Raising All the Money They Can, and Spending All the Money They Raise

There are two broad theories explaining why the cost of higher education has increased at roughly four times the rate of inflation over the past two decades. One is the Baumol cost-disease hypothesis. Economist William J. Baumol used the example of a chamber orchestra to explain why it is so difficult to increase productivity in the service economy. It takes the same number of musicians and same length of time to perform a Beethoven’s String Quartet No. 14 in C-Sharp Minor as it did in 1826. By analogy, the job of transmitting higher-order knowledge from teacher to student is as labor intensive as it was a half century ago. Yet to recruit and retain faculty, colleges must pay their professors far more.

Howard Bowen. His “law” explains about half of all increases in higher-ed tuition and fees.

The other theory, known as “Bowen’s Law,” was articulated by former college president Howard R. Bowen. He laid out five axioms:

  1. The dominant goals of institutions are excellent, prestige, and influence.
  2. There is virtually no limit to the amount of money that an institution could spend for seemingly fruitful educational ends.
  3. Each institution raises all the money it can.
  4. The institution spends all it raises.
  5. The cumulative effect of the proceeding four laws is toward ever-increasing expenditure.

Together, the two theorems explain about two-thirds of the increasing the cost of college attendance in the United States, says James V. Koch, author of “The Impoverishment of the American College Student.” While he gives credence to both theories, his research suggests that Bowen’s Law has twice the explanatory power as Baumol’s cost disease.

If anything, Koch’s conclusion is generous to the cost-disease hypothesis. In his narrative, he mercilessly deconstructs the analogy between string quartets and teaching higher-ed courses. While he concedes that there is an “artisan-like nature” to higher education, he notes that faculty account for only 25% to 35% of the total expenditures of a public college or university. Furthermore, unlike a live string quartet, universities have abundant opportunities to apply technology to boost faculty productivity.

“Advances in technology … have made it less expensive to teach and do research in many disciplines,” Koch writes. “One faculty member can be effective in teaching hundreds of students.” Drawing from his personal experience in distance learning, he notes:

For fifteen years I taught managerial economics annually to undergraduate classes that numbered up to 500 students. The students were located in many different spots around the world but were complemented by a control group of students doing it “the regular way” in front of me. At the end of every semester, I undertook a statistical analysis of student performance. There was no statistically significant difference in the performances of students based upon location or method of receiving the course once one controlled for SAT scores, age, math background, etc.

While not all disciplines can benefit from computer-assisted and distance learning, he says, many can.

Koch draws attention to data showing that faculty members are handling slightly fewer students than in the past. The shift to lighter teaching loads should not be exaggerated, however, he cautions. Many colleges have replaced highly paid tenured and tenure-track faculty members with lower-paid adjunct faculty. (He does not discuss the phenomenon recruiting of highly compensated “superstar” faculty.)

On the other hand, one can plausibly argue that the educational quality of output has declined. Koch cites the work of Richard Arun and Josipa Roksa as well as data from Collegiate Learning Assessment Plus and the National Assessment of Adult Literacy to suggest that a large percentage of college students make no gains — and a few even regress — in their reasoning and analytical abilities during four years of instruction.

While acknowledging the validity of Baumol’s cost-disease hypothesis, Koch contends that it is not inevitable in higher-ed but partly self-inflicted. “In the realm of higher education, much of the rigidity associated with the Baumol-Bowen string quartet simile exists in professorial and administrative minds rather than being dictated by conditions on the ground in classrooms and laboratories. … Yes, Baumol’s cost disease exists, but it is not nearly as confining as its proponents argue.”

By contrast, Koch gives considerable credence to Bowen’s law: higher-ed institutions raise all the money they can and spend all the money they raise. Koch’s core insight is that institutions suffer from what economists label the “principle-agent problem.” College administrators and faculty members have different goals and values than students, parents, citizens, and legislators. A top public priority is to keep the cost of attendance low, which means restricting spending. A top priority among faculty and administrators is to enhance institutional prestige, which entails spending more money.

Over the years, higher-ed institutions have swelled the size of their administrative staffs — from .89 staff per tenured faculty member in 1986-87 to 1.6 in 201-11. Some of this has come at the urging of faculty members, who ask to be relieved of administrative duties, and some comes from administrations’ mission creep.

Koch cites other examples of Bowen’s law. To avoid a political hue and cry over higher salaries, colleges often have bolstered fringe benefits — with payouts far in the future. Colleges compete on the quality of their student amenities, from workout facilities and food services to dormitory rooms and climbing walls and lazy rivers. Administrators suffer from “edifice complexes,” adding expensive new buildings, and from “curriculum creep,” the expansion of new programs in hot new disciplines without a corresponding reduction in old programs in lagging disciplines.

In theory, boards of visitors can act as counterweights to the ambitions of college administrators. But in practice, says Koch, they rarely do. “Members of public college and university boards gradually but habitually tend to evolve into strong advocates for the institution on whose board they serve. Board members usually value most of the things that presidents and administrators treasure, including institutional growth, higher academic rankings, and, lest we forget, successful intercollegiate athletic teams.”

In summary, writes Koch: “The Bowen effect is about twice as important as Baumol’s cost disease in terms of their effects on tuition and feeds, and … together the two hypotheses can explain approximately two-thirds of the increases we have observed in public-institution tuition and fees over the past quarter century.”

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2 responses to “Raising All the Money They Can, and Spending All the Money They Raise

  1. They’re going to do all they can to bury this book and take away his key to the executive washroom…

  2. Although it is a private school, the experience of the University of Richmond illustrates some of the perverse features of college financing. Despite having one of the largest endowments in the nation and one of the highest tuitions in the state, the school increased its tuition by 31 percent in 2005. The president had an ambitious vision for the school. He and the Board of Trustees justified the increase by saying that its tuition was “comparatively low” and “does not accurately reflect the higher quality of faculty, academic programs, and campus resources.” They said that the school wanted to be “comparable to its competitors”. One interpretation of these statements was that, if the cost of University of Richmond was comparable to Duke and others, it would be viewed as being as good as those schools. As with many items in our consumer society, if it is expensive, then, by definition, it must be really good. Another factor was one of the major recruiting areas of the school. When I was teaching there for a few years as an adjunct faculty, my students from the Northeast told me that one of the drawing points was that it was cheaper than many of the schools in the Northeast. So, the school acted rationally: push the price up as high as the market would bear. (By the way, the school was transparent in its goal of using some of the revenue from that tuition boost to increase financial aid.) [Disclosure: My daughter graduated from UR a few years before the big tuition increase. Her experience there was a very good one. I think she would agree that she got an excellent education.]

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