The questions readers put to my previous column on the supposed college cost crisis are best answered by economists. Accordingly, the editors and I have asked the economists whose book formed the basis of my remarks, Robert B. Archibald and David H. Feldman, to reply. — Stanley Fish  Robert B. Archibald and David H. Feldman:  We would like to thank Stanley Fish for allowing us to respond to reader comments regarding his column about our new book. Reading them felt like working through the worst set of course evaluations a professor ever received.  The power of the dysfunction narrative was on full display in the responses. Stories of waste and inefficiency in higher education have a strong appeal, and they are deeply embedded in our public understanding of rising college cost.  Many who wrote took issue with us based on their personal experience. Although this is perfectly natural, generalizing from experience is not always sound. We need to stand back and take a broad look at the economic landscape of higher education.  At the core of the dysfunction narrative you will find a college-centric view of the world. If something unpleasant is happening, like rising cost, then the reasons must lie within the institutions themselves. We take a different approach, and the diagram below helps explain why we argue for a broader aerial view of the higher education industry.  Between the late 1940s and today, the inflation-adjusted prices of dental services and of higher education have behaved in a strikingly similar way. A wide variety of other personal services (ranging from the services of lawyers and physicians to bank service charges and life insurance) also display this same basic pattern of price change. These similarities could be coincidences. Perhaps each industry requires its own separate explanation. We don’t think so. We think one explanation fits them all. College cost, and cost in the other similar industries, is rising for three broad reasons. First, over time we have found ways to reduce the number of labor hours and kilowatts of power needed to produce most manufactured goods and agricultural products. By contrast, many services remain artisan-like. The time of the service provider is the service itself, and labor-saving productivity gains are very hard to achieve. As a result, the cost of a year of college or an hour of a lawyer’s time must rise compared to the price of a ton of steel or a bushel of wheat.  This is “cost disease,” which is sometimes called Baumol’s disease, and a comment by Al zeroed in on it quite accurately. Rising productivity elsewhere in the economy generates this “disease,” while creating the growth that pays the costs for these more artisan-like services. The college-centric view of the world does not accord this argument the central place the data say it deserves.  Second, the upward trend of college cost has been accelerated by changes in income distribution over the last 30 years. People with high levels of education have seen big income gains. Universities rely on highly educated people, as do hospitals, law offices and dental practices, to name a few. Rising income inequality is a force for rising cost in any industry like higher education. And rising income inequality also drives affordability problems. We will have more to say on affordability later.  Third, technology is a double-edged sword in many industries. For the most part, technological changes in how we teach, how we do research and how we equip our facilities have come at a cost. Some new technologies do make us more efficient. We no longer employ typing pools. But other new techniques, like computer-aided design in architecture classes or pulsed lasers in physics labs, have increased cost.  A number of our critics noted that distance learning has the potential to revolutionize higher education. We wish we were as sanguine as the distance-learning optimists. The best evidence suggests that course work that blends face-to-face instruction with distance components yields the best outcome. The best courses for this are introductory classes with relatively static knowledge. Many universities already are well down the path of incorporating these approaches.  Perhaps the most controversial portion of Professor Fish’s column concerns the buzzword “affordability.” To many, our claims about affordability seem to defy common sense.  Tuition is increasing at a faster rate than income. As a result the share of the family budget that must be set aside to buy a year of college education is rising, and this is taken as firm evidence that college is becoming less affordable. Although it seems very simple, this measure lacks any foundation in economic theory. Something becomes less affordable over time if you cannot buy the same amount of it without spending less on other things.  Between 1990-92 and 2003-05, the family at the 40th percentile of U.S. income distribution saw its real income measured in constant 2005 dollars rise from $41,072 to $44,834. This is roughly a 9 percent gain. Over the same period, net tuition and fees at public four-year schools rose from $1,529 to $2,089, also measured in constant 2005 dollars. This is a 37 percent increase. Net tuition is the correct measure because it includes all tuition discounting and grants students receive if their income is at the 40th percentile of the income distribution.  So, paying for this higher tuition does indeed eat up a greater fraction of the family budget; it grows from 3.73 percent to 4.65 percent. But after paying net tuition and fees, this family had $3,202 more to spend on other things. The language is being tortured to suggest that this is an affordability crisis.  In fact, for families at the 40th, 60th and 80th percentiles of the income distribution there is more purchasing power left over for the representative family after subtracting net tuition and fees, and this is true at private as well as public four-year institutions. The only affordability problem we found was for families at the 20th percentile who send their children to private four-year schools.  The rising price of college does mean that it becomes more expensive compared with other things. This could be called a relative affordability problem. But if we somehow banned relative affordability changes, a market economy could not allocate resources efficiently.  In our book, we do not make light of affordability problems. Many families are indeed priced out of the market or forced to choose education options that are less desirable. Anyone who loses a job is a prime example. We have no doubt that the recent recession has made college and university charges less affordable no matter how one measures affordability.  In addition, rising income inequality in the United States drives longer-term affordability problems as the unskilled fall further behind the well-educated. For these families, affordability is a real issue. Solving these real affordability problems is hard. Blaming dysfunctional universities for cost increases is easy.  Two confusions crop up regularly in the commentary we received. First, people use cost and price interchangeably. Sometimes this is innocuous, but sometimes the distinction is crucial. Next, many people do not distinguish between list price and net price. No one should feel ashamed for mistaking these terms. These confusions bedevil much of the public discussion of affordability.  Cost is what the universities spend to provide their service. Caren in Berlin writes, “Yet… education in Europe is virtually free and it’s not like we don’t also use computers and don’t have buildings here.” She is talking about price, not cost. Education in Europe is not costless. It is heavily subsidized. Even in the U.S., most families pay much less than the full cost of the education they receive. Universities get significant subsidies from state government and from private donations.  Our aerial view of the higher education industry is designed to explain the evolution of cost, not price. If states reduce their support, or if endowment earnings fall, this can lead to higher prices for students even if cost is not changing.  The list price is the tuition published in the catalog, and frequently this list price bears little relationship to the price that the student’s family actually pays. Much of this charge is covered by grants of some kind: private scholarships, and tuition discounts offered by the schools themselves. The net tuition is the price paid after all discounts. DGA explained this very well. Alarm over rising list price is misplaced angst.  In addition, much of the “crisis” people perceive is driven by stories of astronomical tuition at elite private schools. But fewer than 10 percent of the students enrolled at four-year universities attend schools whose list-price tuition and fees exceed $33,000. Over 47 percent attend schools whose published tuition and fees total less than $9,000 per year.  We frequently encounter the claim that government grants and loans are at the root of rising price. The very first response by F. Smith makes this argument. R. Lamar Smith concurs, adding that he “did take Econ 101 and learned that lots of new money in a market, like these loans and grants, is certain to entice price increases.” In brief, government support for students expands demand, and up goes the price.  The evidence tells a different story. Most colleges and universities can add students without seeing their costs per student go up. Buildings often can be utilized more intensely and the extra students can be absorbed without needing a significant increase in the size of the faculty. For some smaller schools, adding enrollment actually could lower the cost per student. And new schools can be created entirely from scratch if the demand is there. In other words, the long-run supply curve in higher education is not upward-sloping. It is flat. Costs in this important industry are rising over time because this flat supply curve is drifting upward for the three reasons we discussed earlier, not because government subsidy raises demand.  And finally, is college cost driven upward needlessly because universities over-invest in fancy food plans and plush dorms? Eric complains of “country club amenities” and “gourmet food service,” while Kate complains about “unnecessary comforts.” This gold-plating argument suffers from two defects. First, for most students these are optional charges. Off-campus housing, local restaurants and grocery stores offer competitive alternatives. Secondly, there is no good evidence that quality-adjusted room and board costs are going up any faster than their private sector counterparts. If readers are interested in a more complete analysis of gold plated room and board, see our forthcoming article in the January 2011 issue of Change magazine.  These issues are simply too large to handle with any completeness in an Op-Ed format. We invite interested readers to dive into the book for the full story.
A follow-up to the column on college costs, from the two authors whose book was discussed last week.