Tuesday, November 29, 2011
Why has the cost of higher education risen faster than inflation over the last generation (and why it isn't a "bubble")?
Here's a remarkably concise explanation:
The bubble analogy does work in one respect: education costs, and student debt, are rising at what seem like unsustainable rates. But this isn’t the result of collective delusion. Instead, it stems from the peculiar economics of education, which have a lot in common with the economics of health care, another industry with a huge cost problem. (Indeed, in recent decades the cost of both college education and health care has risen sharply in most developed countries, not just the U.S.) Both industries suffer from an ailment called Baumol’s cost disease, which was diagnosed by the economist William Baumol, back in the sixties. Baumol recognized that some sectors of the economy, like manufacturing, have rising productivity—they regularly produce more with less, which leads to higher wages and rising living standards. But other sectors, like education, have a harder time increasing productivity. Ford, after all, can make more cars with fewer workers and in less time than it did in 1980. But the average student-teacher ratio in college is sixteen to one, just about what it was thirty years ago. In other words, teachers today aren’t any more productive than they were in 1980. The problem is that colleges can’t pay 1980 salaries, and the only way they can pay 2011 salaries is by raising prices. And the Baumol problem is exacerbated by the arms-race problem: colleges compete to lure students by investing in expensive things, like high-profile faculty members, fancy facilities, and a low student-to-teacher ratio.
The college-bubble argument makes the solution to rising costs seem simple: if people just wake up, the bubble will pop, and reasonable prices will return. It’s much tougher to admit that there is no easy way out. Maybe we need to be willing to spend more and more of our incomes and taxpayer dollars on school, or maybe we need to be willing to pay educators and administrators significantly less, or maybe we need to find ways to make colleges more productive places, which would mean radically changing our idea of what going to college is all about.
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