The Rising Cost of Education

To conservatives and libertarians, there is nothing that cannot be explained by simply blaming it on government. College costs have rising dramatically since the 1980s making this vital institution less available to more and more people. To libertarians, what else could be to blame? Government of course. Government grants, subsidies, and loans (The very thing that makes opportunity possible in this country) have created excess demand and driven up prices. Get the government out of all education funding, leave it to the “free” market entirely, and the problem they say, will go away. This fits the conservative narrative wonderfully, since if you cannot afford education, you don’t deserve it. After all, the noble wealthy elite need poor servants  to cook, clean, and serve them at bottom feeder wages.

This is highly dangerous, as removing government funding from education essentially eliminates opportunity for a great deal of society, and makes us all worse off by lowered growth from a less educated workforce. Here, we seek to dispel the myth that government investment in education is the driving faster in rising costs.

  1. Expanding Supply – When you have more people coming into your service, you hire more people to accommodate supply. The argument that rising prices are from “excess” demand relies on the faulty assumption that education is for some reason a fixed supply, or supply inelastic. Why colleges and universities couldn’t hire more faculty and expand their capacity to serve is a mystery. College professors are not supply inelastic. More can be hired, and universities can expand. Prices only have to raise (costs, differentiated from costs) with supply inelastic goods. Education doesn’t necessarily have a fixed elasticity, and thus it doesn’t follow inexorably that tuition must raise as demand increases. Technically demand also increased do to population growth, but if supply can raise to meet demand prices can stay commensurate with demand. More professors can be hired, more buildings can be built. I don’t know how often you go to Purdue campus, but the number of buildings on this campus has increased dramatically in the past ten years, largely do to grants and other public funding to education making education growth possible.
  2. Economies of Scale – To a certain more, more units produced or served can have a lowering effect on cost due to economies of scale.
  3. Education is somewhat non rivalrious – One additional student doesn’t consume more of the professor’s lecture. The same resource “The Professor” can speak to 5 students with 5 tuitions coming in. He can also speak to 20 students, with 20 tuitions coming in, and no students value is diminished with the addition of the other students. More students don’t “take” any more “professor” since 20 people can listen to the same guy and he has to work no harder than if 5 people were listening. Thus, additional demand can actually drive DOWN the cost of education.
  4. A great deal of the funding for public universities comes from Public Spending anyway, which would very likely have offsetting costs to an increase in demand on limited Supply. Government creates the supply (increased funding for professors and capital) that accommodates increased demand from Subsidies.

The following, from the great book “Why does college cost so much” refutes the myth that government spending drives up college prices.

The trajectory of college cost is similar to cost behavior in many other industries, and this is no coincidence. Higher education is a personal service that relies on highly educated labor. A technological trio of broad economic forces has come together in the last thirty years to cause higher education costs, and costs in many other industries, to rise much more rapidly than the inflation rate. The main culprit is economic growth itself.

The argument seems to be that government subsidies drive up the demand for spots at colleges and universities, and this drives up the price—simple supply and demand analysis. We understand that anonymous critics often stake out extreme positions, but we have encountered this one frequently enough that it merits a preemptive counterstrike. 

We do have a supply and demand framework lurking in the background and it helps motivate our story, but it differs from the textbook model underlying these comments. There are several reasons to be suspicious of the notion that changes in demand are an important part of the explanation for rising college costs. First, the evidence is not kind to this idea. Federal government subsidies started with the Higher Education Act of 1965 and they increased substantially in 1972 with the initiation of Pell Grants. A quick check of our diagrams shows that the time path of higher education prices does not take a jump upward around 1965 or 1972. Also, broad demographic forces such as the baby boom and its echoes surely changed the demand for higher education, but they don’t seem to be strong influences on the cost of a college degree. For example, the baby boom generation was still pouring into college at the same time higher education costs were leveling off in the 1970s. Secondly, and perhaps more fundamentally, the thinking implicit in the claim that rising demand pushes up costs and price uses the wrong supply and demand model.

The appropriate supply and demand analysis of a multiple-decade-long increase in college costs and prices would have to use long-run demand and long-run supply curves that allow buyers and suppliers fully to adjust to changes in their economic environment. In the short run, people tend to be stuck doing what they are doing. They may have a gas-guzzling car that they cannot immediately sell, so the amount of gasoline they buy doesn’t fall much immediately after the price goes up. But over time, they can find many ways to economize on fuel. Likewise, a family with a student in a particular college may not be as quick to switch to a less expensive alternative as someone who has more time to plan.

Yet as in the short run, the long-run demand curve is downward sloping. Other things equal, higher prices lead people to demand less. The slope of the long-run supply curve is more problematic and more interesting. It depends on the underlying production relationships. In the long run, institutions can adjust the entire scale of their operations. This means increasing the size of the faculty, the staff, and the physical plant along with increasing the number of students served. If raising the scale of operation leads to higher cost per student, the long-run supply curve for higher education as a whole is upward sloping. In this case, pushing a larger number of students through the system means higher cost per student. This is what many people seem to think when they claim that rising demand over time would push up cost. But if the scale can be increased without increasing cost per student, the long-run supply curve is flat. In this case, rising demand would have no impact on cost. The supply curve could even be downward sloping if increasing the scale of the operation lowers cost per student. Our story is based on a flat long-run supply curve. For starters, this keeps things very simple, yet it is an assumption that makes a lot of sense. It is also an assumption with a great deal of support in the academic literature. Suppose a small college on the west side of the river could open an identical branch on the east side of the river. This new, bigger two-branch college would be twice as large, use twice as many resources, and have twice as many students. But the cost per student could easily be the same on both sides of the river. More generally, we are assuming that any percentage increase in the scale of operation will lead to equal percentage increases in total costs and the size of the student body. This leaves cost per student unchanged. In economic jargon, we are assuming “constant returns to scale.” Many higher education researchers have investigated the question of returns to scale.

Darrell R. Lewis and Halil Dundar (2001) summarize the findings as follows: “Evidence from economies of scale studies over the past sixty years indicates that, generally, unit costs for two-year and four-year institutions decline with an increase in the number of students, and after a certain size, become relatively constant.”4 These studies do not find decreasing returns to scale, so the notion of an upward sloping long-run supply curve is a complete non-starter.

If there are basically constant returns to scale in producing higher education (a flat long-run supply curve), then a change in demand has no effect on cost. In the long run, a college education will cost the same amount to produce if demand is large or if demand is small. Essentially, as more and more students are attracted to college, in the long run institutions are able to accommodate them without having to incur higher cost per student. The evidence even shows that increases in demand at small colleges might lead to lower cost per student if those schools move toward a somewhat larger scale of operation. If the long-run supply curve is indeed flat, then an account of rising college costs has to explain why the flat supply curve has shifted upward over time. This is exactly what our metaphorical three-legged stool will do. Costs rise over time independent of any changes…

Articles 

Catherine Rampell, “Why Tuition Has Skyrocketed at State Schools,”

College tuition and fees today are 559 percent of their cost in 1985. In other words, they have nearly sextupled (while consumer prices have roughly doubled).

There’s a lot of debate about why college costs have risen so much.Many people assume that schools are spending too much money on frivolous things like climbing walls and Jacuzzis. That’s true for a handful of elite schools, but not for a vast majority.

Some of the rising cost has to do with other services schools have been adding over the last few decades, like mental health counselors and emergency alert systems. And certainly there are other inefficiencies that have crept into the system as higher education has become more things to more people.

“But at least at public colleges and universities — which enroll three out of every four American college students — the main cause of tuition growth has been huge state funding cuts.”

Every recession, states face a budget squeeze as their tax revenue falls and demand for their services rises. They have to cut something, and higher education is often a prime target.

Why? Struggling states have to prioritize other mandatory spending, like Medicaid. Higher education usually falls under the “discretionary spending” part of the budget — and in fact is often one of the biggest programs, if not the biggest, in the discretionary category.

Why college tuition keeps rising

A commentary that I saw from the Federal Reserve Bank of New York this week goes a long way towards explaining why students at public universities are getting pounded by soaring tuition. The main culprits seem to be state governments that have been ratcheting back their financial support.

Shrinking financial support for public universities

Here are some facts about why college students at state schools, which is where the majority of Americans receive their college degrees, are feeling the pinch:

1. From 2000 to 2010, funding per pupil at state universities fell by 21 percent – from $8,257 to $6,532 in inflation adjusted dollars.

2. Since 2008, when the recession hit, total public funding for higher education has declined by 14.6 percent.

3. Higher-ed support from states has varied dramatically. For instance, in 2010, the percentage change in public funding per pupil ranged from a negative 18 percent to a positive 16.7 percent. In California and New York, public funding declined by 11.6 percent and 7.5 percent respectively. The big winner was North Dakota, flush with energy money, which boosted its commitment to higher education by 16.7 percent, followed by Texas at 6.6 percent.

4. In every year from 2001 to 2011, at least a third of states experienced funding cuts and in more than half of those years, two-thirds of states did.

5. Real net average tuition at state universities, which is the price after grants are deducted, rose 33.1 percent ($3,415 to $4,546). In comparison, average net tuition at private institutions has risen 21.2 percent during the same period.

6. Before 2007, changes in tuition at public universities did not appear to be linked closely with public funding.

Tuition bottom line

What did economists at the Federal Reserve Bank make of these statistics?

They noted that federal funding, such as Pell Grants, is often blamed for driving up college costs. When low-income and middle-income students receive federal grants to attend college, the argument goes, the institutions simply raise their prices to reflect this aid.

The economists, however, suggest that there is “strong suggestive evidence” that decreases in state and local funding of public universities are linked to tuition increases, particularly since the recession. They find this troubling and suggest that college students will have to shoulder even more of the college cost burden in the future.

The Great Stagnation of American Education (Good Article)

Possible Refutation articles to be ready for, and use to your advantage.

College Costs Out Of Control

Example Debates:

Caleb Bryant I’m just over here busy being a moderate that wants some sane tax reform that gets rid of some ridiculous tax loopholes that are currently being abused.

I’d also like the government to stop subsidizing student loans, as I believe it was the catalyst to massive tuition increase. Business and institutions will charge what people will pay – subsidizes student loans have meant that students have been able to ‘afford’ loans far outside their means.

Normally I like to play devil’s advocate, but free college tuition just isn’t a good idea with the sort of system colleges have in place right now. The 18 year old that actually appreciates or utilizes anything given freely is a rarity, and making everything free will not change the large number of youth working towards degrees with no intention of utilizing them, or pursuing degrees that do not easily translate into a career (I’m looking at you, mr/ms english poetry major).

Michel Schweinsberg Hi Caleb.

It is a common argument from the right that subsidized student loans impel rising tuition costs. This is a myth from the right to propagate the narrative that government can only harm, unless it is legislating in the bedroom. There are several reasons that this argument, and the reasons behind it do not hold up to scrutiny.

Expanding Supply – When you have more people coming into your service, you hire more people to accommodate supply. The argument that rising prices are from “excess” demand relies on the faulty assumption that education is for some reason a fixed supply. Why colleges and universities couldn’t hire more faculty and expand their capacity to serve is a mystery. College professors are not supply inelastic. More can be hired, and universities can expand, and this is exactly what has happened.

Economies of Scale – To a certain point, more units produced or served can have a lowering effect on cost due to economies of scale. Demand only makes price go up is supply is inelastic. But supply of education is largely inelastic in the long run, and thus can expand to fill new demand. The assumption that “more students mean higher costs” assumes a completely inelastic supply of education, a state of affairs that is not the case.

Education is somewhat non rivalrious – One additional student doesn’t consume more of the professor’s lecture. The same resource “The Professor” can speak to 5 students with 5 tuitions coming in. He can also speak to 20 students, with 20 tuitions coming in, and no students value is diminished with the addition of the other students. More students don’t “take” any more “professor” since 20 people can listen to the same guy and he has to work no harder than if 5 people were listening. Thus, additional demand can actually drive DOWN the cost of education.

A great deal of the funding for public universities comes from Public Spending anyway, which would very likely have offsetting costs to an increase in demand on limited Supply. Government creates the supply (increased funding for professors and capital) that accommodates increased demand from Subsidies.

Furthermore, we understand now one of the greatest drivers of the increase in the cost of college is that the cost of skilled labor has gone up in recent decades. College Professors are a highly skilled and very well trained set of professionals. If you look at trends from the 40s through recent day, we see a trend in the rise of salaries in professions such as doctors, lawyers, dentists, and professors, an almost direct overlap. This increase in labor costs due to skill is transferred to higher tuition.

In addition, we did not see a commensurate rise in college Tuition Costs as a result of the GI Bill, which sent a generation of post war young adults to college, and impelled a whole new wave of innovation and education in society.

Darrell R. Lewis and Halil Dundar (2001) summarize the findings as follows: “Evidence from economies of scale studies over the past sixty years indicates that, generally, unit costs for two-year and four-year institutions decline with an increase in the number of students, and after a certain size, become relatively constant.”4 These studies do not find decreasing returns to scale, so the notion of an upward sloping long-run supply curve is a complete non-starter.

Blaming the government for EVERYONE really is just not helpful. We have to look at the real economics behind our issues if we want to build a society that is the most prosperous for everyone. Republican or Democrat, Independent or Libertarian, that’s what all of us want.

Neil, I hope this drowns out the crickets you were expecting in response to more Bernie bashing.

Caleb Bryant

College Costs Out Of Control

Specifically, ” According to Gordon Wadsworth, author of The College Trap, “…if the cost of college tuition was $10,000 in 1986, it would now cost the same student over $21,500 if education had increased as much as the average inflation rate but instead education is $59,800 or over 2 ½ times the inflation rate.””

College Costs Out Of Control
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