Moore’s Law versus the Law of More

There has been a lot of discussion recently about whether there is a “higher education bubble,” that is, whether America’s vaunted college system is headed off the same fiscal cliff that our real estate industry went over.  I’m convinced that we’re in such a bubble and many recent studies show that the higher education business is in turmoil. 

Consider the recent report on Harvard. If there is any private university you would consider immune to fiscal discomfort, it would be Harvard. But this Wall Street Journal report suggests that even that mighty institution has some fiscal “issues” (the modern euphemism for “massive problems”).

Harvard saw its gargantuan endowment fall from $36.9 billion in 2008 (just before the recession) to $26 billion in 2009. It has now recovered to $32 billion, but that is still more than 10% down from its peak.

This has led to such belt-tightening measures as streamlining the library system, eliminating subscriptions to some academic journals, hiring back only half of the 320 non-faculty positions it lost in the recession, and trimming tuition waivers for law students entering public service.

If this is the fiscal reality at the best of all academic worlds, what must the others be like?

As it happens, that is the general topic of an excellent report by Jeff Denneen and Tom Dretler, called “The Financially Sustainable University.” The authors are with Bain & Co. and Sterling Partners, so they are not part of the educational establishment. This gives them an objectivity that (coupled with their expertise in the corporate turnaround consulting business) has produced a remarkably useful document.

The authors surveyed nearly 1,700 public and private colleges, evaluated those institutions’ financial health, and put forward some excellent advice.

Start with the bad news. The authors found that of the colleges they studied, the finances of about one-third have significantly worsened over the past several years. (The authors even provide an online tool that allows the user to look up a specific institution and see how they rate its financial health.)

This is alarming, since, as Denneen and Dretler note, the average tuition inflicted upon students at American colleges has shot up from 23.2 percent of median annual household earnings in 2001 to 37.7 percent in 2010. That rate of increase is 6½ times the rate of inflation (i.e., the rise in the Consumer Price Index). Colleges have pushed more students to take out loans, while the federal government—in a classic case of moral hazard—has encouraged students to pile up record debt. Collective student loan debt has now surpassed $1 trillion—more than the collective national credit card debt.

So, despite their large tuition increases, many colleges and universities are running in the red and piling up debts.

As the authors cleverly put it, colleges have followed “The Law of More” rather than “Moore’s Law.” Moore’s Law describes the behavior of the technologically vital semiconductor industry, where the number of transistors per computer chip doubles every two years, while costs keep coming down. The computer industry has been able to deliver this incredible productivity increase for decades.

But the higher education industry has followed the Law of More: colleges have continuously built up campus facilities, campus spending, the number of programs and the size of the administration, hoping to increase their rankings and reputations. All they have gotten for it is an increased debt risk.

I won’t rehearse every reform that Denneen and Dretler suggest, but among the best are these suggestions:

  • Find where your college has the most to offer and focus on that.
  • Eliminate redundancy—for example, centralize procurement in one office.
  • Outsource such things as IT.
  • Sell campus buildings and other real estate, use the money to improve the financial condition of the institution, and lease back the buildings.
  • Let a private intellectual property management company handle the patent portfolio of the college, just as the tech giants do.
  • Have the boards of trustees control administrative bloat.

This last point is crucial. Most universities face an especially pernicious form of the principal-agent problem: administrators, who are just high-level employees, often think of themselves as owning the institutions they administer, and spend money disproportionately on themselves. This has led to “administrative bloat:” while the number of students over the last couple of decades has risen modestly, as has the number of faculty, the number of administrators has ballooned.

One especially egregious class of administrators are the highly-paid diversity program bureaucrats. For example, at UC Berkeley, the vice chancellor for equity and inclusion alone has 17 people working for him, including a chief of staff, a director of special projects, and a couple of “policy analysts.” His pay alone is $194,000 per year, not counting his perks (pension plan and health care package) and add-ons (such as summer salary). His group collectively is being paid about $1 million a year in salaries—roughly the cost of 20 assistant professors. (As the Pope Center has reported, diversity offices have weathered bad economic times very well in North Carolina, too.)

And UC San Diego has put in place a diversity course requirement for graduation, even as it has cut its master’s programs in electrical/computer engineering as well as in comparative literature.

College faculty and administrators are notoriously slow to admit any fundamental problems in their industry, much less attempt to solve them by any reasonable institutional reforms.  Part of the problem is that academics refuse to concede that their business is in fact a business at all.

But the increasing misery of students and graduates is beginning to register. Statistics show that more than half of our recent college graduates are either unemployed or underemployed and that student loan default rates are soaring. Also beginning to register are the tough times many college cities are beginning to experience.

All of this may concentrate academic minds wonderfully.