The Delta Cost Project Report and True Reform

By Richard Vedder

The Delta Cost project, amidst some publicity (e.g., a story in Friday's New York Times), has released its latest study, detailing revenue and expense trends in American higher education over the 1998 to 2008 decade. While there are a number of areas where I could (and maybe will) quibble with the authors, on the whole I think their findings are spot on, and should rekindle an interest in soaring college costs.

Among the things that the authors say that I agree with are:

• A majority of incremental enrollment over the decade came OUTSIDE the traditional four year college sector, namely community colleges and for-profit institutions; they, not the traditional universities, are doing the heavy lifting with respect to expanding higher educational attainment; 
• however measured, the cost of colleges to consumers is rising faster than their incomes. As project director Jane Wellman says, "The funding models we've created in higher ed are not sustainable;" 
• generally, the instructional spending increase has been small relative to spending on student services, administration ("institutional support") and research; 
• the private research universities went on a spending splurge over this decade, increasing spending in some major categories by 35 percent or more per student adjusting for inflation;
• the funding gap between the elite institutions and those serving large populations (e.g., community colleges) rose importantly over time;
• while continuing to increase costs, institutions relied on tuition fees much more than in the past to finance the incremental spending;
• efforts to expand access are inconsistent with the continuing trend of falling or stagnant university productivity and a failure to innovate and move to cheaper delivery systems.

In other words, universities are largely ignoring the growing economic imperatives to reduce costs by rethinking the way they do business and engage in transformative change. The current economic downturn is forcing some reductions, but most appear to be draconian efforts to contain costs without changing the way services are delivered. Big change is being resisted at all costs.

All the talk about increased access, greater affordability and enhanced accountability is just that: talk. The three "A's make for good rhetorical flourishes, but what is needed for real transformation and rising productivity is attention to the three "I"s—information, incentives, and innovation. It will take other blogs to detail this fully. In short, part of the problem is that colleges fail to collect or disclose key information needed in assessing programmatic performance—you cannot solve a problem if you don't know what it is. Are students learning much? How do they fare after graduation relative to those attending other schools? Do anthropology majors fare better than those in physics? etc. etc. Who knows? For a sector that worships research, the amount of money devoted to R and D towards improving higher education performance is pathetic.

Incentives are largely perverse in higher ed. Institutions attain reputation, the coin of the realm, by turning students away rather than admitting them, causing a stagnation in the growth of supply. Faculty who teach a lot and teach well pay a financial price compared with those who write trivial second-rate papers on third-rate issues for fourth-rate journals. Administrators who trim bureaucracies and lower the stifling costs of decision-making by consensus are usually fired or sent to the branch campus in the equivalent of Timbuktu. University leaders raise tons of money to bribe powerful constituencies (faculty, students, alumni, trustees) by funding their pet projects (e.g., lower teaching loads, uneconomic subsidization of sports, etc.)

Paying attention to the first two "I"s will lead to the third I—innovation—new uses of cheap capital (e.g. computers) as substitutes for expensive capital (e.g., faculty), etc.

Finally, let me say that I think the Delta folks underestimate the problem. They don't conspicuously explain how they do their inflation adjustments. If they use either the respected, but flawed, Consumer Price Index or the absolutely inanely unjustifiable Higher Education Index of the Common Fund (the use of which should be a punishable felony), they are underestimating the inflation-adjusted increase in spending per pupil. By excluding sponsored research, auxiliary enterprises, etc., from consideration, they are not telling the whole story (although a case can be made for excluding these factors in some, but not all, of their analysis).

Enough is enough. Writing this is making me depressed, and it is too early to start drinking. So I will save more for another day.