American Higher Education: Is It in Crisis?

Richard Vedder

Richard Vedder is a board member of NAS and directs the Center for College Affordability and Productivity. His article on the crisis of American education was originally posted here at See Thru Edu.

Is American higher education in crisis?  If you mean “is higher education in an unsustainable and precarious position, which will force major changes in a fairly short time period?” I suspect the answer is yes. If, however, you mean “is higher education in imminent danger of collapse or immediate radical change,” the answer is “no.” The rate of change is going to accelerate, and  in a manner that is going to be unpleasant to many in the academy, but it will not disappear.

Why do I think big changes are coming?

  • The cost of college is rising faster than people’s income, a trend not sustainable forever (at some point, people would start starving to death because higher education would crowd out food expenditures);
  • The ability of Sugar Daddies –state governments, federal loan programs, private philanthropy-- to subsidize higher education is insufficient to deal with the rising cost problem –besides their desire to do so is waning;
  • The disconnect between labor market realities and excessive production of college graduates is leading to the creation of a vast army of underemployed workers being created, a trend that no amount of statistical obfuscation  from cheerleaders for higher education like the Lumina or Gates Foundations can disguise;
  • Technology and economic necessity are leading to a spurt in educational entrepreneurship that will ultimately offer lower cost alternatives to the traditional method of certifying skill competency;
  • There seems to be a growing realization that much so-called “higher education” is neither terribly “high” nor, for that matter, not much “education” either.

Before elaborating a little on the points above, two basic economic principles are involved here. The first is the Law of Diminishing Returns.  When a farmer adds a third farm hand to help him produce his crops, the added output is less than he received from the first or second  worker –diminishing returns set in. When America gives lots of people bachelor degrees, the added output or productivity of the last graduates is less than when college degrees were awarded only to a small segment of the population.

The second principle is the Law of Demand. When something gets expensive, people tend to reduce their consumption of it, moving to lower price substitutes. While finding substitutes has been difficult to do in higher education, that appears to be changing. As Plato allegedly once said “Necessity is the mother of invention.”

Why are college costs rising? The immediate reason is that the schools are increasing spending –inputs—faster than enrollments and research—outputs—are growing. Productivity is, at best, stagnant. But why is that? The incentives for efficiency in higher education are few. Presidents of schools gain prestige, income and job security by spending money, not by reducing costs. Since there is no well defined “bottom line” and it is hard to even say whether a school is getting better or worse,  colleges increase resource usage knowing little whether this is having a good payoff in terms of improved outcomes or not. Massive third party payments –by state governments, federal grants and loans, and by private donors—has partly immunized schools from facing the discipline of the market to be efficient and meet customer needs. Recently, the federal student loan program has been the single most important of these cost drivers.

As productivity has fallen during the ensuing academic arms race, the negative financial effects to schools have been offset by increased subsidies, first by state governments, most recently by more federal assistance to students and research grants. For some private schools, donations and endowment income have been important. But now, the ability or desire of these subsidizers to expand funding has diminished. State governments face huge increases in medical costs for the elderly. The federal government is fiscally in deep trouble, as bad as many overextended European nations. Sharply declining rates of economic growth associated with America becoming a European-style welfare state have reduced the ability of private philanthropy to greatly expand its funding.

Meanwhile, the proportion of recent college graduates getting well paying jobs has fallen below fifty percent. We are in the era of the college educated janitor, taxi driver, waitress, and bartender.  Is it worth spending a fortune on college, only to end up with massive student loan debts and earn little more than what high school graduates make?

To the rescue comes innovation and entrepreneurship. The for-profit education model has provided new competition and introduced some operational efficiency. The open source movement, supported by such commercial ventures as Coursera and Udacity, opens the potential of free or near free general education instruction. The non-profit Saylor Foundation and for profit StraighterLine are other examples of exciting new ventures in low cost on-line education.  Packaging free or inexpensive on-line courses together in a low cost degree is only a matter of time. While some want the socialization/networking dimensions associated with residential education, these new options will reduce the market share of traditional institutions. One problem:  evidence is mounting that actual improvements in knowledge or critical thinking skills from the college experience is modest, further reducing the attractiveness of high cost residential institutions. To be sure, there will always be expensive, elitist, selective admission schools, but even they will not be totally immune from the changes coming to the academy.

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