Thursday, December 15, 2011

Why Does College Cost So Much?

Why Does College Cost So Much?

Robert B. Archibald and David H. Feldman
(Oxford University Press 2011)

Reviewed by George Rainbolt

The authors of this book are professors of economics at the College of William and Mary. I had read and liked a couple of their articles. My expectations for this book were high and I am happy to report that they were met.

Archibald and Feldman are covering some complex ground. However, they succeed in making this book accessible to anyone who can read The New York Times. The technical material is moved to two appendices. They are focused on high-level structural features of the higher education market. They are not examining what makes college X cost more than college Y. They are examining why, over the last sixty years, average tuition at four-year institutions of higher education has risen significantly faster than the overall inflation rate. They then make suggestions for broad changes to the US higher education system to improve access.

Here, in a nutshell, is their answer to the book’s title question. They point to three factors.

(1) Technological progress tends to reduce costs in those industries where machines can be substituted for people. (Think clothes and steel.)  However, in industries were machines cannot be substituted for people, technology will not lower costs.  In fact, it will raise them. In those industries, labor productivity will not increase as it will in industries where machines can be substituted for people. Salaries for workers in the industries that are substituting machines for people will rise as their productivity increases. This means that employers in the industries that cannot substitute will need to pay their workers more to keep them from moving to work in the industries that can substitute. However, ex hypothesi, these employers cannot use technology to reduce costs and so must pass on this higher pay in the form of price increases. (Footnote 1) Thus, one reason for the increased cost of college is the higher cost of industries where it is hard to substitute machines for people.

(2) The technological progress that the US has seen in the last sixty years has favored people with higher levels of education. The number of individuals with higher levels of education has not kept pace with this increased demand so the “price” that firms must pay to employ these individuals has risen. (That is, the salaries of highly educated individuals have gone up faster than the salaries of those with less education.) Universities must employ many highly-educated individuals so their costs have gone up rapidly.

(3) Technological progress does not always reduce costs. Sometimes, instead of allowing firms to make the same item at a lower cost, it allows them to offer a new item and this new item may be costly.  (Think tablet computers. They offer lower performance at a higher cost than a desktop but we still want them because they give us something new, portability.) Archibald and Feldman argue that the technological change in higher education has mostly been like tablet computers, not like steel. For example, they point to the computer systems that every university now has and argue that, instead of reducing costs, it allows universities to do things that they never could do before (e.g., allowing students to pay their fees while sitting in a coffee shop, crunching huge amounts of data). Doing these things is expensive.

There is a lot one could say in response to each of these points, but Archibald and Feldman’s case is interesting and plausible.

Having answered their main question, Archibald and Feldman must admit something that is perhaps uncomfortable. Their view implies that it is not possible to reduce the cost of college without decreasing quality. Therefore, if one wants to increase access to higher education, one must devote more resources to higher education. This is not a message that will go over well in legislatures. Archibald and Feldman propose to double federal support for higher education grants. They also argue for a simplification of higher education financing by eliminating all current financial aid programs that offer grants (e.g., Pell Grants) and replacing them with grants given to each high school graduate.  This money could be used at any institution, but would be lost after a certain number of years if not used for higher education. This is a version of Georgia’s HOPE scholarship and Archibald and Feldman have very positive things to say about HOPE.

Although I am not sure that I agree with all their conclusions, Archibald and Feldman have written a nicely accessible introduction to the economics of higher education. Anyone working in the field would benefit from reading their book.


(1) As Archibald and Feldman note, this phenomenon has been studied for a long time, at least as far back a Ricardo in the early 19th century. In economics, it is called “cost disease” even enough this name isn’t very helpful.