The Stumpjumper and College Costs

I have refrained from writing about a current controversy in the reauthorization of the higher education act because it is both complex and at this point perhaps too close. But on Friday Russell Roberts at Cafe Hayek gave me a good reason to change that - he wrote about the complexity of determining things like the real changes in the CPI. His point is an old one in economics - namely that products and goods and services change - so what might cost more today may also be much better.

Congressman Howard "Buck" McKeon has tried to work on the issue of college costs for most of the last decade. In 1997 he created a National Commission on College Costs - and I was his appointee to that group. The Commission published a report on college costs that recomended, among other things greater transparency on college costs. But McKeon clearly wanted more. In this iteration of the reauthorization of the statute that governs federal policy on student aid he includes some provisions on college costs. In all of his statements on the issue he sees the proposal as a reporting mechanism but it is not. It is a crude implementation of price controls. And like all other price controls, it will produce a series of negative effects.

Here is what the McKeon proposal would do. It would divide up higher education into groups (public 4 year, independent, etc) then it would add any institution whose tuition and fee increases went up by more than twice the rate of inflation over a couple of years into a special group - if your institution were in the top 25% in your group you would have to develop a series of reports and actions that would be sent to the Secretary of Education and which the Inspector General of the USDE could then review and audit.

Here is where the Stumpjumper comes in. Over the last decade mountain biking has increased in popularity. Originally, a top quality bike could cost $750 - now some cost as much as $7000 or a growth rate in excess of four times the rate of inflation. (Considerably higher than the underlying rate of changes in college costs which consistently have grown by about 1-2% over the underlying change in the CPI) But if you look at the $750 bike and the $7000 bike there are considerable differences - shock absorbers, less weight (dropped by about a third), new kinds of suspension. All of those make even the least expensive model considerably more reliable and useful than its counterpart of many years ago.

In the last decade, what has higher education done with its money? A lot of it went to funding student aid and to salaries (two of the most important categories of spending). Some of it went to things that were not considered essential a few years ago - like broadband Internet coverage. Is that the only place where institutions have spent their money? Of course not. But the broad categories are representative of the kinds of things that colleges and universities spend their money on. Even with the changes in higher education prices over the last decade, no student ever pays the full cost of education. There is a major difference with most other commodities in the economy. Students get subsidized either in minor or major amounts as a result of fund raising and state subsidies and a whole host of other things. As the report explained there is a difference between cost, price, subsidy and net price. And those four factors work in very different ways.

Some in Congress think that higher education has a cavalier disregard for costs (although they think the way to attack that problem is through price controls). In my experience, college trustees, in either public or private institutions, take the decision for changes in tuition very seriously. Are the institutions organized in the best way to consider cost issues - probably not. But would McKeon's proposal assist in that pursuit? No. Ultimately, colleges will begin to think more carefully about costs when they begin to utilize mechanisms which will allow them to compare. That is with disclosure not the kinds of Rube Goldberg monstrosities like the "College Affordability Index."