Book Review: Going Broke By Degree

Going Broke by Degree: Why College Costs Too Much, by Richard Vedder
Hardcover – 259 pages (June, 2004) American Enterprise Institute Press

It’s no secret that college costs have been rising faster than income – ask any parent (or student) who has written a tuition check in recent years. Each year, it seems, the press reports another round of tuition increases and colleges offer various justifications, and life goes on.

Richard Vedder, a professor at Ohio University, risks biting the hand that feeds him by writing a well-researched tome that both confirms the explosion in college costs and tries to explain why they have occurred.

Many people may assume that when we read of annual tuition increases that exceed the rate of inflation that this is some kind of odd aberration, dictated by a surge in some component of college costs or other transient condition. Vedder produces data that shows that the high rate of college cost increases in no aberration – between 1981 and 2003, the rate of tuition increases exceeded the change in the Consumer Price Index every single year. Frequently, the differences were not small – in many years, tuition increases more than doubled the CPI.

This lengthy period of rapid increases means that tuition is fundamentally a larger expense compared to income and to other major expenses than it was a generation ago. This raises two major questions – what has caused this increase, and why haven’t market forces worked to keep college tuitions in check?

The latter question can be answered in several ways. Vedder, an economics professor, creates the obligatory supply and demand curves to explain the situation. Mathematics aside, one factor is steady or increasing demand for the most visible universities – when schools like Harvard, Columbia, Yale, et al reject nearly nine out of ten applicants, one can make the argument that these schools are holding tuition at levels well below market levels. While only a small number of colleges are in the enviable position of turning away the vast majority of their applicants, there is little doubt their visibility has great influence and that they set tuition expectations for many lesser schools.

The biggest factor preventing a consumer revolution is the fact the role of “third party” funding sources. Just as consumers often have little sensitivity to health care costs when most of those costs are covered by insurance, grants, scholarships, and loans help mask the true cost of college. Colleges have perfected a form of price discrimination which allows them to analyze the finances of each consumer and award aid packages designed to keep the cost of college within that consumer’s reach.

As far as the reasons for the high rate of tuition cost increases, Vedder identifies quite a few. Perhaps the biggest reason is that traditional universities have bucked the trend set by both the manufacturing and service sectors of the economy by achieving lower productivity levels over time. While virtually every business and institution emphasizes doing more with less, Vedder shows that college have seen both professorial and administrative productivity decline, at least in terms of the inputs needed to educate undergraduate students. At most schools, teaching loads have declined over time, while administrative staffs continue to grow.

Fundamentally, Vedder notes, administrators have little incentive to increase productivity. Adding more staff can, in fact, make life easier for these administrators and that is what often happens.

One of Vedder’s more intriguing assertions is that state funding of higher education is part of the problem. He notes that states may allocate additional funds to higher education in order to make college affordable for more state residents; in fact, tuition rarely declines, but the increased funding levels are often used to fund salary increases or other ongoing institutional expenses. He also shows that there is little correlation between the level of higher education funding in a state and that state’s economic growth; if anything, states with the highest levels of educational funding seem to experience lower economic growth. Vedder suggests that state legislators hoping to make education more affordable use some kind of voucher system which puts educational funds in the hands of consumers. These consumers could then make choices between schools which would be forced to keep their offerings attractive and competitive.

Vedder suggests additional reforms that would make college more affordable in the long run, notably that privatizing higher education (in conjunction with vouchers or payments to families) would get the government out of trying to manage college spending while putting more power in the hands of education consumers.

Going Broke by Degree will be interesting to anyone who wants to understand the dynamics of higher education costs, but should be must reading for legislators and college administrators.

As Vedder points out, college costs can’t keep rising more rapidly than inflation forever – even a seemingly inelastic demand curve will put pressure on enrollments eventually. The real question is whether reforms can make this a smooth transition or whether runaway costs will force changes in a painful upheaval.

Reviewed by Roger Dooley

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