Haim, for someone who is offering advice about economics, here are a few elementary pointers about the subject. First, profit-maximizing behavior does not occur, for example, where government regulates prices or profits. Universities are largely regulated and subsidized. Profit-seeking is illegal. Therefore, universities cannnot attempt to maximize profits (or, like other monopolists, equate marginal cost and marginal revenue). In particular, universities are exempt from taxation under section 501(c)(3). Therefore, should they spend any official time figuring out how to maximize profits, they would be guilty of tax fraud if not racketeering.
Your claim that universities are like "shoe stores" likewise confuses price and marginal revenue equation with government administration and a political or administered model of economic behavior. Also, your argument that universities are like shoe stores overlooks universities' heavy government subsidies. Do shoe stores receive 1/3 and more of their revenue from government? If universities are in fact profit-maximizing, then they would have to explain to government why they are using the government subsidies to maximize profits. Such an admission would go much further in making Langbert's point, that universities have not been cost minimizing.
The behavioral model that you are using assumes freely functioning markets. While the assumptions of "perfect competition" need not fully apply, administered prices, such as tuition, are politically influenced. Does social security or the DMV charge profit maximizing prices for social security services and motor vehicle registration? You seem to think so, but Langbert might argue otherwise.
There are additional confusions on your part, Haim. You claim that because universities have antiquated accounting systems and do not know how much their administrative costs are, they cannot complain about federal grants' being insufficient to cover administrative costs. Yet such complaints appear in the Chronicle of Higher Education.
As far as knowledge of cost accounting, a major overhaul of accounting methodologies would NOT constitute an insurmountable challenge because development of accounting standards that could be applied to universities has ALREADY BEEN largely developed by the private sector. In other words, private sector generally accepted accounting principles (GAAP) can be applied to universities. For your information, I refer you to the work of Robert Anthony, formerly of Harvard Business School, who has written extensively about why private and public sector accounting should not be different.
To cap off your education, Haim, I would suggest to you that I am Professor Langbert's former student. I learned about monopolist behavior, cost accounting, the assumptions of perfect competition, the political model of managerial decision making (which is obviously relevant to this discussion and about which you might learn) and Robert Anthony in only one of his classes. Perhaps that is why he gets high student ratings. Perhaps you can reduce your envy of Langbert's achievements a bit and stick to mathematics, where hopefully you do a competent job.
<"Of course, it is the "double the rate of general inflation" that made me think to post the article here, but the entire comment is very strange coming from an economist. A university, like a shoe store, will charge whatever the traffic will bear. I.e., universities charge more because they can, and "improved university governance" has nothing to do with it."
Oops! The man is not an economist. Well then, it is a strange comment coming from a man who should have talked to an economist or two. Later on, he does sort of link tuition level with the pay of college presidents, but the main point, I am sure, is that colleges will charge whatever they think they can get, regardless.
In the fifth paragraph we read,
>Insiders know that administrative and facilities' costs >are a large percentage of total higher education costs, >though it is difficult to get universities to admit to >how much.
The implication of Langbert's language is that the universities know "how much" in detail. I seriously doubt this. I suspect Langbert does not fully appreciate just how chaotic is cost accounting, and management in general, in most large institutions, especially of the non-for-profit kind.
I am reminded of the first years of Rudy Giuliani's administration in NYC. One of his first acts was to demand a budget from the then Board of Education. He was denied. Ah, but he was not denied because they had it and would not give it, he was denied because they did not have it. Imagine! A $15 BBBillion institution without a budget! I would not run a Boy Scout Troop without a budget.
While I am deeply sympathetic to Langbert's general thesis, and as much as I would love to see his proposals implemented, in the end I think he does not understand the enormity of time, effort, money, and agony it will cost universities, and therefore the improbability that they will ever satisfy his demand that
>...[universities] develop objective measures of student >performance, student participation, and faculty >research productivity that would be made public.
In other words, Langbert's call for reform of tertiary education sounds to me just as improbable as is the general call for reform of public education. I believe the answer in the one case is the same as in the other: forget about fussing with the extant institutions, and start constructing parallel, independent institutions.
The College Board recently reported that the cost of a four-year college degree is up 35% from four years ago after adjusting for inflation. At four-year private colleges, costs are currently $13,200 after financial aid adjustments, and at public colleges they are $5,836. The College Board estimates that from 1989 to 2005, college tuition inflation was almost double the rate of general inflation, 5.94% versus 2.99%.The reason for the ever-increasing costs is lax management. The solution is improved university governance.
The adjacent table shows that, in the New York region, baseline tuition ranges from $36,088 at Sarah Lawrence College to $4,157 at the City University of New York. Baseline tuition at Columbia and New York University is $35,166 and $33,420, respectively. University presidents' salaries similarly vary. They range from Shirley Kenny's $287,000 at SUNY Stony Brook to John Sexton's $789,989 at NYU. Note that, with a couple of exceptions, presidents at the higher-priced institutions tend to earn more than presidents at the lower-priced institutions.
Lax administration rather than faculty salaries explains high tuitions. An increasing percentage of professors are adjuncts, parttime faculty members paid on a per course basis. Adjuncts earn peanuts. CUNY's heavy reliance on adjunct faculty explains its modest tuition. Most adjuncts earn under $5,000 per course, even when a large lecture course generates $180,000 or more in revenue. In 2005, the Chronicle of Higher Education reported that while nationally, colleges employed 60,000 more professors in 2003 than in 2001, the increase for full-timers was only 2% whereas the increase for adjuncts was 10%, resulting in a 50-50 ratio of full-timers to adjuncts. This trend may be related to adjuncts generally not receiving health insurance as well as to their low direct pay.
Moreover, average full-time faculty pay excluding health insurance has approximately tracked inflation. In 2004, inflation was 1.9%, while full-time faculty pay increased on average 2.1%. If the average associate professor makes $90,000, including health and retirement benefits, while the average adjunct makes $25,000, the average of the two is $57,500 including benefits. The result of averaging the modest pay increases for full-time faculty with the low salaries of adjuncts suggests that faculty salaries cannot explain tuition increases. Indeed, executives in many other industries would envy universities' ability to substitute part-timers for fulltimers.
Insiders know that administrative and facilities' costs are a large percentage of total higher education costs, though it is difficult to get universities to admit to how much. Currently, the federal government caps the percentage of administrative costs of university research grants ? for which colleges have to delineate all expenses ? at 26% and allows an unlimited amount for facilities. Yet, colleges argue that the cap is restrictive and should be eliminated.
In the spring 2006 issue of the journal Academic Questions, I wrote an article in which I correlated university expenses, student characteristics, endowment growth, denominational affiliation of the university, geographic region, ranking, and category of institution with university presidents' pay. The strongest correlations are between presidents' pay and revenues and between presidents' pay and expenses. In addition, revenues and expenses per student have strong, slightly above .5, correlations with university presidents' pay.
Economists like to think in terms of incentives. What are the incentives that university presidents face with respect to tuition? They are that higher budgets and higher costs per student are, at least on the surface, associated with higher presidential pay. Thus, college presidents not only have no incentive to contain tuition costs, they also may have incentives to see that tuition increases, especially if tuition is linked to increases in overall revenue and expenditure.
Some economists have argued that budget size ought to be associated with university executive pay levels because decisions of executives of large universities have larger effects than decisions of executives of small universities. However, this claim is debatable because executives of larger universities have larger staffs to whom they can delegate difficult decisions, have larger budgets for consultants to provide them with advice, and find it easier to obtain funding from public and private sources. Presidents' pay should not be increased because they spend more.
One way to resolve the debate is to see whether factors that are unarguably related to institutional performance, such as the entering students' SAT scores, the school's tier, and the percentage of classes with fewer than 20 students, have a larger effect than factors that are unarguably unrelated to institutional performance, such as enrollment, religious affiliation, and the kind of college, such as liberal arts, university, and so forth. It turns out that enrollment, expenses, religious affiliation, and kind of institution explain most of the variability in college presidents' pay, while performance-related factors such as SAT scores explain almost none.
Universities have expended almost no effort to create incentives that might encourage university presidents to cut costs and constrain tuition. Moreover, it is difficult for outsiders to assess management even in the best of circumstances, yet colleges continue to use not-for-profit financial disclosure methods that are designed to leave outsiders in the dark about what university managers are doing.
Thus, those who are concerned about rising college tuition should look to reform the management of universities. In that regard, two steps would be effective. First, parents, students, and government should insist that universities issue financial statements that include information that is specifically relevant to colleges, such as facilities, operations, and instructional costs per student. Second, they should insist that university trustees begin to grapple with the design of appropriate incentives that will motivate university presidents to constrain rather than to expand costs.
A number of approaches are available. For example, university presidents could be paid bonuses when tuition is reduced. They could also be rewarded for improvements in faculty research productivity, students' participation in extracurricular activities, and improvement in performance on achievement tests. Trustees who have the skills and motivation to monitor presidents could be hired, and such trustees could develop strategic plans, linking presidents' pay increases to achievement of specific objectives. Trustees could also increase their interaction with faculty and administration to learn about cost-saving ideas. They could base merit pay for faculty and administration on cost reduction and increased student performance.
To implement such management policies, universities would need to develop objective measures of student performance, student participation, and faculty research productivity that would be made public. The sunlight of public disclosure would likely prove effective in limiting tuition hikes.
Mr. Langbert is an associate professor of business management and finance at Brooklyn College and may be visited at democracy-project.com.