Monday, July 5, 2010

Follow the Money

"Follow the Money" Raymond Chandler advised us (via Marlowe), and it's good advice to take when considering how the cost of Tertiary Education effects it's future. It's timely to think about now, as Ireland, from where I write, considers whether to continue with a 'free' fees model, where the state pays, or return to a fee paying model, where some or all of the fees are paid by students directly to the University. How might these choices play out in the long run, and which is the smart one?

All else being equal, the cost of a University education would rise in proportion with inflation. If GDP growth outpaces inflation, as it tends to, University education gets cheaper in real terms. More and more people can afford it, and we all live happily ever after. All else, alas, is not equal. As we get richer, our expectations rise. The school my firstborn starts in on August 31st might as well be on a different planet from the school I started at in '79. It's more reasonable to think of the cost of University education in terms of it's share of GDP.

Whether the cost will rise or fall as a share of GDP depends on who, exactly, is paying.

Where the state funds University education, as in Ireland, it's a single, strong customer with tight pursestrings. That keeps a lid on costs. Unless Universities suddenly get a lot better at picking the governments pocket than they are, the costs can't grow faster than GDP, and will probably shrink as other agendas draw on state coffers. The state will pressure universities to expand enrollments and spend less.  While the slice of national wealth consumed is smaller in relative terms but the cake is growing all the time. So, in absolute terms, Universities do get more money, and deliver a better service. The voting middle classes won't mind them bleeding a little, but won't like to see them bled white, just like schools. While universities command a smaller and smaller wedge of national wealth, more and more people go there, because it's cheap. You end with with near universal tertiary education in the long run excluding only those so already too badly sabotaged by family or school to make it. That's how state funded primary and secondary education works, why should tertiary wind up any different.

Universities won't like this. Having only one paying customer is bad business. Like a pea farmer selling to a big supermarket, you suddenly realize you don't work for yourself anymore, and your profit margin is what they tell you it can be. When they feel a squeeze, you get crushed. Primary schools don't have a lot of autonomy.

Universities would like to work like any other business. They would deliver a service, and charge what it costs, or as much as they can get away with, whichever is more.  As well as helping the top line, making goods more expensive makes them more exclusive. All Universities, deep in their hidden hearts, want to be Harvard when they grow up, and that means being expensive enough to filter out the riff raff, and elite enough to attract the very best talent. Employers, at least ones that potential students would like to work for, like that too. It makes it easy to sort the CV into a slush pile. There are some Universities, who, as a core value, try to keep costs as low as possible, but they are, alas, not economically significant. You can see this model in operation in the US.

Where education is on a fees basis, the prices will rise as fast as the market will bear. Faster, if predatory lending practices, as seen in the US, come into play. If people are borrowing for their education, based on their beliefs around future earnings, fees can logically rise faster than GDP growth. Fees go up, Universities command an expanding slice of the national pie, and (successful) Universities are grand and well resourced, like the US Ivy Leagues. If you can afford to go to the best, or can swing a scholarship, your future is assured. Less and less people can afford to go. Things like community colleges, online and for profit colleges spring up to satisfy that market.

Note that other costs (housing, food, and so forth) are more or less neutral either way. Whether you are in college or not, you've still got to eat and sleep indoors. There is an opportunity cost as well, time spent in lectures and years of earnings foregone while in University. In either model of funding, so long as University can get you a better income than no University it's worth going. That better income might be a better job than a non graduate, or indeed any job. If practically everyone has a degree, not having one would be a fast track to the benefit office, with rare exception.

These two scenarios are of course end members of a continuum of solutions. In Ireland, people suggest an intermediate model, where Universities charge fees but the government provides adequate scholarships to ensure access for people who cannot afford them. This is a great idea, and like many great ideas, it won't fly.  Democracies don't reliably support people who don't vote. Any scholarship programme for the deserving and needy will get whittled away over time. Cutting those programmes keeps them out of college, and not competing for jobs with the children of nice, voting, middle class parents who knows the name of their elected representative and would like the money spent on themselves. Think of the consistent heavy flak affirmative action attracts in the US, and how it survives only because it is supported by a substantial mass of voters who benefit from it.

The other intermediate model is to have some state supported free Universities and some fee paying Universities, so everyone gets what they want. This is not unlike the US system, and has serious consequences for social equity. Your degree will forever record how rich your parents were, and humans being humans, your place in the pecking order is set.

There are, of course, many excellent Moral Arguments for this funding system or that. I'm not concerned in this blog with Moral Arguments, however just. I'm just concerned about what will happen. History has no morals. Nor am I concerned with what decision Society will make. Society does not make decisions, it responds to stimuli.

Universities however, are small enough to make actual choices. Given these two options what should a clever University lobby for? What is likely to ensure your relevance and survival in the long run?

If you are in the top 10%, then lobby for a fees model. You've got a good shot at 'Ivy League like status in the long run. Take it. With the enforced egalitarianism of state funding removed, you can lay claim to the top spot in the public mind. Fees will bring competition, and you're well placed to win it. Call your Minister, book a nice Restaurant and good luck.

If not, think carefully. You're not going to get a big endowment or asset base, like the Land Grant colleges in the US, to cushion you against the hard years. In a free market, they will come. The state might be one big customer, but it's checks don't bounce very often. THe business will start to look a lot like the Private sector. Rising costs will bring in competition, like in the US. Strange movements, like the EduPunks, will challenge your right to exist as an institution. Students incurring big debts are much more likely to cause trouble. If your country grows an Ivy League, and you're not in it, what then?

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