Education as an Investment.

The median survival rate for metastatic breast cancer is three years from time of diagnosis. However, as any recently-diagnosed patient—or their desperate SO—will tell you, statistics are agglomerations of individual cases. They don’t tell you YOUR fate. It’s the same with college degrees. On average, over a lifetime people with college degrees earn a lot more than do people without college degrees. That doesn’t mean that all college graduates earn more than all non-graduates. That also doesn’t mean that the extra income earned is worth the cost of getting the degree.[1] Peter Cappelli, who teaches at the University of Pennsylvania’s Wharton School, elaborates on a theme he first sketched out in a WSJ Op-Ed in November 2013.[2] Cappelli’s deeply-researched book addresses a raft of issues of the day.

The “Great Recession” is but the latest shock to the American economy (and the “American Dream” come to that). It led students to focus on career-oriented majors as defined by Labor Department projections, rather than a broad liberal arts education; their parents usually resolutely back them up in this choice. This has been very distressing to broad liberal arts educators and to the skinny ones as well. Cappelli warns that many of these majors are so knowledge-specific and so likely to be drowned in new graduates that students are actually doing themselves long-term harm. For example, 30 percent of recent engineering graduates couldn’t get jobs in engineering. Capelli argues that liberal arts degrees often are actually a better preparation for adapting to unexpected developments than are the loud-mouthed “career” majors.

American students (and their families in equal measure) pay about four times as much for a college degree as do students in other Western industrial countries. A lot of this is financed through debt, rather than from savings. Senator Bernie Sanders has floated the idea of a free college education at America’s public colleges. Both those who graduate and those who fail to graduate can find themselves burdened by a lot of debt. Naturally, consumers have become enraged at the sellers. Conservatives have argued that the expansion of financial aid and borrowing by students has just allowed colleges to raise their tuition. Critics rightly point out that the administrative component of college staffs have grown 50 percent faster than have instructional staff. As presented to the public this fact conjures visions of Rolex-adorned Assistant Vice Deans for Something-or-Other. In fact, most of the growth is in support staff dealing with the reality that Johnny can’t read, claims he will go to pieces under the pressure of college, and only came here to play baseball anyway.[3]

One of the reasons that college educated people do better than the others is employer-bias in hiring. Currently, at least 40 percent of graduates end up in jobs that don’t require a degree. Employers still preferred them to people without degrees. (Nearly 60 percent of parking lot attendants have some college.[4]) What happened to the other job applicants? They got shoved farther down the income ladder, displacing teen-agers just trying to get some work experience and pocket money. This displacement may be part of the explanation for the mounting drive for a higher minimum wage.

Above all, there is an evident mismatch between American education and the economy.

[1] Peter Cappelli, Will College Pay Off? A Guide to the Most Important Financial Decision You will Ever Make (PublicAffairs, 2015).

[2] See “Major Uncertainty,” November 2013.

[3] See the Cardale Jones Twitter mishagosh for an extreme example of the latter. https://en.wikipedia.org/wiki/Cardale_Jones#Twitter_controversy

[4] They can’t all be living hand-to-mouth while they write the Great American Novel.

Advertisements

Colleges Bobbing for French Fries.

Education has always been a commodity like any other. Sellers set the price at what the market will bear. Calling colleges and universities “not-for-profit” hides from this reality. The only difference between Chrysler and a college is that colleges have no shareholders or proprietors.[1] Therefore, increased revenue goes directly to the employees. The reverse is also true. In a period of revenue constraint, the costs are taken out of the hide of the employees.

Suzanne Mettler has argued that the political gridlock in Washington has kept federal aid, like Pell grants, from rising enough to keep an increasing burden for tuition from falling on ordinary families. At the state level, the requirement to balance budgets and a widespread hostility to taxes has intersected rising costs for Medicaid and prisons to force cuts to state aid to public institutions.[2] Access to college is becoming a privilege of wealth instead of motor of American prosperity.

Barton Swaim isn’t buying it.[3] First, he sees a huge expansion of the scale and activities on the part of colleges and universities since the mid-1980s. “Departments and schools have multiplied, lavishly expensive student facilities and high-tech research centers have gone up even during recessions, well-paid administrators have multiplied like locusts, and federal grant-money has poured in at ever-increasing rates.” Why has this happened? “When government pays the bills, prices always go up.” Sellers charge what the market will be bear. Second, Swaim argues that the supposed recent “cuts” in state-funding for education are usually presented in terms of a falling share of state budgets, rather than as inflation-adjusted real dollars. (Swaim himself doesn’t bother to give any figures to support his alternative interpretation.) Implicitly, what is needed is some market discipline. Third, Swaim’s interpretation fits into the narrative of the unforeseen—and disastrous–consequences of liberal good intentions. Mettler, he says, “is right that American higher education is no longer the force of equality and opportunity that predominantly liberal policy makers intended it to be. What she misses is that those policy makers are to blame.”

What does Swaim get right and what does he get wrong? First, he’s right about the fact of the huge expansion in activities since the mid-1980s. He’s just wrong about the cause of it. Simply put, there are too many colleges and universities relative to the demand for them. They compete by multiplying academic program to reflect the latest fad, degrading academic standards, engaging in an amenities arms race, and multiplying recruitment and support staffs (i.e. administrators). We need a shake-out.

Second, he’s wrong on the cuts-in-state-financing-causing-tuition-increases issue. Tuition at public school has spiked much more than has tuition at private ones. This is the product of cuts in state aid. (See: “College costs: the old eat the young,” 27 September 2014.)

Third, he misses (or dodges) the chance to talk about the equivalent unforeseen—and disastrous–consequences of conservative good intentions. The war on drugs and the conversion of tax cuts from a rational policy choice into a primitive fetish (of the religious, rather than the sexual sort[4]) have been just as much exploding cigars as anything liberals have advocated.

[1] On the other hand, when is the last time you heard of a student recall? Jus sayin.

[2] Suzanne Mettler, Degrees of Inequality (Basic Books, 2014).

[3] Swaim, review of Mettler, Degrees of Inequality, WSJ, 14 March 2014.

[4] Although I suppose that someone could work up a funny patter on the parallels with BDSM. If that’s how you roll.

College costs: the old eat the young.

It is always worth asking whether a consumer is getting value for money. Is a college education today worth the higher price than that paid by earlier generations?

Everyone knows that inflation-adjusted college tuition has more than doubled since 1992. Except that it hasn’t. Everyone knows that it can cost $60,000 a year for college. Except that it hardly ever does.

The real price of college has to include the financial aid (other than loans) supplied to the student. This gives the net price. Since 1992, the net price for community college has fallen; the net price at a private four-year college has risen 22 percent; and the net price for a four-year public college has risen 60 percent. The average of the two falls into a range between a 40 percent and 50 percent increase in net tuition. This puts college tuition in the same ball-park as medical costs (35 percent) or day care (44 percent).

The “sticker shock” tuitions beloved of the media and the politicians only apply to people from affluent families who are not eligible for financial aid attending elite schools that can charge what the market will bear for a prestigious degree.

Taking lower costs and higher aid into account, the average price for a student attending a four-year public college was $3,120 a year in 2013; the average price for a student attending a four-year private college was $12,460.[1]

Why has the net cost of a four-year public college risen so much more than the cost of a four-year private college? In the United States, about eighty percent of college students attend public colleges. Between 1988 and 2013, nominal tuition at these institutions more than doubled. This has created a terrible problem of debt for parents and students when most incomes have been stagnant. However, the revenue earned by these colleges stayed flat. In 1988 colleges earned an average of $11,300 per student; in 2013 they earned an average of $11,500 per student. If colleges aren’t getting rich, then where did the additional tuition go? To tax-payers, that’s where.

Traditionally, public colleges were subsidized by state legislatures. In 1988, each student at a public college received an average of $8,600 a year to subsidize his/her studies. The student and his/her family kicked in the additional $2,700 a year. In 2013, each student at a public college received an average of $6,100 a year to subsidize his/her studies. The student and his/her family now have to kick in $5,400 a year. A four year BA went from costing the state $34,600 to costing $24,400. That same four year BA went from costing students and parents $10,800 to costing $20,800. People who got a cheap BA paid for by others, now want to pay lower taxes.

The Obama administration has the idea that introducing ratings for colleges will help “education consumers.” They want to consider factors like affordability, drop-out rates, and the earnings of graduates. Federal subsidies—“Jump, boy, jump” versus “Bad dog, no biscuit”—would reward colleges which score well on the standardized test.[2]   People push back, saying that there is too much difference among students to make a single standard meaningful. The economist Susan Dynarski has suggested that the “risk adjusted” rating system used for hospitals might offer a useful means of adapting any rating system.[3] Better still, restore the state aid.

[1] David Leonhardt, “How Government Exaggerates College’s Cost,” New York Times, 29 July 2014.

[2] I can foresee the criticism that this will lead colleges to “admit to the test” just as schools “teach to the test.”

[3] Susan Dynarski, “Where College Ratings Hit the Wall,” New York Times, 21 September 2014.