And Don't Even Get Me Started on The Price of Textbooks!

If I were a real economist, as opposed to someone who merely pretends to understand economics on the internet, I’d want to know why, since 1958, college tuition has continued to increase at an average rate of 8% and somewhere between 1.2 and 2.1 times the general inflation rate.

William F. Buckley, also no economist, offers the following analysis:

The marketplace rule is that competition reduces prices. Well, the marketplace rule is hogwash when it comes to higher education. The explanations for this are multifarious. 1) More Americans, especially in the two decades after the war, decided to attend college, making for great rises in demand. 2) Choice colleges are hotly competed for, giving them a relative immunity to market pressures. 3) Ever since the fifties, teachers have been demanding a living wage. 4) College perquisites increased; academic offerings for students with exotic interests are understandable, but some college administrators think themselves delinquent if they do not offer a course in jujitsu.

The free marketeer is tempted to address the problem with the kind of fatalistic glibness that makes us so offensive to so many fellow citizens. He will say: So what? There is the demand — a lot of students desiring a lot of things. And there is the supply — 4,140 colleges and universities nationwide. Obviously these colleges would not survive if the money needed to operate them were not provided. So what we have arrived at is an amalgam of contributors to the students’ needs.

The rest of Buckley’s column addresses that amalgam, including the increased role of the federal government in guaranteeing and subsidizing loans since the 1960s. Though he doesn’t especially stress this factor, my instincts are that it is crucial in understanding why the cost of college, together with the cost of health care, has consistently outpaced overall inflation.

Backtracking a bit for a moment, first, it is certainly true that more Americans and more Americans as a percentage of the overall population have sought a college education in the past fifty years. But that is true of the increase in demand for all sorts of goods in the last half century, too, some of which have actually decreased in real price over the same period.

As with health care, however, higher education is labor intensive, also using lots of high capital-investment labor, at that. Still, when you look at the PhD glut in some academic fields and the increased reliance on contract instructors for many undergraduate courses, the similarity between, say, hospitals and universities begins to shrink. So, also, while some academic disciplines require heavy capital investment, especially science, engineering and medicine, by contrast, law schools (which, by the way, almost invariably run at a profit) and most of the humanities and social sciences operate much as they did fifty years ago. If anything, computer assisted legal research has diminished the need for the one major capital expense of previous generations of law schools; namely, law libraries.

Choice colleges are indeed vastly more competitive than they were decades ago, but choice colleges represent a tiny fraction of the four thousand colleges from which students can themselves choose. Okay, so maybe Yale or Stanford or other brand-name universities can set their tuition pretty much wherever they please, but does that mean No-Name College can do the same?

George Washington University in Washington, D.C. charges nearly two thousand dollars more in annual tuition than Harvard ($35,630 vs. $33,709). GWU is a good school with a good reputation, don’t get me wrong; but it certainly doesn’t carry the same cachet as an Ivy League school, let alone better. What permits it and hundreds of much less prestigious schools to charge tuition comparable to that of the nation’s most elite schools?

Buckley’s third observation, that “since the fifties, teachers have been demanding a living wage,” is especially amusing from a man who ten years ago wrote, “Mr. Carey insisted that part-time workers for United Parcel Service earned ‘too little to live on,’ which prompts the question, Why aren't they dead?” Still, we know what he means.

Collective bargaining of one sort or another plus the genuinely rising value of academic stars over the years have largely eliminated the notion of an academic career as one of genteel poverty, at least for those who successfully run the tenure gauntlet. Still, unless fifty years of higher than inflation raises in tuition can be accounted for by faculty salaries, there must be more at play than full professors now earning six-figure incomes at many universities.

Finally, there is what I would call the amenity issue. There’s something to be said about this. College dormitories weren’t air conditioned when I was an undergraduate (and, yes, air conditioning had in fact been invented back then), nor were student lounges, dining facilities and many other amenities nearly as comfortable or in some cases downright posh as they are today.

Still, not counting the one significant and comparatively inexpensive option of community colleges, it is odd that in the absence of some extrinsic factor there would not be more price competition at least among the vast majority of schools that don’t make the cut in the U.S. News rankings every year. And the most likely culprit would appear to be ready access to subsidized loans.

Universities are free to set tuition at a level that factors in the student’s ability to borrow money. Were that money not readily available to prospective students and the result was a decrease in the number of students applying for or accepting admissions offers, there would be at least that much more pressure on the schools to cut or at least contain costs. In a crude sense, it is as though car dealerships knew that young car buyers could count on Mom and Dad (or Uncle Sam) kicking in a few thousand dollars toward the negotiated purchase price. How do you think the average dealer would use such information? Is there any reason to expect universities to act differently?

One critical factor missing from my argument is whether the amount available to borrow has increased commensurately over the years. The student loan market is a hodge-podge and the sorts of loans available to students have varied over the years. Thus, I admit I haven't been able to determine whether, as I suspect, increased tuition costs have successfully put upward pressure on loan limits. I know that students may borrow more nominal dollars today than in my student days, but I don't have any clear data as to how borrowing limit increases over the years, adjusted for inflation, have tracked tuition increases. [UPDATE: Reader AC directs my attention to a CATO Report that appears to close the gap here.]

In any case, I don’t contend that this is the only or even the major factor contributing to rising college costs, but only that it is likely one of the significant factors in play. Higher education is, after all, still a market. We shouldn’t be surprised when government involvement perversely affects that market’s prices or when the unintended consequence of attempting to make college affordable for some is making it less affordable for most.