Simple Economics Lessons for Two Historians

Posted on November 29th, 2012, by 4 Comments

I’m currently working on a project related to economic rent-seeking in higher education. As part of the research, I’m combing various histories of American higher education to learn how colleges have managed to gain government subsidies and political favor throughout history. One such volume is The Shaping of American Higher Education (2010) by Arthur Cohen and Carrie Kisker. While the book has provided some useful insight into the early developments of American higher education, I was taken aback when I came across a passage discussing the meager pay of college faculty during the 1790-1869 period and decided that some simple economic lessons are in order for our historians. On page 98, the authors write “…the professors were severely underpaid in terms of the years of education it took before they became qualified…”

Several principles of economics suggest that the authors’ assertion is incorrect. First is the principle of opportunity cost.  If the professors were willing to accept the wage rate offered to teach, then they must not have had a better option. Either that or they value teaching and affiliation with the college more so than strictly pecuniary benefits. Regardless of the preferences leading to the faculty member’s decision to work for the college, the principle of opportunity cost in addition to rational behavior suggest that the professor did not have a better alternative and was thus not underpaid.

Second is the simple principle of supply and demand: When supply of faculty members is greater than demand for them, downward wage pressure exists, irrespective of the time required to obtain the necessary qualifications. The authors recognize, in the paragraph preceding the above assertion, that “…supply of faculty was never in jeopardy,” yet they are still led to an incorrect conclusion that professors are underpaid.

The authors cannot be said to be ignorant of the existence of economic principles that govern human behavior, but a case can be made that they misunderstand them. The following sentence illustrates the point: “As long as the supply was greater than the demand, and as long as there were no contracts to enforce payment of a living wage, the colleges lived on the backs of their staff members.”  Here the authors are not denying that supply and demand factors dictate the wage rate of professors, they instead are suggesting something akin to a minimum wage need to be instituted. While it is true that a minimum wage would increase the pay for those professors able to get a job, such a rule would also entail greater unemployment among persons qualified to become professors.  Assuming that professors teach because doing so and being affiliated with the college is reflection of their preferences, not being able to do so because of a minimum wage rule entails these persons being made worse off than in the absence of the rule.

If the goal is to make the professors better off, then restricting their opportunity to do work that they value by enforcing a minimum wage rule is not the way to go about it. Some will be made better off and others worse off. This is not what economists call a Pareto, or welfare, improving policy.

This post originally appeared in CCAP’s “Higher Education and the Economy” blogspace for

Some Thoughts on the Indiana University Tuition Freeze

Posted on November 27th, 2012, by Leave a comment

Last month’s announcement by Indiana University that they will freeze tuition for some students presents an interesting experiment in keeping down higher-education costs, along with student loans.

If, after a student’s sophomore year, he or she remains in “good academic standing” and will graduate in four years, tuition increases will be offset. University President Michael McRobbie emphasized that the tuition freeze should be regarded as a temporary, not a permanent, policy.

While the initiative might hold down student-loan debt and increase IU’s four-year graduation rate, it’s anything but a guarantee.

For the students receiving the freeze, they’ll accumulate a lower burden of debt and university tuition. Though that doesn’t mean universities fees, an increasing share of the cost of an education, will remain flat.

A tuition freeze, however, doesn’t actually combat higher-education costs; it only lowers costs for the students granted the freeze. The loss of tuition revenue from those students must be recovered through other means (higher tuition levels for incoming students, increases in state funding, or perhaps increasing alumni donations a more aggressive fundraising strategy), or services must be cut or restricted.

Of course, if it costs less to educate a student during their junior and senior year than it does to educate them in a fifth or sixth year (typical expenses along with the opportunity cost of a seat for a fifth-year senior rather than a seat for a freshman who will pay tuition for at least three more years), the tuition freeze could actually increase revenue along with graduation rates.

The freeze clearly benefits the affected students, but the as-yet-unseen effects will determine the long-term sustainability of the proposal. The freeze needs to lower the cost of educating students, instead of acting as a subsidy, paid for by other or future students. As colleges and universities view a reduction of their budgets or a cut in services as tantamount to a felony, don’t expect them to accept revenue reductions without replacement increases.

Bill Gates on Higher Ed Reform

Posted on November 13th, 2012, by 1 Comment

I only now came across Bill Gates’ review (published a couple of weeks ago) of the blockbuster book, Academically Adrift. There were a few snippets from Gates which I thought are worth chewing over:

Overall, the book depicts a culture in academia where undergraduate learning is only a peripheral concern; where the professors don’t want to assign complicated papers because grading them is hard work; where the main feedback is course evaluations from students who  dislike writing complicated papers; where there’s an attitude of, “Don’t mess with us and we won’t mess with you.” And there’s no accountability for any of it…

…I’m optimistic about the potential of innovation to help solve many of the problems with our post-secondary system. But we need more and better information. I’m reminded of a point made by Andrew Rosen of Kaplan, the for-profit education company, that colleges today know more about how many kids attend basketball games and which alumni give money than how many students showed up for economics class during the week, or which alumni are having a hard time meeting their career goals because of shortcomings in their education.

While certainly would second the motion that we need “more and better information,” from where I sit, I think the chief problem in higher ed today is actually what Gates mentions at the beginning of the passage I quoted. What really needs to happen is for student learning to move from the periphery to the primary focus. New and improved information is only worth in the context of achieving that overarching goal.

Cheating U 2

Posted on November 12th, 2012, by 1 Comment

Every once in a while I find myself fixated for a time on the latest cheating scandal du jour on American college campuses (for a taste of this, see here and here and here and here). Sometimes the scandal involves student behavior (the classic example would be “The Shadow Scholar” article published by the Chronicle two years ago to the day), but other times it is relatively high ranking school officials engaging in illicit calculations (the Claremont McKenna College scandal of earlier this year being the most prominent example). Other times the scandal is out and out academic fraud, culminating in revelations of researchers fabricating entire empirical studies, such as the one recently reported concerning Yoshitaka Fujii in Japan.

Now the latest scandal of dishonesty to hit the news comes from the heart of the nation’s capital (queue the political jokes) and from the campus of George Washington University (queue the cherry tree jokes). As the Chronicle reported, “George Washington University’s admissions office misreported data on the class rank of incoming students for more than a decade… [which] resulted from a combination of good data and faulty ‘estimates.'” In one sense, the GW saga is less scintillating than the Claremont McKenna one. For starters, CMC is a top 10 school (according to U.S. News) while GW barely misses out on the top 50. While one might suppose that GW was cooking the books to effect an increase in rank, one would have a much bigger hill to climb to credibly make the same assertion about CMC. That said, there is no justification for either case; the CMC case dealt with overt data falsification and the GW case dealt with practices that are explicitly forbidden in the data guidelines U.S. News sends to schools.

Somewhat understandably the InsideHigherEd story focuses on the implications the GW data manipulation has for the U.S. News rankings. Part of the problem with viewing the scandal primarily through this lens is that it tends to ignore the possibility that this kind of less-than-laudatory behavior may very well occur absent any motive related to rankings. In fact, that appears to have been exactly what was going in the Claremont scandal: the underlying cause had more to do with the bickering between the dean of admissions and the college president over institutional policy than it did with the U.S. News rankings (and, in fact, the data falsification in that case did not change Claremont McKenna’s rank anyway).

I suspect that if we could indeed imagine a world without rankings, we would realize two disconcerting facts: 1) it’s not easy, and 2) we’d still be left dealing with problems related with institutionally reported data, if for no other reason than that there would still be motive for some to fraudulently burnish their image for prospective students, parents and the general public. In fact, I tend to view the existence of rankings as both providing much needed consumer information in higher ed that would otherwise not be available but also as facilitating our ability to catch those who do massage the data improperly. Taking the GW scandal as an example, I would argue that it would have been much more difficult to discover and establish that numbers were being cooked absent the presence of rankings. First off, if there are no U.S. News rankings, there would be no U.S. News guidelines on data reporting, implying that there would be even more disagreement than at present over what should be considered standard reporting practice. Second, if the school had thought it could get away with manipulating data without much (if any fear) of retribution because almost no one would think twice about reported class ranks (the notable exception being prospective students and their parents on a campus tour), it would not have had any less motive to engage in the practice and much less reason to disclose it (because if others are doing the same thing, why harm yourself by being the only one to raise the red flag?).

The bottom line in my view? It goes back to the issue of cheating. Should we really wonder why students seem to like cheating so much (McCabe et al estimate it’s somewhat more than two-thirds of all students) if the schools in which they are incubated are doing much the same with more regularity than we would care to think

Forward on Student Loans

Posted on November 12th, 2012, by Leave a comment

In terms of a refreshing, step-back-and-look-at-the-big-picture, Bryan Caplan’s answers to objections to a

free market in educational loans is at the

top of the list.

Milton Friedman on Universities

Posted on November 7th, 2012, by 1 Comment

While perusing in the archives, I came across this quote from Nobel Laureate Milton Friedman on the business model of universities (in a 1991 interview with Forbes magazine) that is as salient now as ever:

I have always argued that universities are multiproduct enterprises. They produce three major products: schooling, research and monuments.

Even separately, any one of those three missions can be expensive (particularly when a university is trying to impress mom and dad with a brand new, Donald Trump-esque college). Combining all three of those enterprises under one roof can easily lead to the scenario in which the total is much greater than the sum of the parts.

Now That’s Some Business Model!

Posted on November 1st, 2012, by Leave a comment

If you want to learn more about the University of Michigan’s costs, finances and tuition pricing policies? How about enrolling in a course offered by UM entitled, “The Challenge of College Affordability: Financing the University.” As Matthew Dolan reported for the Wall Street Journal,

Fifty-six students are registered this semester for “The Challenge of College Affordability: Financing the University,” a series of seven two-hour lectures taught by top administrators at the public university. The course, geared toward sophomores, is designed to explain where the school gets revenue, what drives its costs and how that translates into tuition rates and financial-aid packages.

“We were interested in elevating the thinking about the topic,” said Phil Hanlon, the university provost who co-teaches the course. “It is often the case that it’s controlled by sound bites.”

Mr. Hanlon and his co-instructor, Vice Provost Martha Pollack, said the course tells the school’s side of the story but not at the expense of a balanced, academic approach. “We wanted students to reach a better understanding of the issue, particularly the interaction between academic quality, cost of attendance, investment in financial aid and expenditure reductions we’re doing on campus,” said Mr. Hanlon, who is the school’s chief academic and budget officer.

So let me get this straight: if you want to be able to hear a defense and/or analysis of the existing operating model and tuition pricing policies at elite public universities, you must first pay tuition (set, of course, by existing pricing policy) for the privilege of attending a class devoted to that subject at one of those elite public universities. That’s absolutely brilliant.

College Sports DO Have Positive Spillover Effects!

Posted on October 25th, 2012, by 1 Comment

While I have wondered before whether college athletics really have the benefits so often attributed to them, it turns out that they do, in fact, have some rather important positive externalities. It’s just those spillover effects are not necessarily the kind one would immediately think of when addressing the topic of college athletics. In a piece for Slate, Tyler Cowen and Kevin Grier point me to this paper by Andrew Healy, Neil Malhotra, and Cecilia Mo which demonstrated that there is “clear evidence that the successes and failures of the local college football team before Election Day significantly influence the electoral prospects of the incumbent party, suggesting that voters reward and punish incumbents for changes in their well-being unrelated to government performance.” The paper shows that football victories within 1o days of Election Day boosts the incumbent’s vote share by 0.8 percentage points, with larger effects for localities with teams that generate high attendance or are powerhouse programs.

However, on second thought, I’m not so sure that I can really call these “positive spillover effects.” After all, whether or not they are “positive,” really depends on how one views the particular incumbent in each political race. If the incumbent happens to be on the other side (as defined from each voter’s individual perspective), then the spillover effect would be a negative one, so whether this effect yields an overall social benefit is a wash. The only problem now is that some politicians may decide to call for more spending on college athletics in the hope of stimulating their vote in the next election (just kidding!).

Minnesota Struggling to Enter 21st Century?

Posted on October 22nd, 2012, by 2 Comments

The internet was abuzz last week after the Chronicle of Higher Education broke the news that Coursera, the free online course provider, had updated its terms of service to inform residents of the Gopher State that “under Minnesota Statutes (136A.61 to 136A.71), a university cannot offer online courses to Minnesota residents unless the university has received authorization from the State of Minnesota to do so.” Coursera had added this language after pressure from the Minnesota’s Office of Higher Education, citing a law dating back a couple of decades (the letter from the State to Coursera is available here).

Substantial backlash on this move (see Robert Talbot for the ChronicleAlex Tabarrok of MarginalRevolution or Will Oremus of Slate) caused Minnesota to do a little bit of backpedaling (or clarification, depending on how charitable one feels toward the Office of Higher Education). As Nick Anderson of the Washington Post reported, Larry Pogemiller, director of the Office, has followed-up the initial news reports to say that the Office was not trying to enforce a blanket prohibition of any and all free online education in the state and will allow Minnesotans the opportunity to enroll in free online courses.

It seems the law the Office was initially so keen to enforce is one that deals with degree-granting institutions, which Coursera is assuredly not. Furthermore, as others have pointed out, the rationale for the original requirement in Minnesota for degree-granting colleges and universities to obtain government permission is to protect higher education consumers (i.e., students) from scammers, a rationale which can’t apply to Coursera because 1) its courses are free and 2) it does not offer any degree. (Besides, none of the university partners of Coursera offer traditional academic credit for completion of Coursera courses.)

While it is heartening to see that the Minnesota Office of Higher Education is wanting to revisit the old law and update it to reflect the technological realities of the 21st century, I’m not so sure that the Office fully realizes how far its current rules are from reality. After all, Coursera really is not in a position to being the academic equivalent of a University of Minnesota bachelor’s degrees. While I’m sure Coursera would love to be in a position where it could offer the equivalent of a degree, it really can’t offer that at this point, at least in terms of a credential that employers would recognize as the equal of a traditional degree. If traditional universities want to be part of the technological frontier by partnering with organizations like Coursera, that should be perfectly fine. These universities are involved with Coursera, at least at this point, not to supplant their traditional model of offering degrees but to experiment with a completely different kind of educational offering. Otherwise, these institutions would allow full credit for Coursera courses and allow students to receive degrees for nothing more than proven completion of Coursera courses.

All that aside, however, if we do prohibit, in some form, free offerings of online courses, should we not also prohibit college professors from using free online sources (a YouTube video or online textbook) in their courses? Should we not also prohibit the more than 33 percent of professors who use social media in their classes? I doubt we want to open up that can of worms.

Quote of the Week

Posted on October 12th, 2012, by Leave a comment


Baumol’s theorem on cost disease only holds if you refuse to accept change. It requires you believing that you can only heal yourself if some doctor with 12 years of education spends 20 minutes talking down to you. The same holds for the college industrial complex. If you think that “college” means a fancy campus with fancy professors doing fancy research and jetting around the world, you can be assured that the prices will continue to skyrocket.