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Tuition, State Funding and the Alcoholic's Booze

Posted on March 16th, 2012, by Comments Off

Back in December of last year, Mark Yudof, president of the University of California, delivered a speech titled, “A Baker's Dozen Myths About Higher Education” in which he attempted to dispel what he sees as thirteen myths underlying the common perceptions of rising college costs, particularly at the University of California. In this speech, Yudof made the assertion that “Tuition goes up because state funding goes down. Plain and simple.”

Yudof's speech raised the ire of Bob Samuels, who, in an able rejoinder to Yudof (which caught the eye of Edububble), argues that Yudof is ignoring a very important point. As Samuels observes, “if you look here at the history of UC tuition increases, you see that in the last twenty years, UC has increased tuition every year except twice… tuition has gone up even when state funding has gone up.” This is not to say that Samuels disagrees with Yudof that there is generally a negative relationship between state appropriations and tuition at public institutions; he is simply arguing that Yudof is not completely capturing the picture.

I tend to agree with Samuels on this one. It seems to me that the evidence which Samuels cites in the case of UC applies broadly across the nation as well (see this chart which CCAP published last year showing that, by and large on the state level, regardless of what happens to state appropriations, tuition tends to go up, at least over the period 2005-10, implying that, on the state level, there is essentially no relationship between tuition and state funding). A better description of reality perhaps would be that state appropriations sometimes go up, sometimes go down but tuition always goes up. In fact, I wonder if part of the reason state legislators cut state appropriations is that they see colleges continually raising their tuition prices and figure that, well, why should we continue with our high levels of subsidies when the colleges can get that revenue from sources other than state funding.

There is, however, another way of looking at t

he relationship between state appropriations and tuition levels at public colleges. If one starts with the proposition that the problem higher ed faces is a revenue problem, then Yudof's claim that tuition increases because of decreases in government appropriations is likely true; however, if we begin with the assumption that higher ed has a spending problem, then it does not necessarily follow that the chief cause for tuition increases is a decline in another revenue source for the simple reason that changing where an alcoholic gets his booze does nothing to address his real problem.

Starting with the assumption that higher ed has a spending problem has some important consequences. In the short-run, there very well may be a negative relationship between public subsidies and tuition (we see this quite often when officials at public institutions cite drops in state appropriations as the reason they must raise tuition). But, perhaps more importantly, there may be a long-run relationship between state appropriations and tuition that is actually positive; that is, in the long-run, increases in state funding actually lead to higher tuition levels. The reason for this is, to put it simply, that government subsidies, which lead to below-market prices at public colleges, lead to increased demand for college (with the result that the demand curve shifts to the right). That is, could the relationship between state funding and tuition be similar in nature (though more complicated, due to the nature of state appropriations) to the relationship between government financial aid and tuition growth that some have identified?

Regardless, however correct Yudof may be about an inverse relationship between state funding and tuition, he is flat-out wrong when he claims that such a relationship is plain and simple. It's more complicated than he wants to let on. While there may be a short-run inverse relationship between tuition at public institutions and state funding (that is, when state governments decrease their subsidies, the institutions respond by raising prices), that fact alone by no means establishes that a similar relationship exists in the long-run.

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