What Will Convulsive Change Do to Our Colleges?

In the highly competitive free market economy that propelled the United States into our planet’s richest nation, business enterprises making mistakes pay huge and sometimes fatal consequences. Indeed it is what Joseph Schumpeter aptly called “creative destruction” that forces firms to be productive, efficient, innovative, and willing to take risks. Contrast this to higher education.  Schools that make mistakes suffer minor but not grievous consequences. The top three schools in 1900 (Harvard, Yale, Princeton) are usually regarded as the top three today.

I looked at the Fortune 500 list for 1993. Of the top 20 companies, more than one third have undergone radical change. Three have gone bankrupt, although they still survive: General Motors, Chrysler, and Eastman Kodak. The Kodak stockholders have been almost completely wiped out and Chrysler has been sold. Three oil companies ceased to exist, being merged into larger companies (Mobil, Texaco, and Amoco). Philip Morris has undergone a fundamental transformation and has divided itself into several entities. Others have had their standing radically change for the better (Berkshire Hathaway went from 158 to 7, Apple from 67 to 17), or worse (Boeing went from 14 to 39, United Technologies from 18 to 48).

By contrast, there has been little change in the top 20 universities as measured by US News & World Report.  17 schools in the top 20 in 1993 are still there; no school in the top 20 in 1993 ranks below 23rd today. There is no “creative destruction” going on, at best a wee bit of what Clayton Christensen calls “disruptive innovation.” However,  three forces at work suggest bigger changes are coming, and that we will see more fatalities and well as big success stories in American higher education in the next generation.

1.  Erosion of Third Party Support

The single biggest reason universities have little creative destruction is that third parties -persons other than the consumer or the producer -have highly subsidized them from the consequences of mistakes. There are five big sources of subsidy income: state government institutional subsidies; federal government grants, especially for research; governmental (mostly federal) student financial assistance; gifts by private individuals to universities; and endowment incomes. There are good reasons to believe the growth in all five of these will be limited over time.

Americans have not yet realized that as we move from a market-based competitive free enterprise society towards a more socialist welfare state on the European model, economic growth is falling, probably permanently. That means we simply cannot afford to do thing we normally would think were within our capacity. The ability of the federal government to expand its spending is constrained by a slowdown in expansion of tax revenues, excessive debt burdens, and heightened competition for subsidy dollars, especially from health care – arising from expanding benefits and an aging population. This will crowd out both research grant spending and subsidies of students via grants and loans. Similarly, the population aging is increasingly crowding out state spending on colleges, a trend that shows no long-term signs of abetting, despite some modest recent increases in appropriations. A more stagnant welfare state means reduced income and wealth growth among the rich, aggravated recently by a soak-the-rich tax policy.  This means philanthropic giving will not show robust growth. Similarly, lower economic growth will impede investment returns of endowment funds.

The irony of it is that American higher education is left-centric; it overwhelmingly likes President Obama and other liberals. Yet the policy prescriptions of American welfare state liberalism are what will wound if not kill the growth of American higher education in the years to come.

2.  The Erosion of the Labor Market for College Graduates

The view that college graduation provides a near-guaranteed ticket to a prosperous middle-class life style conflicts with the reality of today’s labor markets. The number of college graduates vastly exceeds the number of relatively highly-paid skilled jobs traditionally filled by degree holders. More and more recent college graduates are working as hotel desk clerks, bartenders, taxi drivers and janitors. Meanwhile, a construction industry employment consultant tells me that he is desperately looking for welders for clients – welders earn great incomes but have little postsecondary education. We are turning out more college graduates than skilled-job growth requires even in the best of times, increasing the risks and job security problems of earning a degree. This all translates into reduce demand for university services.

3. Rising Competition

When something gets expensive, consumers look for lower-cost alternatives. For years, for-profit providers have developed increasingly attractive options to traditional education, increasingly at low costs (e.g., StraighterLine). Coursera, EdX, Udacity and the Saylor Foundation are just four new providers of almost zero-cost online courses, often of high quality. Soon innovators will package these into low-cost degrees despite efforts of some traditional providers (with the assistance of the accrediting agencies they control) to stop them. Career colleges have grown enormously, offering certificated training for future chefs, truck drivers, hair stylists, medical technicians, etc. Developing job competency by examination may grow -we have a CPA examination and a bar examination for lawyers, why can’t we have a College General Education Equivalency Test, where those doing well show a probability of occupational success equal to that offered by holders of bachelor degrees? If a diploma costs $100,000 to $200,000, surely there are feasible and cheaper ways of telling employers who is likely to prove competent.

Already signs of big changes are appearing. Overall college enrollments fell last fall for the first time in years. Even law schools are struggling for students -the ABA is openly discussing possibly going to two-year training. Bond rating agencies are showing growing concern about indebtedness of colleges, and student-loan default rates are very high.  Big changes are coming to American higher education.