenure.

The incentive systems are all screwed up. Let the students be damned, universities are about doing obscure writing for a few colleagues that provides professional esteem and job security for the writer who is paid out of tuition, taxpayer-provided subsidies and private donations. As Baurelein says, it is time to changes things. Abolish the requirement to publish the scholarly book, and ask for some, more modest, research in order to get tenure. And increase the relative importance of teaching in faculty evaluations from its current role (maybe 10-20 percent at most at good research universities) to one of prominence (maybe 70-80 percent).

Why doesn't it happen? Because we do not have a customer-driven, competitive environment that rewards those who please the customers. Tenure adds to the sense that we can ignore the customers and do what we want and like, not what our society needs and customers want. Also, research is visible (albeit, not to the general public) and measurable on a national scale, while teaching results are less visible beyond the local community and more difficult to quantify.

I have written or edited about eight books, perhaps 200 journal articles and chapters for books, not to mention hundreds of op-eds and other shorter writings. They have given me a little bit of a national reputation. But I think the thing I have done that has made the greatest contribution to society over the past half century of involvement in higher education is the 12,000 or students I have taught, a few hundred of whom were measurably impacted by what I said to them (some of which had precious little to do directly with the subject matter of my courses). We must return to basics in higher education if it is to retain its integrity and economic viability over the long run.

Something Is Fishy Here

by Andrew Gillen

This story (HT: Student Lending Analytics Blog) indicates that Dickinson is offering a guarantee of 4% above the rate of tuition increases for participants in their I-529 plan.

Historically, "tuition increases have been between 5 and 6 percent a year at Dickinson and its peer institutions", so unless I'm missing something, Dickinson is guaranteeing a return of between 9 and 10 percent a year. Just to be clear, let me say that again: Dickinson is guaranteeing a return of between 9 and 10 percent a year.

Perhaps it is just my "if it sounds too good to be true, it probably is" sense, but I just don't see how anyone, anywhere, ever can legitimately guarantee near double digit returns. Perhaps Dickinson is planning on freezing tuition, and if so, they are really only guaranteeing 4%. But even then, I don't even see how anyone, anywhere, ever can guarantee a 4% return, year after year for up to 18 years.

BTW, the inflation adjusted annual return on the S&P 500 for the last 18 years (without dividends) was just 1.66%. These certainly aren't normal times, nor were the last 18 years a typical 18 year period. But it does highlight the problem with guaranteeing even a 4% return, let alone 10%.

Tuition Madness: Daniel Kerrigan's Contribution

By Richard Vedder

When CCAP chief Whiz Kid (and my friend) Matt Denhart and I wrote an op-ed piece last Friday for the Wall Street Journal on March Madness, we got the usual number of predictable emails, some liking what we said and one or two hating it (and one predicting we would be in some danger from the NCAA, which, in the writer's view, did not take kindly to public dissent of its policies). The most interesting email came from Chicago businessman and financial guru Daniel Kerrigan, who sent me a copy of his "Tuition Madness", giving the brackets for the NCAA men's basketball tournament complete with the cost of attending each school, presumably for four years.

Virginia Commonwealth University was the only school under $100,000 ($98,025), while over three times higher was Boston College at $345,504. All colleges are expensive, but some are distinctly more expensive than others.

That got me thinking. Is Boston College worth three times as much to attend as Brigham Young ($100,710)? Even if one accepts the proposition that "college is a good investment", some college choices may be better investments than others. Why is Harvard so popular? Its cost is not a great deal more than Boston College, and for many students, it is in fact less. Yet Harvard has a far better reputation, its graduates make more money upon graduation, etc. Harvard, in fact, charges only a small fraction of what us economists call the equilibrium price --where the quantity wanting the service equals the quantity of service that the provider is willing to offer. At VCU, which turns relatively few students away, the gap between the quantity supplied and the quantity demanded is very small at the existing tuition fee. That is why, on value grounds, I usually encourage kids to go to the best school they can get into, since the variation in quality between schools is vastly greater than the variation in price.

The gap in tuition charges between the elite colleges and the medium quality state schools is less in another regard --a typical student will graduate from a high quality private college typically in four years, but is more like to take five or even six years at the typical state school. Thus the true cost of college differs less than the stated sticker price.

Kerrigan is raising another issue --namely that competition between schools is far more than what basketball records and scores would indicate. Universities are supposed to be about academic things and values more than the prowess in putting a ball through a hoop. You wouldn't know that from the reaction of the American people to the current tournament.

The High Cost of Political Correctness

By Richard Vedder

Universities are notorious for going wild for the latest liberal fad. This year, the big thing is sustainability, whatever that is. These fads all cost money, often do little but appease some local bleeding hearts on campus, but add to the rising cost of college.

That was brought home to me yesterday when I was asked to "dialogue with" our campus's Sustainability Coordinator. Sizable amounts of university resources were used to produce a little webcast presentation on whether we should engage in a campaign on my campus to get persons to buy goods from local farmers to help the planet (this is no doubt one of our university's innumerable Earth Day or Earth Month or whatever it is activities).

Our $47,265 a year sustainability czarina argued that we would be more environmentally conscious if we bought goods from local farmers. I rebutted that my sensitivity to the environment is not altered in the slightest if I eat lettuce made in Mexico rather than Ohio and, what do you have against helping starving farmers in Third World countries? Putting aside the absurdity of the idea, why do we have a Sustainability Coordinator in the first place? When you add in the $53,349 Recycling Coordinator, fringe benefits, some secretarial help, etc., we probably spend conservatively $200,000 a year to make liberals feel good about themselves -- and that does not consider the costs of collecting the used bottles, papers and cans. But are we saving the planet if the cost of implementing recycling exceeds the revenue received from recycling goods? If it costs us $50,000 to recycle plastic each year and, because of a near non-existent market, we get only $5,000 in revenue, are we not imposing costs on Planet Earth? All those trucks hauling recycled plastic are polluting the air, depleting non-renewable energy sources, contributing (allegedly) to Global Warming, etc.,etc. Does sustainability add or subtract from the environment? Who knows? Who cares? We do it to raise the self esteem of a few do gooders, socking it to students who pay the bills. I have a friend who claims that if he were made president, he would serve spotted owl canapes at his inauguration. I am not that insensitive to environmental issues, but my friend may be no more harmful to the environment then some sustainability coordinators who pollute the intellectual landscape of many campuses.
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I am not making this up. My university is changing credit card providers. All users of university credit cards are told they must attend a two hour training session on how to use the new credit cards (called pcards for some reason). Only in academia. I don't use a university credit card, so am not impacted, but if I did I think I would burn the card in protest (no doubt sending the environmentalists up the wall). The same people it takes two hours to learn how to use a credit card are educating our youth!

And the NCAA Basketball Tournament Champion is...

by Daniel Bennett

SUNY Binghampton*, according to the Center for Responsive Politics. The center announced its March Madness tournament bracket, picking winners according to which college spent more on lobbying the federal government in 2008. The other final four "teams" were the Southern California, California-Berkeley* and Michigan.



*Lobbying total includes spending by all universities in the same system

March Madness: A Time to Reflect

By Richard Vedder

My Chief Whiz Kid, Matt Denhart, and I have a little article appearing in tomorrow's Wall Street Journal, on, of all things, March Madness. It will be not be on the editorial page, but in the "taste" pages in another section of the paper.

We raise the question about the exploitation of student athletes by adults. Is it right, moral, and ethical, one might ask? Is it really "exploitation"? What are the economics of intercollegiate sports? The little piece Matt and I have coming out only hints at answers to these questions.

Bob Villwock, late of CCAP and now studying great ideas and, I suspect, chasing women in southern France (and running the original Marathon route between Athens, Greece and Marathon), joined Matt in doing a great study of college sports in America, which CCAP will be publishing shortly. They look at some of the great questions posed above, and provide some factual information helpful in assessing the role of intercollegiate sports in America.

So as you watch affordable, exciting and wholesome entertainment over the next couple of weeks in the form of young men running up and down a court and throwing a ball, think of the broader implications of this not only for its participants, but for higher education at large. CCAP will try to help elucidate the issues more clearly for you both tomorrow in the Journal piece and in the forthcoming study.

The AIG Bonus Scandal and Universities

By Richard Vedder

Politicians from the President on down are furious at $160 million in bonus payments being made to AIG employees in the midst of abject failure and huge federal bailouts. It infuriates people that their money is being used to reward people who made bad business judgments.

Yet, on a smaller scale to be sure, the same thing has been happening all the time in higher education. Big payoffs are being made to high level managers and decision-makers at a time when performance is often declining or showing little improvement; these payments often come from taxpayers. Deju vu all over again, as Yogi Berra once said.

Let me give a case study. Ohio University by most accounts has been in a bit of a decline over the past five years. A well intentioned, decent alumnus of the university was named president, but most knowledgeable persons (including students and faculty) think he has done a mediocre job. The school's US NEWS & WORLD REPORT ranking has fallen by 16 during his presidency --a pretty hefty slide for four years.
Now one may argue that this ranking is highly imperfect (I have made that case once myself), but it is a reputational measure widely observed by the higher education community.

Yet, using a detailed data set, CCAP Whiz Kids ascertained that the top 25 paid persons --all administrators or coaches --received on average 19 percent higher compensation over the past five years (adjusting for inflation) --compared with less than a three percent increase for lower level administrators and a similar single digit increase for faculty. The institution was struggling --yet it gave its people at the top big raises while the rank and file showed little increase. Not terribly different than AIG since Ohio University derives a huge portion of its income from government in the form of state appropriations and federal research grants.

Up the road at Ohio State, a similar salary explosion at the top is occurring, although in this case the external evidence hints that the school is in a period of advance, and that its reputation is rising. Throughout the land, university presidents and other top officials have received huge increases relative to other employees or the public in general. The recession will certainly slow this trend down, but I doubt it will end it permanently.

Nearly eight decades ago, Adolph Berle and Gardiner Means wrote a path-breaking book arguing that the divorce of ownership from control of modern corporations was troublesome and could lead to some bad things --such as executives implementing policies bad for stockholders. That problem continues to some extent in corporate America --but it may well be even much greater in universities. It is hard to measure outcomes in higher education (or, more accurately, we choose NOT to measure them), so bad performance often goes partially or fully undetected for years. There are no stockholders, and the only group to which administration reports is typically a board of trustees that seldom meets and is often co-opted by the administrators over which they are nominally superior.

The first step to changing this is to demand that universities provide measures of performance, and that these get widely disseminated. Despite some nice rhetoric and even some minor amounts of action, however, universities have resisted providing the needed information ---so they largely escape the accountability that even AIG ultimately had to face.

Digest of Education Statistics 2008

by Daniel Bennett

Today, the Department of Education unveiled its 2008 report on higher education. According to the NCES website:

"The Digest contains data on a variety of topics, including the number of schools and colleges, teachers, enrollments, and graduates, in addition to educational attainment, finances, and federal funds for education, libraries, and international comparisons."

Sunday Chat With Dr. David Helfand

by Daniel Bennett

Dr. Helfand was kind enough to take time out of his busy schedule as President of Quest University in British Columbia, Canada's first private not-for-profit secular college, to chat with me about the implications of faculty tenure and an alternative approach. Dr. Helfand has led a fascinating and commendable career in the academe, spending the majority of his 30 year professorate as a non-tenured faculty member at Columbia University, and by choice. He turned down the opportunity for lifetime employment at one of the most prestigious colleges in the world for ideological reasons.

I asked Dr. Helfand to describe the main problems with tenure. His response was to describe an implementation problem with perverse incentives. In summary, tenure:

1) Denies academic freedom for non-tenured faculty more so than protecting it for tenured faculty.
2) Produces a selection effect in which very smart, risk-taking and entrepreneurial professors are filtered out due to a faulty reward structure that rewards research and public stature and punishes teaching, in favor of risk-averse scholars who want job security.

When asked if being a non-tenure faculty ever inhibited his academic freedom, Dr. Helfand responded with a chuckle, stating that the concept of academic freedom is a state of mind and that he never felt shackled with what he could say, nor have there been any consequences for speaking his mind at faculty and other university meetings; however, conceding that the outcome may have been different had he been employed at a public institution. He suggested that he was "not a shrinking violet" during his academic career and that he felt more protected by the 1st amendment than a non-legally enforceable tenure agreement.

I inquired as to whether professors who choose a path similar to his were extended additional compensation to account for the lack of job security. The answer was a profound NO. In fact, there is an inverse relationship in the academe, citing the examples of lecturers and adjuncts. He did suggest, however, that his renewable contracts were accompanied with compensation commensurate with his accomplishments and that his salary was comparable to his tenured peers, adding that the periodic self-reflection of accomplishment and 5-year goal setting has greatly enhanced his career perspective.

Given his personal experience, I asked Dr. Helfand how employment contracts can be structured to best benefit faculty, students, colleges and taxpayers alike. With an excitable tone, he proceeded to describe the manner in which Quest University, has structured its faculty contracts. Let me premise this by stating that Quest has a unique teaching environment in which students take one class at a time in 3.5 week blocks and each faculty teaches 6 blocks per semester.

All faculty hires begin with an initial one year contract and their performance is reviewed at the end of that year. If the university decides to extend the contract, then the faculty member negotiates a 3-year contract with the Chief Academic Officer in which the criteria for performance evaluation are agreed upon based on the strengths of the faculty member (teaching, administration, recruitment, research, community service, curriculum development, etc). At the end of the 3 years, a committee reviews the faculty performance according to the criteria agreed upon by the CAO and employee. If acceptable, then a new 3-year contract is negotiated, in which the criteria for evaluation can be adjusted. If not acceptable, then the faculty member is permitted to teach for an additional year while seeking another job. At the end of the second 3-year contract, a committee again convenes to review the performance in accordance with the agreed-upon criteria and if acceptable, the faculty member negotiates a new 6-year contract and so forth.

I asked if a professor really loved teaching and wanted to increase his/her teaching assignment from the 6 blocks per semester, if they could do so at the expense of the other job criteria. Somewhat jokingly, Dr. Helfand responded that the university would be open to the possibility, although no one has yet expressed an interest in doing so.

Dr. Helfand and Quest offer an innovative approach that is certainly a breath of fresh air for evaluating faculty employment contracts. It dissuades diminishing faculty productivity while at the same time rewarding performance, without stifling academic freedom. Dr. Helfand believes that this sort of structure will attract talented, motivated and entrepreneurial professors that will add significant value to the educational opportunities of its students, especially as colleges continue to shift away from the tenure practice in lieu of less costly adjuncts and lecturers, a shift that he views as exploitation.

I asked if this sort of contract structure would catch on at other colleges. With a slight laugh, Dr. Helfand responded that it will be a less daunting task to begin new colleges with this sort of structure than to change the existing system, thus exasperating the problem higher education is an industry resistant to change.

Our Human Capital Stock is Growing 2.14% a Year

by Richard Vedder and Jordan Templeton:

This is another in a series of blogs on some of the most exciting research either of us has ever done (and one of us has been doing research for over 45 years). We estimate that the human capital stock of the United States rose from $54.782 trillion (in 2007 dollars) in 1980 to $97.022 trillion in 2007. That is a compounded annual rate of increase of 2.14 percent a year. About half of this reflects a growth in the working population, mostly from population growth but also partially from a rise in the employment-population ratio. But a significant amount of the growth also reflects a rise in human capital per worker, or per person. Human capital per person in 2007 dollars rose from $241,090 in 1980 to $321,217 in 2007, an increase of 1.07 percent a year.

But the disaggregation of the data provides even more interesting details:

1. Females contributed almost as much to the growth in the human capital stock as men ($20.655 trillion vs. $21.585 trillion), almost certainly the first substantial period in U.S. history where this is so.

2. Slightly over 60 percent of the increased human capital stock reflects increases in human productivity associated with post-formal school experiences, which is to say, roughly speaking "learning by doing." This component accounts for $25.492 trillion of the human capital stock increase, compared to a maximum of $16.648 trillion attributable to formal education. Moreover, some of that $16 trillion probably reflects in increases in human capital formation attributable to pre-schooling or extra-schooling characteristics, such as learning instilled by the family, genetic characteristics inherited at birth, etc.

3. Although we have not done all the analysis and calculations yet, it is almost certain that the expenditures on formal education since 1980 exceed the growth in the human capital stock attributable to education. Since some schooling expenditure is necessary to take account depreciation on the human capital stock (as workers retire and die and are replaced by a new generation), this in an of itself proves nothing. But it does suggest that the data we are collecting might be eventually insightful in determining whether education spending can be viewed largely as "human capital investment" or other things --consumption spending, income redistribution from taxpayers to educators, etc.

4. Over 100 percent of the increase in human capital associated with education is attributable to postsecondary education (the proportion of workers with no postsecondary education has fallen significantly, lowering human capital amongst this cohort). About 30 percent of the total growth in the human capital stock relates to the increase in the proportion of workers having bachelor's degrees or more, although again some of that may actually reflect pre-schooling created human capital. There are some data issues that make conclusions here murky, and lots of caveats that can be made about the methodology, which is based on the discounted present value of the earnings of workers.

This is a research effort that keeps on giving. Stay tuned for more.

An Answer to the Endowment Blues

by Daniel Bennett

College endowments have taken a hit over the past year, dropping in value along with the stock market. I recently learned of an investment that could be the saving grace for college endowments. The Congressional Effect Fund seeks to minimize political risk by investing in securities (S&P 500 index, ETF indices, etc) only when Congress is out of session. The fund invests in risk averse instruments (t-bills, money market funds, etc) when Congress is in session.

According to the fund's fact sheet, it:

"...has analyzed empirical data since 1965 that shows that on
days Congress was in session, the S&P 500 index had
an annualized price gain of only +.31% as compared
to +16.15% on days when Congress was out of session."

This is a fascinating investment philosophy that appears to have some merit, especially with the regulatory uncertainty that has spooked investors away from the market over the past few months. College financial managers might consider the Congressional Effect Fund (Cussip 207267105) as a means of mitigating the political risk of the current business regulatory environment.

**Disclaimer - neither the author nor CCAP are affiliated with the aforementioned investment fund. The above reference is for informational purposes only and does not constitute investment advice. Investors should seek professional financial advice regarding the suitability of investing in any securities or following any investment strategies.

College Rankings: A Thoughtful Perspective

By Richard Vedder

Eating lunch with Bob Morse, US News & World Report's guru on college rankings, reminded me that I have not talked much, if at all, about a soon-to-be-released CCAP study by two of our Whiz Kids, Luke Myers and Jonathan Robe. I think it is a fine addition to a growing literature on rankings.

The historical evolution of rankings is interesting. Long before US News revolutionized the rankings business 25 years ago, people were ranking colleges. Many of the early rankings, like many overseas today, were done not to promote consumer knowledge but to help in allocating public resources, allow schools to see how they were doing relative to competitors, etc. The consumer orientation of rankings is relatively new.

The most important contribution in the study from an originality perspective, I suspect, is empirical evidence that shows there are, in fact, a fair amount of differences in general undergraduate rankings. It is shown, for example, that the statistical relationship between rankings and instructional spending is quite different between the US News and the Forbes rankings.

Both Bob and I agreed that more rankings are better than fewer, and that rankings serve a useful function. For that reason CCAP will continue to work with Forbes in compiling college rankings, and I intend to attend an international meeting of rankings experts to be held later this year in central Asia.

This chart shows the percent of human capital derived from formal and informal learning by education level.

View past charts of the week here.

Sources: U.S. Census Bureau, BLS, CCAP calculations

Informal Learning Is Very Important

By Richard Vedder and Jordan Templeton:

Whatever the merits of President Obama's specific idea of having every American acquire some post-secondary education, it is true that most of our nation's human capital stock (over three-quarters by our calculations) is possessed by individuals with at least some college. Yet a look at earnings data has us convinced that a very large portion of the human capital of, say, college graduates, comes from "learning" that occurs after their formal college training.

We are trying to proportion the $97 trillion stock of human capital of our nation into three categories: human capital dervied from formal schooling, human capital acquired largely from post-education experiences on the job (learning by doing), and human capital acquired that is not directly related to schooling, but reflects, largely, the effects of the non-schooling environment in early childhood and even capital that is genetically inherited at birth.

We are part way through this estimation process, but we find the results so fascinating, and potentially so important, that we are not waiting on usual academic procedures (peer review by an academic journal) to announce our findings. In doing that, we risk saying things that are not entirely accurate, but that is, to our mind, better than risking NOT saying things that are essentially correct (this is akin to Type I and Type II errors in statistics).

Our findings are found in the enclosed table. Let us discuss a few of the results briefly here.

1. $52.8 trillion in human capital can be attributed to formal education ---or to the early childhood non-schooling effects not yet measured. However, $44.3 trillion in human capital --46 percent of the total --is attrbuted primarily to adult learning on the job, along with the maturity and wisdom that comes with age.
2. The post-school informal learning component is considerably stronger amongst college graduates (for which it is a majority of their human capital), and for males. Males still work more years than females, so are naturally expected to have greater productivity gains associated with work experience.

3. Those with very limited education (say less than high school) derive only modest amounts of post-schooling human capital, despite the fact that they have potentially longer working careers (since they are out of school at a younger age). It may well be that higher forms of conventional schooling (like college) give people the ability to learn more effectively on the job, suggesting that "college is a gift that keeps on giving." However, this is not necessairly the explanation for the phenomenon observed here. College graduates may have, for example, higher critical thinking skills than those with lower amounts of education, but this may reflect genetic or even family influences in early childhood as much as the direct effects of schooling. We will be studying this dimension further, along with trying to estimate the growth in human capital and its proximate causes over time.

The methodology will not be discussed in detail here, but it is based on the discounted present value of the earnings streams of Americans classified by gender and educational attainment. The male and female tables follow.

Unintended Consequences: Ricci v. DeStefano

By: Matthew Denhart

This past January the U.S. Supreme Court agreed to hear the case of Ricci v. DeStefano acknowledging the need to revisit the legal question of employment testing. The outcome of this case will have huge economic impacts; however, CCAP is most interested in its effect on colleges and the growing gap in college attainment among Americans. Our latest publication, The Law of Unintended Consequences Revisited: The Case of Ricci v. Destefano (available here) argues that upholding the Second Circuit Court's ruling in Ricci would reaffirm the earlier Griggs decision which has contributed to the observed rising cost of college and decreasing economic opportunities for minorities since the 1970s.

The case originates in New Haven, Connecticut where a group of white firefighters sued the city after their results from a test used as a factor in promotion were thrown out. The city feared that since whites tended to score higher on the test, it had created an unintentional disparate racial impact on promotion chances. The 1971 ruling in Griggs v. Duke Power clearly forbids this. However, the firefighters argue such an act constitutes reverse racism and is in violation of their own rights guaranteed under Title VII of the 1964 Civil Rights Act. The central question for the court is whether or not a municipal government can refuse to validate employment tests if they believe the test will disproportionately advantage whites.

Our study presents evidence that shows a growing demand for college after Griggs as employers turned to college degrees as a signaling device of employee competence rather than through testing. Earnings differential data between college and high school graduates backs-up the claim that attaining a college degree has become ever more important since Griggs. Yet, concurrently the price of attending college has grown beyond the rate of growth in inflation and personal income with minorities being those most adversely affected. We argue that this is at least one factor that has increased the gap between whites and minorities in college enrollments and attainment since the 1970s.

Indeed it seems that Griggs has created a consequence for minorities unintended and certainly unwanted by those who initially pushed for the passage of the 1964 Civil Rights Act. An affirmation of the lower court's ruling in Ricci would further restrict employment opportunities for minorities and exacerbate the growing divide between America's "haves" and "have-nots."

Matthew Denhart is a Research Associate at CCAP and a student at Ohio University

The Latest in Online Education

Last week, we blogged about the University of Toledo and how it was considering outsourcing some of its coursework to Higher Education Holdings in exchange for a percentage of tuition revenues. This effort has apparently been stymied by some of the faculty at UT, according to an article published by Inside Higher Ed yesterday.

The faculty questioned the quality of education that could be provided by an online provider - a valid concern. However, the same concern has to be raised over the quality of education being provided in a physical classroom, especially given the lack of outcome-based measurements of what students are actually learning. Furthermore, the proposed online program would have offered two graduate-level education degrees online at a fraction of the cost of on-site instruction. Judging by the poor results of educating the nation's youth, I would argue that the online program couldn't be any worse than the current educational training programs being provided by the colleges. Not to say that these types of contractual arangements are the cure-all to the education problems, but it is at certainly worth giving the "old college try", rather than flat out rejecting it, especially when the arrangement will reduce costs and tuition significantly at a time when families are struggling to afford college and student debt levels are burying both graduates and non-graduates.

In a semi-related story, education entrepreneur Shai Reshef plans to open the virtual doors to the University of the People this April. UoP is

"the world’s first tuition-free, online academic institution".

The institution will charge students application and exam fees on a sliding scale that is based on the relative wealth of the student's home country. UoP courses will be staffed by

"A community of educators, comprised of active and retired professors, master level students and other professionals, will participate and oversee the assessment process."

I'll be anxious to hear more about the success (or failure) of this innovate effort to increase access to the world's socio-economically disadvantaged.

Debt Rule of Thumb

by Andrew Gillen

Mark Kantrowitz, who runs finaid.org offers this rule of thumb for students:

"There's growing concern that more and more students are overborrowing," he says. "A good rule of thumb is if you borrow more than your expected starting salary, it's going to be hard to repay your debt, and if you borrow more than twice, you're at a very high risk of default."

The story I pulled this from is here.

A Four Diamond Idea

by Andrew Gillen

Writing for Slate, former New York governor Eliot Spitzer advocates a new system for student loans:

the concept is simple: Instead of paying upfront or taking loans with repayment schedules unrelated to income, students would accept an obligation to pay a fixed percentage of their income for a specified period of time, regardless of the income level achieved...

The smart loan model would permit all students to fund their own educations, guaranteeing that finances would no longer be a barrier to the education our work force needs. It would also free parental savings for other obligations—such as health care—at the same time that it would recognize that the student's ability to repay will grow over time as income increases through a career. The current system of hitting graduating students with immediately sky-high payment obligations just as they enter the work force is nonsensical...

This idea has a lot of potential - so I give it a rating of 4 diamonds. Now, if I can just remember where I got the idea of using diamonds to rate things...

Now I Am Distressed

by Andrew Gillen

This article - Democrats Limit Future Funding for Washington Voucher Program - did not make sense to me until I read this, by Timothy P. Carney:

The top two teachers unions—AFT and the National Education Association—spent more combined, $5.27 million, than the top two defense contractors.

The top five lobbying firms, combined, didn’t equal the AFT and the NEA in federal contributions in the 2008 cycle. Both of the teachers unions gave more than any oil company, and the NEA and AFT combined gave more than the top four oil companies combined.

These contributions give the unions clout, and federal lobbying records show they use this clout. Again, on closer inspection, the teachers unions look an awful lot like those corporate special interests Democrats supposedly oppose.

I don't give much weight to conspiracy theories about buying off politicians. With a few exceptions, such as Rod Blagojevich, I think most politicians truly believe in most of what they advocate, and that beneficiaries of what they advocate give them contributions because of their positions - ie the causality runs opposite to how conspiracy theorists would have it.

Ignoring conspiracy theories, I was distressed to come to the realization that the Democratic party is so pro government monopoly that they will kill off other arrangements for ideological reasons. I had thought that their past objections to school choice were based on concerns about the additional costs, or a lack of evidence of effectiveness, but that is clearly not the case.

The government is literally throwing money at anything that moves in the hope that the multiplier will be big enough for it to make sense (the deficit this year will be bigger than any of the budgets from 1996 through 1999). The cost of any program is not an obstacle right now.

Nor is there an aversion to experimenting to see what works best:

God, I love having smart people in the administration!...

These folks actually get that we DO NOT KNOW what will work, and therefore whatever states try out needs to be rigorously evaluated...

So the only explanation for the attack on vouchers is that they really think that government monopolies (the same ones where 1 in 3 Los Angeles high school students drop out) is the best system. My reading of history and economics indicates that monopolies are rarely* the best system.

*Temporary monopolies (patents, copyrights, etc.) are generally acknowledged to spur innovation, and economies of scale can also lead to situations where monopolies are optimal. Neither of these are very applicable to education.

Exporting the Highly Skilled Imports

by Daniel Bennett

A new study entitled America's Loss is the World's Gain was released this week by a team of academic researchers. The report addresses the issue of highly skilled and educated immigrant workers to the U.S. who have returned to their native countries. The researchers utilized a unique methodology in collecting the qualitative data from 1,200+ survey respondents - Linkedin, a professional networking site. The respondents indicated that the main reasons they have returned to their native lands were for career opportunities, family ties and quality of life. Immigration policies were found to be a minor factor.

So why is the loss of immigrants a concern? Immigrants have historically played an vital role in the economic development and entrepreneurship in the U.S. In 2007, 15.7 percent of the U.S. labor force and hence, taxpayer base, was comprised of immigrants --not an insignificant amount. Many of the immigrants returning home are young, highly skilled and hold advanced degrees (engineers, IT professionals, scientists, etc.). This reverse brain drain is likely to be harmful to long-term economic growth in the U.S. at a time when we need entrepreneurship and new businesses to spur an economic recovery.

Chart of the Week: 03/03/09

This chart shows that the income gap between highschool and college graduates increased dramatically after the Griggs v. Duke Power ruling. Learn more about the Griggs case here.

View past Charts of the Week here.

Source: U.S. Census Bureau

Should All Kids Go to College?

By Richard Vedder

I have already written enough about the Obama higher education proposals in this space, but some reactions to similar comments I made for an Associated Press story are worthy of commenting about.

First, I flatly do not agree that everyone should do post-secondary education, a basic premise of the Obama higher education platform. I do agree that for most persons wanting to enter employment, a high school education is typically inadequate. I also think there are some kids currently not going to college who might benefit from that experience. But I also think there are many current students who do not belong in college. Pushing everyone into post-secondary education is expensive, sets some up to fail, can dilute the quality of higher education, etc. etc. etc.

I told Justin Pope of the AP that, he printed it, and the comments have rolled in--more than on almost anything else I have ever done. Interestingly, though, a majority of the comments were highly positive. And many came from teachers and professors in the trenches who think I am right.

The negative comments normally do not disturb me, but the shrillness and bellicose attitudes of some respondents were unbelievable. It is one thing to say that I am disgraceful, a blot on academia, etc. This is a bit strong, but perhaps within the limits of a civilized response. However, it is another thing to say, as one person did (who bragged about her three college degrees), that I should have my tenure revoked, and who also sent a comment of her remarks to my department chair. This mentality has been growing in America --the person who believes wisdom is on his/her side and that alternative viewpoints are intolerable and should be prohibited - the First Amendment is an anachronism. This strikes at the heart of what universities are all about, and this is the mentality behind such things as speech codes.

But I got one email I want to share with you, with the permission of the author, a professor at a school with a reputation for taking decidedly marginal students, many of a minority background. He says "Many of my students should not be in college. Many of them haven't got the skills necessary for college. Many don't even really want to be in college and they certainly don't have the work habits necessary to succeed in college. Does that make me a crank? a racist? a reactionary? No, it makes me a realist." Amen.

He also says, correctly, I think "The problem has nothing to do with money and everything to do with culture. But money is an easy fix and culture is a tough fix. So we always talk about money." Amen, again. I received several other emails expressing somewhat similar responses.