Why Tuition Goes Up Every Year

Middlebury College is expected to announce a plan to hold the annual rise of tuition to one percentage point above the inflation rate. This announcement will likely be greeted with praise. But why? Costs may be held down in comparison with other colleges, but the bedrock assumption here is a familiar one: tuition must go up each year; it’s just a matter of how much. In hard times, other businesses cut costs and live within their means. Colleges and universities don’t? And now we hear more calls for government to do something about it.
Like most economists, I do not like attempts of politicians and government bureaucrats to interfere in decisions of buyers and sellers by limiting changes in market-determined prices –minimum wage laws, rent controls and other intrusions into market processes inevitably lead to unintended consequences: higher unemployment, less housing and housing of poorer quality, etc. Thus I start out predisposed to oppose tuition fee caps such as introduced in many states. But my opposition to these caps has been reduced by the fact that higher education markets are hardly free of interferences to begin with, and government has contributed to tuition price explosion through its numerous ways of increasing the demand and reducing the supply for higher education services. Tuition caps at least temporarily force some universities to slow down a bit their inexorable tendency to increase spending, much of it on things at best tangentially related to the true mission of universities—disseminating and creating knowledge (e.g., the number of sustainability coordinators, public relations specialists, associate provosts for international affairs, etc. has grown dramatically in recent years).
Even these legally imposed temporary restraints on university desires to raise prices are often thwarted by various strategies – requiring kids to eat and sleep in university facilities and then raising room and board rates dramatically, or creating new fees (technology fees, lab fees, recreational center fees, parking fees, even charging more to buy soft drinks out of campus machines, etc.) But a recent article on “Inside Higher Education” suggests that tuition caps themselves are at best temporary—-after periods of capping tuition, deals are cut to end the cap, and then fees tend to explode, reaching levels equal to what they would have been had there never been a tuition freeze. It is almost as if tuition fees are going to rise 3 percentage points more than the inflation rate, and nothing can change that. Call it the natural rate of higher education inflation.

Universities usually complain about declining public support, but it is interesting that the tuition explosion is as prevalent among so-called private universities that receive little governmental subsidy. University leaders also are fond of saying that they are subject to the Baumol Effect, named after an economist who observed that in the performing arts, there are inherent limits on technology’s ability to reduce costs – it takes as many actors today to perform King Lear as it did when Shakespeare wrote it 400 years ago. While it is true that in some respects teaching is a bit like theater, is this argument truly valid?
The relevance of the Baumol Effect is very limited for two reasons. First, faculty members spend typically fewer than 300 hours a year (and for senior professors, 200 hours) in the class room. Even the actor performing Lear year round is in front of audiences at least twice that amount. My guess is that at a typical research university, fewer than 10 percent of worker hours are spent “performing” for students in classroom settings.
Secondly, technology can be utilized to lower the labor intensity of instruction. To be sure, some instruction, particularly advanced specialized course work, is best handled teaching, roughly, the way Socrates did 2,400 years ago, but there is good evidence that computer based instruction and other forms of distance learning can work in many circumstances: I once taught, via interactive television, students sitting in five different locales simultaneously, and by all appearances it worked pretty well.
But the basic problem, that universities continue to ignore, is that the staff is largely opposed to cutting costs. For example, it is easier, less work and more fun to teach one group of 30 instead of five groups of perhaps 80 simultaneously—so interactive TV gets limited use. One of the benefits of recessions is that they demonstrate that cuts can be made in costs without materially jeopardizing the educational mission. Colleges complain that the world is ending because a position was cut here, and travel budgets constrained there, but life goes on pretty much as it did for the important people, namely the students themselves.
The staff, especially faculty members and senior administrators, collectively believes that it owns the institution and that it is being run for its benefit. Increasingly, the clients (students) are viewed as cash cows, providing rationale and funding for doing what the staff does, but not the prime focus of attention. After all, faculty have more important things to do, like writing an article that will help nail tenure by being published In the Journal of Last Resort or whatever. Each year, 2,000,000 journal articles are published I am told, and my guess is that fewer than 10 percent of them are read by as many as 1,000 persons.
In a world where the staff claims ownership rights, but where legally the operation is non-profit in nature and owned by a distant group of university trustees, key university officials gain little in the way of wealth, income or prestige by reducing costs or even improving the quality of the product. That is particularly true since third parties, especially government, pay many of the bills, and the public knows little about the outcomes and input usage of colleges because of a concerted effort on their part to not provide useful information to consumers, donors, and taxpayers. However, despite the lack of market-based financial incentives prevalent in the private corporate sector, university staffs can use university resources to better the quality of their work lives. They are better off when more staff is hired, reducing workloads and increasing power. The staff derives benefits from having fancy offices, liberal travel to exotic locales, and other cost-enhancing amenities of campus life. Low teaching loads in the name of “research” enhance the good life. There is little to be gained, and much to be lost, by trying to emulate the efficient private enterprise model of cost reductions and quality improvements stimulated by competitive market forces.
I increasingly believe small, incremental reforms and policy moves such as imposing tuition caps, restricting tenure, or easing credit transfer between schools are not likely to have much impact. It is going to take a major transformation of the higher education environment, in particular a change in the incentive system that influences behavior.
This is not the place to elaborate an incentive scheme that might work to moderate the tuition explosion. Two things would help hugely, though. First, if the market driven, for-profit sector continues to grow dramatically amidst a decline in the traditional 18 to 22 year old population base, a larger proportion of higher education would become market oriented with properly aligned incentives, and pressures would grow on the traditional schools to radically reform, which might even include some privatizing of state universities (the Universities of Michigan, Virginia and Colorado would be good early candidates). More struggling high cost weak not-for-profit institutions might literally sell themselves to for profit providers. Second, if government would dramatically reduce direct subsidies to higher education, tuition fees would become more important and push schools into a more market-driven approach. A first step in that direction would be to convert institutional grants from governments, particularly for the state universities, into student scholarships (vouchers). Given state budget exigencies, this is both politically feasible potentially politically attractive. Maybe even more radical experiments – converting state schools to for profit status, converting government support to student vouchers, and giving staff stock in the schools based on seniority, salary and experience– would work.
Tuition fees are soaring because schools can get away with it, not mainly because of a lack of governmentally imposed price constraints. Indeed government is part of the problem, not the solution: governmental funding has made customers extremely insensitive to price in making college choices —the elasticity of demand was recently estimated to be a very low -0.10, meaning a 10 percent increase in fees lowers the number of college applicants by a paltry one percent. By pushing more funding responsibility off on consumers directly, they become more price conscious, reducing the ability of colleges to charge whatever the traffic will bear.