GOING BROKE BY DEGREE Why College Costs Too Much Why College Costs Too Much Richard Vedder Richard Vedder Job Name:1577191 Date:13-06-26 PDF Page:1577191cbc.p1.pdf Color: Cyan Magenta Yellow Black Praise for GOING BROKE BY DEGREE Why College Costs Too Much “Going Broke by Degree is another example of Dr. Vedder’s effective- ness at breaking down public policy myths and shining the light of factual research and market truths on the process. This book shows how parents across America are picking up the tab for higher tuition costs as a result of increased spending at colleges and univer- sities that often has nothing to do with the education of our young people.” —Governor Mark Sanford “Professor Vedder expertly and fearlessly dissects the failings of American higher education in 2004 and persuasively shows that radical reforms are needed if this vital enterprise is to retain its strength and world standing. State legislators should pay close attention. So should Congress and the White House as they labor over the federal Higher Education Act.” —Chester E. Finn Jr., senior fellow, Hoover Institution, Stanford University, and president, Thomas B. Fordham Foundation Going Broke by Degree Why College Costs Too Much Richard Vedder The AEI Press Publisher for the American Enterprise Institute WASHINGTON, D.C. Distributed to the Trade by National Book Network, 15200 NBN Way, Blue Ridge Summit, PA 17214. To order call toll free 1-800-462-6420 or 1-717-794-3800. For all other inquiries please contact the AEI Press, 1150 Seventeenth Street, N.W., Washington, D.C. 20036 or call 1-800-862-5801. NATIONAL RESEARCH NRI INITIATIVE This publication is a project of the National Research Initiative, a program of the American Enterprise Institute that is designed to support, publish, and dissemi- nate research by university-based scholars and other independent researchers who are engaged in the exploration of important public policy issues. Library of Congress Cataloging-in-Publication Data Vedder, Richard K. Going broke by degree: why college costs too much / Richard Kent Vedder. p. cm. Includes bibliographical references and index. ISBN 978-0-8447-4198-7 (paper) ISBN 0-8447-4197-3 (cloth) 1. College costs—United States. 2. Universities and colleges—United States—Finance. 3. Education, Higher—Economic aspects—United States. I. Title. LB2342.V43 2004 378'.3'8—dc22 2004001157 10 09 08 3 4 5 © 2004 by the American Enterprise Institute for Public Policy Research, Washington, D.C. All rights reserved. No part of this publication may be used or reproduced in any manner whatsoever without permission in writing from the American Enterprise Institute except in the case of brief quotations embodied in news articles, critical articles, or reviews. The views expressed in the publications of the American Enterprise Institute are those of the authors and do not neces- sarily reflect the views of the staff, advisory panels, officers, or trustees of AEI. Printed in the United States of America Contents LIST OF ILLUSTRATIONS x ACKNOWLEDGMENTS xiii INTRODUCTION xv PART I THE PROBLEM 1 1. THE COST EXPLOSION 3 Rising Tuition Costs and the Ability to Pay 8 Higher Education Costs vs. Other Consumer Goods and Services 11 Net vs. Gross Tuition Costs 12 Why Has Real Tuition Risen? Simple Supply and Demand Analytics 14 Reasons for the Rise in Demand 17 The Role of Supply 21 Conclusions 22 2. WHY ARE UNIVERSITIES INEFFICIENT AND COSTLY?24 Resource Allocation: Universities vs. Private Business Enterprise 24 Four Reasons for Rising Costs 26 Third-Party Providers and the Vicious Circle of Funding and Spending 26 The Lack of Market Discipline 27 Ineffective Price Competition 30 Government Regulation 32 The Future: Factors Restricting Spending Growth 33 The Slowing Growth or Reversal of the College Earnings Differential 33 v vi GOING BROKE BY DEGREE Demographic Changes 35 Slower Rise in Higher Education Participation 36 A Slowdown in Third-Party Payment Growth 36 Conclusions 37 3. PRODUCTIVITY DECLINE AND RENT-SEEKING 39 The Rise in Higher Education Spending 39 Where Did the Money Go? 43 The Increase in Personnel 46 Is Productivity Falling in Higher Education? 50 Instructional Productivity 52 Research Productivity 56 Employee Compensation and Rent-Seeking 60 Is Real Faculty Pay Stagnating over Time? 62 Additional Observations on Changing Faculty Compensation 63 Conclusions 64 4. THE NEW PECULIAR INSTITUTION 66 Price Discrimination 67 Other Forms of Discrimination in Admissions 73 Tenure 74 Cross-Subsidization 78 Instructional Subsidization 79 Intercollegiate Athletics 84 Food and Lodging Operations 85 Conclusions 88 PART II HAVE OUR UNIVERSITIES LOST THEIR WAY?89 5. AMERICAN HIGHER EDUCATION: PAST AND PRESENT 91 American Higher Education Today 91 Graduate vs. Undergraduate Enrollments 95 The Increase in “Nontraditional” Students 96 The Globalization of American Universities 99 The Feminization of the American University 100 Racial Dimensions of Changing Enrollments 102 Two- vs. Four-Year Colleges: Trends 104 Type of Institution: Private, Private For-Profit, Public 106 CONTENTS vii Interstate Differences in Participation in Higher Education 108 American Universities in International Perspective 111 Characteristics of American University Students 112 Conclusions 114 6. WHY DO WE NEED UNIVERSITIES? FIRST PRINCIPLES OF HIGHER EDUCATION 115 The Dissemination of Knowledge 115 The Production of Knowledge 116 Why Universities? 117 Economies of Scale Arguments 117 Higher Education as a Screening Device 119 Alternatives to Universities 120 The Teaching Function 120 The Research Function 121 Conclusions 123 7. UNIVERSITIES AND SOCIETY 124 The Positive Externality Argument and Its Weaknesses 124 Equality of Opportunity Arguments 128 Higher Education as an Investment 128 Additional Testing 138 Government University Support and Economic Growth: Case Studies 141 North Dakota vs. South Dakota 142 Illinois vs. Michigan vs. Ohio 143 New Hampshire vs. Vermont 144 Higher Education and the Quality of Life 145 Conclusions 146 PART III SOLUTIONS: THE FUTURE OF AMERICAN HIGHER EDUCATION 149 8. NEW ALTERNATIVES TO TRADITIONAL HIGHER EDUCATION 151 For-Profit Higher Education 151 The University of Phoenix—Higher Education’s Financial Success Story 152 Career Education Corporation 156 Corinthian Colleges, Inc. 157 viii GOING BROKE BY DEGREE DeVry University and Associated Businesses 158 Strayer Education, Inc. 159 Distinguishing Characteristics of For-Profit Colleges and Universities 159 Distance Learning 162 Alternative Forms of Certification 165 Conclusions 166 9. EVOLUTIONARY CHANGE ON THE CAMPUS: ONE SCENARIO 168 Reducing Instructional Costs 168 Increase the Student-Faculty Ratio 169 Use Technology to Reduce Instructional Costs 172 Change Tenure 173 Cut and Consolidate Costly Programs 176 Other Forms of Cost Reduction 177 Reduce Bureaucracy and Noninstructional Staff 177 Contracting Out and Privatization of Services 179 Reform Intercollegiate Athletics 180 End Formal Affirmative Action Programs 184 Improving Productivity: The Output Side Matters as Well 185 Academic Retention 185 Issues of Academic Quality, Standards, and Scholarly Openness 187 Change University Governance 187 The British Experience 189 Conclusions 190 10. AN ALTERNATIVE SCENARIO: SYSTEMIC REFORM 192 A Tale of Two Paradigms 192 The Optimal Solution: Defund Higher Education 195 The Second-Best Solution: Reduce Public Support 196 The First Paradigm: Scholarships (Voucherization) and Privatization 196 Transitional Issues with Voucherization 201 Ultimate Privatization 202 The Second Paradigm: Other Regulatory and Financial Options 204 CONTENTS ix Price Controls 204 Tax Tuition 205 End State-Subsidized Prepaid Tuition Plans 206 Change Tax Benefits 206 Subsidy Reduction or Realignment 207 Mandated Cost Reductions 208 Conclusions 210 11. THE FUTURE OF THE AMERICAN UNIVERSITY 212 Rationalizing Public Policy: Piecemeal Approaches 216 Rationalizing Public Policy: More Systemic Reform 218 Move to Student-Centered Funding 221 The Ultimate Reform—Privatization of Higher Education 223 Performance-Based Vouchers (Scholarships) 224 New Approaches to Funding Research: More Competition 226 Competitive Funding 229 Alternative Delivery Systems for Research 230 A Final Word 230 NOTES 233 INDEX 245 ABOUT THE AUTHOR 259 Illustrations TABLES 1-1 Annual Increase in Tuition and Overall Prices, 1979–2003 5 1-2 Growth in Tuition and Capacity to Pay for College, 1980–2000 9 2-1 Earnings Differential, Male College and High School Grads, 1970–2002 34 2-2 Earnings Differential, Female College and High School Grads, 1970–2002 34 2-3 U.S. Population Ages 18–24 Years, 1960–2020 35 3-1 Spending on U.S. Higher Education, 1929–2000 40 3-2 Changing Allocation of Public University Spending, 1976–2000 45 3-3 FTE University Staff per One Hundred FTE Students, 1976–2000 47 3-4 Staffing per One Hundred Students, 1999–2000, Two- and Four-Year Public Schools 50 3-5 Average Graduate Record Examination Scores, 1965–2000 53 3-6 Average Real Annual Pay, Faculty on Nine- Month Contracts, 1970–2000 61 5-1 Enrollment in U.S. Higher Education, 1870–2000 93 5-2 Higher Education Enrollment per 1,000 Population Ages 18 to 24 94 5-3 Composition of University Enrollments by Type of Student, 1970–2000 96 5-4 Changing Nontraditional Student Enrollments, 1975–2000 97 x ILLUSTRATIONS xi 5-5 Percentage of Female Students, 1870–2000 101 5-6 Growth in Enrollments, by Race/Ethnicity, 1980–81 to 1999–2000 103 5-7 Higher Education Enrollees per 1,000 Population, by Group, 2000 104 5-8 Growth