Is the College Cost Disease Incurable?

Higher education in America is criticized for many reasons, but by far the most frequent criticism is leveled at the rising cost of higher education. Professor Robert Martin’s recent book The College Cost Disease focuses directly on that problem. As a professional economist who has spent most of his career in higher education, he brings expertise and personal experience to his analysis of the reasons for the rapid, seemingly endless escalation of tuition.

Since colleges are unable to credibly calculate the value of the education they provide to their graduates, they cannot compete on that basis. Instead, competition among institutions has come to be based mainly on reputation, and that, Martin argues, is the primary source of cost escalation. The way colleges and universities establish and maintain reputation is mostly by the level of and increases in their spending. The more the spending per student, the better the institution’s reputation, according to Martin, and there is a rough correlation between the influential U.S. News rankings and spending per student.

Without question, much college spending is unnecessary and the quest for reputation leads to something like the old arms race, but I think Martin is too dismissive of expenditures on sources of student satisfaction – pleasant living conditions, good food, athletic facilities, and so forth. It is not unreasonable to see the good that colleges offer as a complex joint product that includes all of these characteristics. Therefore, expenditures that he regards as wasteful may be real components of the product that the college offers.

Moreover, the linkage between spending and reputation is not rock solid.  Spending per student is only one of many factors that enter into an institution’s reputation and ranking; it may be no more than a proxy for other characteristics that are the real causal factors. The college I headed around the turn of the century (Grove City College) was routinely ranked highly by U.S News, but its spending per student was among the lowest in private higher education. In fact, a good part of Grove City’s reputation (and ranking) was based on its combination of low costs and high quality.

I don’t know how many other schools are in the same position, but my experience shows that high spending doesn’t guarantee a good reputation and ranking, nor does economy preclude them. The trouble, however, is that most college officials assume otherwise.

Another aspect of the “cost disease” is the principal-agent problem that Martin contends is especially severe in higher education. When one person acts as an agent for another, the agent’s incentives usually are not precisely aligned with the principal’s. While the agent is supposed to do what is best for the principal, often he actually does what’s best for himself.

Complying with the staggeringly complex federal regulations governing universities provides opportunity for this. For example, the regulations on diversity open the door to building huge bureaucracies, with attendant big budgets and resulting salary increases and the other perks that running a large bureaucracy brings.

As my experience at Grove City College shows, however, the principal/agent problem doesn’t have to undermine efforts at cost control. The college had a long history of strong management, emanating in the first instance from the board chairman. There was a clearly established line of responsibility running from the chairman to the president and then to the rest of the administration. There was constant communication between the board chairman and the president, which implied continuous monitoring of the president.

The college was relatively small, so monitoring costs within the rest of the college were low. Expectations were clearly laid out and performance regularly evaluated. All of this contributed to minimization of agency costs.

Those conditions are unusual in higher education, at least in my experience, but they helped us avoid the cost disease at Grove City College.

Martin also analyzes the market for faculty, which can be another cost driver. His main point is that measuring research productivity is far easier than measuring teaching productivity. The result, he says, is an active market for scholars, but the virtual non-existence of a market for senior teachers.

Here’s his argument. Successful scholars often receive external offers that the institution must counter if it is to retain them. But good teachers seldom receive such offers. Scholars move from institution to institution, increasing their incomes but accumulating little seniority; teachers stay put, gathering years of seniority but only modest salary increases.

Martin thinks that strengthening the market for senior teachers is essential. Some of his main recommendations are directed to this problem. He suggests that technology may provide solutions, mentioning e-learning as a means to identify top teachers, e-competitions among teachers, and electronic courses prepared by professors and published. In other words, he proposes reforms that would recognize teaching quality and make it as rewarding as scholarship.

He also recommends paying more attention to value added in colleges – the actual addition to knowledge capital that the years of college provide — through the use of entry and exit examinations and better statistics on entering classes, retention rates, and graduation rates.

While those steps might improve the situation, who has the incentive to undertake them?

That is a difficult problem, but one where responsible leaders can make a difference. As mentioned above, one of the most important reasons for Grove City College’s success in keeping costs down while maintaining high quality was (and is) the clear and strong line of authority from the Board of Trustees through the chairman to the president, coupled with active engagement of the chairman in the affairs of the college.

This requires a board chairman who is willing to devote time and effort to the college; figureheads or persons interested in the position for the prestige it conveys are unlikely to be willing to bear the costs involved. Of course, success on these lines is more likely in small, private institutions than large public ones, simply because the costs of engagement (information, monitoring, evaluating, disciplining) are much smaller.

Martin’s careful and insightful work shows that the problem of college cost escalation is serious and deeply rooted. And yet, there are signs of increasing cost consciousness among college leaders. The slow but steady shift to multiyear faculty contracts with the resulting erosion of the tenure system is one indication. The much-criticized but increasing use of adjunct professors is another. Those practices may have slowed, if only slightly, the rate of cost increase, although hard evidence is not available.

From my own experience, the college cost problem is difficult but not intractable. The explanation for Grove City College’s low costs involves several factors.  The college had no debt and no debt service. It famously refused all federal aid, thus avoiding substantial compliance costs. Nearly every faculty member taught a full load of courses. (The college was known for the excellence of its teaching.) There was no tenure and no faculty (or other) union.

In addition, non-faculty staff was kept small and there was strict accountability for administrators and faculty alike. We tried to minimize costs to keep Grove City affordable for as many students as possible. Undergraduate tuition at this private college in Pennsylvania is about $2,500 less than at Penn State, the state’s flagship public institution.

America appears to be entering a time when traditional higher education institutions will have to tighten their belts. New and growing competition – the continuing development of for-profit universities, colleges, and technical institutions, the increasing delivery of courses over the internet (sometimes for free), and innovative new alternatives (often based on new technology) will increasingly press traditional institutions. Survival will require that they cut costs while delivering a superior service.

This pressure, more than recommendations from outsiders, is the best hope for curing the “cost disease.”

I suspect that smaller schools, which are most vulnerable to this competition, and where trustees, administrators, and faculty can be brought together to focus on student learning, will be most responsive. It can be done.