Thursday, June 16, 2011

CATO Institute Report: Nonprofit Higher Education is a Pig!

In a report released yesterday, the Cato Institute severely criticizes nonprofit higher education for its "profligate" spending at the expense of students and taxpayers and concludes that government policies should not favor nonprofit over for-profit higher education.  Indeed, the report suggests that the massive government subsidies for higher education stimulate price increases and have the perverse effect of making education less accessible.  Instead of increasing supply, to put it in economic terms, and thereby increasing access, government subsidies are spent on anything but needy students, thereby decreasing access!  As an intuitive matter, I have always tended to agree.  It seems to me, and I have been working in higher education first as an administrator in 1991 and since 1999 as a educator, that there is a correlation between increased financial aid and higher prices, for example, whether in nonprofit or for-profit higher education.  So long as the government subsidizes ability to pay, higher education has no incentive to hold down costs.  Eventually, as seems to be the case today, costs increase at rates exponentially greater than subsidies, with subsidies remaining at least sufficient to lure students into incurring incredible and unsustainable amounts of debt.  The lion's share of the cost increases, contrary to popular notions perhaps, are being horded by private and public nonprofit higher education, according to the report. 


Here is an abstract from the report:

Undergraduate education is a highly profitable business for nonprofit colleges and universities. They do not show profits on their books, but instead take their profits in the form of spending on some combination of research, graduate education, low-demand majors, low faculty teaching loads, excess compensation, and featherbedding. The industry's high profits come at the expense of students and taxpayer.

To lower the cost of education, federal government policies should encourage competition. Regulations should not favor nonprofits over for-profits. Further, the accreditation process should be reformed so that any qualified institution can easily enter the industry. The financial-aid process should be redesigned to remove the bargaining advantage that colleges currently hold over prospective students.

The higher-education industry is heavily subsidized by the federal government. These subsidies play a significant role in the high profitability of the industry and represent a massive transfer of wealth from the taxpayer to the industry. This should change. All tax credits and deductions should be eliminated immediately, as should all direct subsidies. The federal loan program should be restructured to eliminate the government subsidy and ensure that any deserving student can graduate from college without excessive debt, and eligibility for Pell grants should be tightened significantly. The net result of these changes would be greater efficiency and annual savings of $50 to $60 billion. To the extent that the federal government continues to play any role in higher education, its goal should be to ensure that all deserving students have access to higher education, not to maintain high industry profits.

Here is an early indictment from the body of the report:

The profligacy of nonprofit colleges is well known. As long-time Harvard president Derek Bok once quipped, "universities share one characteristic with compulsive gamblers and exiled royalty: there is never enough money to satisfy their desires."Why do nonprofit colleges behave this way? Thirty years ago, Howard R. Bowen, an economist and president of three different colleges, proposed what is known in education circles as Bowen’s Law. It can be summarized as "colleges raise all the money they can, and spend all the money they can raise." Bowen’s Law is well-accepted by scholars of higher education economics. But don’t colleges try their best to keep costs low in order to keep tuition down? No! As Bowen points out:  The question of what ought higher education to cost—what is the minimal amount needed to provide services of acceptable quality—does not enter the process except as it is imposed from the outside. The higher educational system itself provides no guidance of a kind that weighs costs and benefits in terms of the public interest. The duty of setting limits thus falls, by default, upon those who provide the money, mostly legislators and students and their families.  This isn’t to say that most college insiders necessarily realize they are spending excessively. Rather, spending for just about anything is justifiable to them in the name of reputation and the pursuit of knowledge. Further, the culture of academia tends to see practical financial concerns as anathema to the scholarly ideal.

What I worry about most, besides how I am going to pay for my own kids college education, is how long the higher education bubble can keep expanding before it blows up in our faces.  Like housing values ten years ago, higher education values are grossly overstated, almost to the point that stakeholders are begining to use words like "fraud."  States are already saying "no more" to higher education spending and our noble nonprofit bubble is no longer persuasive to most people.  We in the acadmey tend to turn up our noses at for-profit higher education but the Cato report suggests we might benefit from some capitalistic discipline, meaning cutting costs and doing without government subsidy.  The counter-argument, of course, is that profit-making and qualitative outcomes are at some point mutually exclusive; at some point, high quality will necessarily be sacrificed for profit.  There is some legitimacy in the argument but right now we have gone in the extreme opposite.  We have completely eschewed low cost and efficiency ostensibly for the sake of high quality, as if the those two things are mutually exclusive.  Instead of first seeing how we can squeeze more quality out of what we already have, we assume that higher quality necessarily requires more money, either in the form of taxpayer subsidy or higher tuition and certainly not for the purposes of increasing the number of students given access to higher education.  What a stupid policy. 


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