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Reflections on the Cost Commission

By Jonathan Brown

Jonathan Brown, president of the Association of Independent California Colleges and Universities, was a member of the commission.

Jonathan BrownTHE COST COMMISSION was created, in part, on the basis of syntactic confusion between two conceptsĖcost and price. The confusion between cost and price should not give solace to those in college administration who think there is no problem. The system of college finance needs some clarification. We need to make sure that our consumersĖfamilies and policy makersĖunderstand what we are doing and how much it costs to do it.

One fundamental lesson during Commission discussions was demonstrated early: None of us who has worked with higher education, either from the inside or the outside, understands the impact of the confusion between cost and price.

Perhaps the best resource for the Commission was the wonderful work of the Williams College Center on Higher Education. The Centerís work shows that every student, whether in public or private institutions, receives a subsidy. If higher education were to be compared to the automobile industry, it would sell a car that costs $20,000 to produce for $6000. Automakers add profit to cost of production to produce a price; higher education subtracts subsidy from cost to produce. That is a very different way of looking at the world.

The substance of the Commissionís recommendations vests the primary responsibility for the control of costs where it should be, with the institutions. While we discuss the need for shared responsibility among all of the constituent groups (i.e. families, institutions and government) of higher education, the primary role for controlling costs should be where costs are generated.

  Related information
  A Short History of the Cost Commission
With more time, the Commission could have looked at a couple of key issues in more than a cursory way. For example, we could have developed some models of pricing. Assumptions about the appropriate price to charge, after colleges gain a firm understanding of costs, is key to maintaining the kinds of access colleges decide to offer.

We also did not have time for more than an anecdotal response on the burden of regulation. Stanfordís President Casper estimated that the costs of regulation amount to more than 7.5 percent of revenues. I believe that to be a very conservative estimate. I suspect that a longitudinal analysis would also show that the costs of regulation have advanced even faster than the price of higher education.

Finally, we did not do a careful analysis of a whole set of personnel issues that could be examined, such as changes institutions could make in relationships with faculty and administrators. Those of us who have been around higher education for a long time harbor suspicions about reductions in teaching loads and increases in administration. Those concerns can be artfully explained away but they need to be carefully examined.

One of the toughest issues we dealt with was the impact of technology on higher education. While technology has had a profound effect on other sectors of the economy by reducing costs, the experience in higher education, to date, suggests that technology is still a significant cost center; for some reason we seem to have missed out on the benefits. My suspicion is that at some point in the very near future, that will change. However, those who think technology will be a cost savior are wildly optimistic.

The Commissionís report will undoubtedly disappoint at least two groups. The first includes those who support explicit or implicit price controls. One of our most profound discussions was whether the availability of student aid causes colleges to raise their prices. Some advocates in higher education suggest that student aid produces virtually no economic effects. Yet, that assumption is unsatisfying. If all the general subsidies that are a major portion of finance in public institutions, and the need-based subsidies that are increasingly important in independent institutions, did not have an effect, why would we offer them?

The second effect is that the colleges explicitly increase their prices as a result of the availability of student aidĖboth grants and loans from outside sources. In this area, after a great deal of discussion and reflection, the Commission found no evidence to support the hypothesis that there was a direct price effect. That does not mean that a comprehensive econometric analysis would not suggest a relationship, but with the available evidence, we found no direct correlation.

  Related information
  Chart comparing Congressional Requests with the work of the National Commission on the Cost of Higher Education
One commissioned paper suggested that loans, not grants, have influenced pricing decisions of colleges across the country. Its author, Arthur Hauptman, argued that since grants are only a small portion of the total resources applied to the price of higher education, their influence on pricing decisions is limited. However, since loans take an increasingly larger proportion of the prices paid in higher education, Hauptman argued that they indeed have an effect on price. What bothered some of us on the Commission was the leap in logic.

Hauptman established a direct correlation between changes in price and changes in availability of aid. There are several other obvious relationships. The fundamental fallacy in Hauptmanís approach is to ignore the fact that higher education sells its wares at a significant discount to the cost of production. Every student receives a subsidy, a reduction from the actual cost of providing the education.

Hauptman tags student loans as the culprit in increases in tuition, especially at independent institutions, yet data on college pricing over a very long period of time seem to indicate that prices have risen in an inconsistent pattern outside of the availability of loans.

His proposal would have limited eligible tuitions (prices) for coverage of loans. What is most odd about this is that the fastest growth in loan volume in recent years came when institutions were either freezing or limiting their tuition growth.

Some of us did spend a considerable amount of time thinking about the implications of proposals that the federal government establish price controls. But neither the argument for specific controls nor the evidence of other price control mechanisms offers any convincing evidence that they will achieve any measure of success. However, there is considerable evidence that price controls in other areas produce unintended negative consequences.

The second group of readers who will be disappointed by the Commissionís report are those who seek a "magic bullet" to solve the problem. We heard from several who offered their version of the Rosetta stone. Those solutions took many forms: abolishing tenure; mandatory restructuring of teaching loads; uniform formulas for administration; implementation of technology, or any one of a number of ideasĖmany of which are not new.

I feel that the Commission was united in its belief that the search for a cost control grail will yield very little. American higher education has benefited from a diversity of institutions that vary in size, control and mission. To assume that with any amount of time we could come up with one or a number of uniform solutions that would control costs in the same manner for all is the height of folly.

The experience on the Commission was intense. I was surprised and pleased that the Commissioners ended up doing what the authorizing legislationís sponsor asked us to do. The members thought carefully about a range of issues and came up with some ideas that are worthy of implementation.

In the end the success of our effort will depend on how carefully our colleagues in higher education consider our work. If higher education does not respond to the substance of the recommendations, we will see another commission created in the next few years that will be considerably less thoughtful about gross regulatory responses.

Photo by Steve Grove for CrossTalk

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