College: Over Invested and Over Priced

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[Neocon source, but some interesting points.]

Over Invested and Over Priced

American Higher Education Today

Richard Vedder

A Policy Paper from the Center for College Affordability and Productivity
November 2007

An excellent case can be made that we are over invested in universities, that too many students attend school, that much of our investment is wasted.

If incremental state funding encourages relatively unqualified students to pursue college, the marginal attrition rate amongst those students is likely to be extremely high.

While it is true that college graduates are more productive than those not attending college, it is unclear that most of that higher productivity has anything to do with going to college. College graduates, on average, are more intelligent, more motivated, more disciplined, and more honest than non-college graduates. As Richard Herrnstein and Charles Murray famously and controversially noted in The Bell Curve, the average IQ of college graduates is notably higher than that of their non-collegiate counterparts. Relatively uneducated persons have higher crime rates [(a measure of unreliability and untrustworthiness) than college trained counterparts.

When employers hire a college graduate and pay a relatively good salary to that person, are they primarily renting use of the skills the student acquired in college, or are they renting qualities largely acquired before college—maturity, discipline, intelligence, honesty? The answer, of course, is that some employers do buy college-generated skills—knowledge of accounting, advanced engineering skills, etc.— but a large part of what they buy are skills and traits not directly related to the college experience. It is wrong to attribute the high school/college earnings differential solely or even predominantly to things “taught” in college.

College diplomas provide information to employers not readily available elsewhere. A diploma from a decent to high quality university indicates “this person probably is reasonably literate, dependable, and intelligent.” A high school diploma alone does not convey that information, given the dubious quality of American secondary education. Therefore, employers pay premiums for college graduates, as the probability they will be good is vastly higher than for high school graduates, for reasons that have relatively little to do with learning.

The cost of learning whether job applicants would make good employees has always been fairly high, but the Griggs v. Duke Power Supreme Court decision of thirty-five years ago raised it enormously. For all practical purposes, the Court outlawed most forms of employer testing of potential employees, vital sources of information on their capacity to perform needed skills. That increased the importance of colleges as a screening device. I think it is no accident that shortly after Griggs, the high school/college earnings differential grew substantially, enabling colleges to raise their prices aggressively.

I do not think it is much of an exaggeration to say that, with the possible exception of prostitution, teaching is the only profession that has had absolutely no productivity advance in the 2,400 years since Socrates taught the youth of Athens.

It is not a coincidence that the two big components of the Consumer Price Index with greatest price increases—health care and higher education fees—both have large third party payments.

Did Stanford have a good year in 2006? Who knows?

Accreditation procedures can lead universities to act like cartels, agreeing to the rules of the game for operation, excluding newcomers with innovative ideas and sometimes a better product at a lower price. Schools do not engage in vigorous price competition for fear of offending old friends at rival institutions. Until forced to stop by the Justice Department, elite schools regularly met to discuss aid packages to individual students—a form of price-fixing that some university officials openly wish to restore.

Universities are adroit at charging whatever the traffic will bear, making wealthy students without unusual distinction pay high tuition fees, but giving discounts to persons on the basis of need, but also on the basis of special skills (extremely high levels of intelligence, high competence in throwing or catching balls) or racial/ethnic/gender status. Price discrimination has grown, and some of the financing of institutional financial aid has come from aggressive increases in sticker prices. Only universities do not tell consumers the price they have to pay for a service until they have given intimate financial and personal information.

Economists use the term “economic rent” to refer to payments made that have no impact on economic activity. Compensation of employees beyond what market forces dictate is common in higher education. There is a strong correlation, for example, between federal research grants and salaries of senior professors. Many persons obtain grants to do what they would have done anyway without the grants, raising the total cost of higher education.