The Road Ahead: Cost, Price, Productivity and Affordability

Blog 5 Jordan Hall at Central College

NOTE: This is the fifth installment in a six-part series of essays reflecting on the future of liberal arts colleges. Some speculate all liberal arts institutions are destined for failure. I disagree. We will explore the current dynamics and set the context for the future of Central College.

As a young admission counselor I was seated in a conference room with the faculty and staff of the college I then served. It was an annual gathering scheduled just prior to the beginning of each academic year. For this particular session we were joined by the chair of the Board of Trustees who shared some thoughts from the board and participated in a question and answer period. He was a very impressive man, and I was completely intimidated. His career was known to all of us and he had earned the respect of many as the CEO of a major company. It was clear he cared deeply for the college, but was very tough minded and disciplined.

As the Q&A session unfolded, I approached the discussion with the perspective of a recent college graduate. My first year of college (1977-78) just a few years earlier had a price tag of $3,200 that included tuition, fees, room and board. Coming from a very modest economic background, I received financial aid through a federal grant now called a Pell Grant (then BEOG, the Basic Educational Opportunity Grant), a state grant known as Tuition Assistance Program (TAP) for residents of New York State, and a scholarship from the institution I attended. Together this aid package covered 100 percent of my first year expenses with no loans. I sheepishly raised my hand and the board chair called on me. My heart pounded, but I was determined to ask my question, which went something like this:

“Our annual expenses for students are now above $10,000 per year. Are we afraid that we might be out-pricing the market?”

I will never forget his response:

“Everyone has prices.”

He then turned to take the next question.

The year of my question was 1984. The price for my alma mater had tripled in seven years.

The interaction of cost, price, productivity and affordability is incredibly complicated and volumes have been written on the topic. My task here is not to unpack all that can be discussed. What I can do, however, is help with some context.

Robert Archibald and David Feldman in their book, Why Does College Cost So Much? (2011), provide a backdrop for interpreting the relationships among cost, price, productivity and affordability in higher education. Most interesting in their work is clarity of understanding on how these factors differ dramatically among different sectors in the economy. They write,

“Our aerial view of the higher education landscape emphasizes the importance of economy-wide changes that influence higher education. Higher education does not operate in a vacuum. Just like every other industry, colleges and universities are part of the larger economy. They have to compete with other firms for workers. They have to purchase equipment just like other firms do. Technological progress affects higher education even if that progress occurs in other sectors of the economy. And importantly, what is going on in other parts of the national and global economy affects the kind of education that is being demanded.”

So the board chair had a point. Everyone has prices. He was teaching me early on that the realities of cost and the determination of price are a function of many interrelated factors. Pricing, therefore, is more than an isolated decision. Such choices are the result of a system of interactions that shape the boundaries and contours of decision-making.

Archibald and Feldman start with the premise that price increases are, in part, a function of the kind of sector an organization reflects. For example, pricing among durable goods manufacturers follows similar patterns impacted by the cost of raw materials, labor, energy, transportation and technology. These manufacturers have been able to manage price in relationship to their costs, by increasing levels of productivity. For some this is related to decreasing the human workforce in favor of machines, computers or even robotics. For others, there may be less expensive labor costs found in other countries. Total Quality Management, Continuous Quality Improvement, Six Sigma, Business Process Redesign and related lean strategies also have made important contributions. Accordingly, ability to lower costs through increased productivity, manages price and supports affordability to the consumer.

By contrast, service industries follow a different pattern. Providing a service may or may not benefit from gains in productivity, even with the application of new technologies or methodologies. Higher education falls most neatly into the professional service category since this sector relies on a highly educated workforce, with specific advanced professional qualifications. Other professional service firms include doctors, dentists, lawyers and any other profession that relies on face-to-face contact. These firms have inherently high labor costs with relatively low gains in productivity. Thus, the fundamental problem is that increasing costs of operation, without the benefit of increasing productivity, leads to escalating consumer prices, thereby impacting affordability.

To drive the point home, our authors refer to the work of two other economists, William Baumol and William Bowen. These two illustrate the problem of cost by using an example in the performing arts:

“A half hour horn quintet calls for the expenditure of 2.5 man hours, and any attempt to increase productivity here is likely to be viewed with concern by critics and audiences alike.”

Archibald and Feldman go on to write,

“The process is usually called ‘cost disease.’ Rapidly rising service prices follow from the fact that service industries’ costs are rising more rapidly than the costs of producing most goods. Higher education and many other service industries have considerable difficulty increasing the productivity of their workers. As a result, their prices will be driven up over time by cost disease.”

What we do as a residential liberal arts college is inherently expensive. Our aim is to provide the time and space necessary for well-prepared students and well-prepared faculty to engage in a shared experience of teaching and learning. Over the past five years the Higher Education Price Index (the equivalent of the Consumer Price Index) shows our costs (i.e. food, energy, technology, medical insurance, supplies, etc.) increasing at average rates above 4 percent per year. In some recent years our costs have seen spikes in certain cost areas as high as 8 percent. Yet, our salary increases for faculty and staff have been quite modest by comparison.

Colleges and universities are not passing the full cost of operations on to students and families, nor have they ever done so. We simply can’t. Instead we are constantly refining how we do things and continually seeking the support of generous individuals, corporations and foundations to offset cost increases that cannot be fully supported by price increases. Yet, we still face a great challenge.

When the board chair of my alma mater referenced prices there existed a social contract. For generations, it was assumed by our society that higher education was a public good reflected in a partnership among institutions, state governments and the federal government. All that has changed. Today our assumption is a higher education is primarily a private good that is consumer driven. We risk something important here. As critics point to expanding amenities on campuses they forget we have released our institutions, both public and private, to these market forces, unleashing competition. The need for expanding revenue, to support increasing costs, in the absence of increasing productivity, means we rely on hopes of increasing enrollments, escalating competition in the marketplace even further. Higher education pricing reflects this dynamic. Price and affordability are tightly coupled with cost and productivity, and fueled by competition.

As I have noted in previous essays in this series, the answer for some is increasing productivity by using technology to lower labor costs in instruction. In other words, significantly reducing the role of faculty and the infrastructure of a physical campus means we can also reduce price and increase affordability. Is that what we want?

Next time: The final essay in this series – seeing the residential liberal arts colleges through a new lens with some old ideas.

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10 responses to “The Road Ahead: Cost, Price, Productivity and Affordability”

  1. Brian Peterson says:

    Thanks for this, Mark. In my mind, part of the problem with many who argue that college prices are too high is that it’s not clear exactly what price is being used as a reference. Is it the gross price, posted on the school’s website, that is there as a potential signal of prestige – when the reality is that perhaps less than 1/10th of 1%, if that many, actually pay this posted price? Or is it the net price, after discounting, that students pay on average? As we’ve seen from articles recently in Inside HigherEd (see, for example, http://tinyurl.com/969knc6), the net price bears little resemblance to the posted price.

    This also assumes that price and productivity bear some correlation in the market – as we’ve seen from labor wages over time, that may not be the case.

    Education, especially a residential, liberal arts experience that we provide is what economists call a composite good – it cannot be subdivided into smaller components. As a result, it’s not going to be the case that we can gain productivity changes as we could on an assembly line. We should not be expected to ramp up productivity like this, as if I can squeeze out more learning from my students upon request.

    Should I cut costs where possible? Of course. That’s part of the need to stay competitive, especially in a higher education landscape such as this. But to assume that an education is the equivalent of xx credit hours misses the point entirely.
    BJP

  2. [...] faculty to engage in a shared experience of teaching and learning. … Continued here: The Road Ahead: Cost, Price, Productivity and Affordability – Mark … ← Exactly What Loans Can Be Found for People With Poor Credit [...]

  3. Ross Vermeer '88 says:

    I’m glad to see an entry that finally addresses the astronomical cost increases in higher education. This is certainly a pertinent topic: as I pointed out in a comment earlier in this series, the cost of a degree at Central has risen six times faster than the rate of inflation over the past 50 years.

    But as I read, I kept wondering: where is the explanation for this trend? Yes, higher education is a complicated service, but the cost of a degree has risen far faster than costs for other complicated services such as health care, which is obviously much improved over 50 years ago in terms of diagnostic technologies and treatments. So has higher education improved even more drastically than health care has? And what about proposals for reining in these costs before it’s too late?

    The closest this essay comes to justifying the rise in higher ed costs is to say that “we are constantly refining how we do things”. That’s great. But what’s specifically, demonstrably better about liberal arts colleges such as Central now than 10 or 30 or 50 years ago? Their day-to-day operations look much the same to me. Students live in dorms (although these are now no doubt more luxurious), eat in the cafeteria (the food may well be better) – and attend classes. But are those classes, and the other ‘relational’ elements at the heart of the liberal arts experience, six times better? Perhaps class sizes are now much smaller? Or is the faculty far more intelligent and well-trained? Did the class of 2012 graduate having learned six times as much as the class of 1962? Did they cheer six times harder for the football team? Somehow I doubt it.

    Here’s what I think is a much more plausible explanation for why college costs have gone up so rapidly and disproportionately.

    First, the higher ed sector in the USA forms a de facto cartel that controls entry to the middle and upper-middle classes, and their associated financial and status benefits. This cartel is based on a complex of cultural, economic, and political factors, but in essence most American students and their parents have been convinced that living a full and meaningful life requires a degree. Being a ‘self-made man’, or a manual worker who’s respected – much less looked up to – has become increasingly implausible, even absurd. Educators and politicians alike state openly that every American child should pursue the ‘dream’ of higher education. This subtle but extremely powerful cultural undercurrent has fueled unprecedented demand for higher education.

    Second, far from under-funding higher education, the US federal and state governments have provided great floods of money to support and extend it. In the past, it’s true, a greater proportion of that money was granted to students (and hence to colleges and universities) with no strings attached, but as the higher ed sector has expanded beyond all reason, it’s become impossible for governments to pay for it all. We’re now in the late stages – perhaps at the end stage – of this government largesse. The money’s still made available, but a much greater proportion is offered as loans. Whether government policymakers actually believe today’s students and recent graduates will ever pay back the more than 1 trillion dollars they owe is an open question: perhaps they assume this colossal backlog of personal debt will soon be inflated away, along with the federal government’s own 16 trillion in IOUs, or maybe a blanket student debt amnesty is in the cards. In either case, America’s savers and taxpayers will get shafted.

    Third, just how vigorously have colleges and universities tried to keep costs down? There is instead convincing evidence they’ve consciously, even aggressively, done just the opposite. For example, a recent story (link: http://tinyurl.com/8sm34wk/) in The Atlantic profiles Stephen Trachtenberg, former president of George Washington University, who explains with great brio and charm how he more than doubled the cost of a GWU education (in constant dollars) during his recent tenure, and thereby succeeded in raising the university’s perceived quality. This is the very definition of bubble-building. And Trachtenberg got away with it – he is still, in a way, being lauded for increasing the price of a GWU degree simply for the sake of making it appear more worthwhile, while in fact providing no discernible added value (outside of cosmetic improvements to the university’s physical plant). And just about every other university and college in America has followed right down this path to looming financial ruin.

    I’ll end with a modest proposal. Might we all agree that it would be good for college costs to be reined in just a bit in the coming years? I’ve got a daughter who’ll be college-aged in a few years, so I know I’d certainly like to see more affordable prices. Well then, how about this: instead of the government lending money to students, who then turn it over to colleges to spend, why shouldn’t colleges be trusted with the business of lending to the students they wish to admit? Then, if those students default, the colleges themselves will be stuck with the bad loans, instead of the American taxpayers. This one simple step might focus college administrators’ attention on more carefully managing their institutions’ financial resources, and it would almost certainly bring higher ed costs down.

    I’d be delighted to see other proposals here as well.

    • Paul Weihe says:

      Hey Ross,

      Interesting comments, and thanks for pointing to the Atlantic article. I’d like to respond to several points:

      1. The GWU President compares college education to vodka…all basically the same. He’s wrong, and it’s bizarre that a college President would say something so patently absurd. Does anyone really think that an education at GWU, Central College, and any other institution are all really the same? Yes, you get a Bachelor’s degree, but…there’s certainly a difference.

      2. At non-profit colleges & universities, the uptick in tuition must be spent on SOMETHING, since it’s not paid as dividends to stockholders, etc.. So, let’s consider where the money is going…and a lot of it is going nowhere, it doesn’t exist: the cost of tuition is misleading because of the high discount rate.

      3. As for your suggestion about student loans, I have to say I don’t understand how it would be somehow more cost-efficient. If colleges have to set up loan operations, do background checks, manage paperwork & payments from graduates…well, all that would cost money. Frankly, I already think colleges have too many things distracting from the educational mission as it is.

      • Ross Vermeer '88 says:

        Hi Paul;

        Thanks for your reply.

        I agree that of course not every college and degree program is the same. But college degrees in the USA are, to a great extent, fungible. There’s obviously a top tier of big-name colleges and universities that have national – and perhaps more importantly, international – name recognition and reputation. Central is patently not one of them.

        In fact, there’s little chance Central will ever be able to compete with the ‘name’ colleges and universities. So as Professor Huffman has rightly asked, how does a middling liberal arts college such as Central ‘establish existing quality’? What existing quality at Central distinguishes it from its many competitors such as Luther, Simpson, Wartburg, Coe, Cornell, Northwestern – and on and on, since there are many fine liberal arts colleges in the upper Midwest?

        Central surely has a good reputation in Iowa, and perhaps that reputation extends into the surrounding states to some degree. But my experience after graduating from Central has all been farther afield, and essentially no one outside the upper Midwest has heard of it, unless to confuse it with another institution. It’s a pity, isn’t it, that its name is so generic and unmemorable, and that attempts to change it have all failed (I remember there was a campaign to do so while I was a CUI student). Ah well; c’est la vie!

        For your point 2, I know what you mean about the discount rate. Yet the quoted price still has great power. If a Central student is quoted a price of 40K, and is granted 25K/year in scholarships (hence discounting the ‘real’ price sharply), she must still come up with 15K/year. And if her family has no money, and she must take out loans to cover that sum for four years running, then after she graduates she must pay back, with no chance of relief from bankruptcy, 60K in very real money, plus interest. As a parent, this is what I care about. There is simply no denying that the ‘real’ price of a college degree has increased vastly over the past few decades, over and above the discounting you mention.

        And as for your third point: any additional administrative costs would be as nothing compared to the cost savings that would result from colleges having to risk their own funds instead of simply passing that risk on to students, and hence these days to the taxpayers, while being able to spend these other parties’ money risk-free. Just about everyone is more careful with their own money than they are with other people’s money. Colleges that had to finance their own students’ loans would choose those students more carefully, and they would be far less likely to spend money in ways that did not directly promote their students’ graduation and prospects for future economic productivity. If a liberal arts education is as valuable as its proponents claim, then this scheme should pose no serious problems.

  4. Don Huffman says:

    Ross,
    You’ve raised some valid questions re the cost of “higher education” here and in previous related blogs. Your proposal to turn over financial support to the colleges is interesting, and no doubt would have some influence in costs assuming the colleges/ universities had means of getting the needed financial resources.
    I believe that in fact we have many “higher ed” institutions which should not succeed, though their demise would be difficult for many of them to accept.
    Many colleges, including some state supported universities and community colleges admit students who are not qualified or prepared for
    higher ed academics. Many former liberal arts colleges have also catered to off-campus programs and correspondence courses which are more profitable, but often are not of great academic rigor and certainly not “relational” in their approach.
    There have been some failures in past years, but I suspect if colleges/ universities were not admitting unprepared/incapable applicants each year, and if academic rigor were present, there would be many more “failures” or changes in admissions policies of such institutions.
    Apparently some of these institutions feel that greater numbers of “warm bodies” admitted or retained will insure more financial aid from states or other supporters, and apparently this is still the case.
    George Washington U. apparently feels that they gained stature by increasing costs, but this has not always been the case elsewhere. How does one establish existing quality for a college given the misleading advertising and other claims of value?
    My guess is that the perceived distinction and performance of graduates is perhaps the best answer for excellent liberal arts colleges/ programs, though this is often difficult to demonstrate.
    Meanwhile, we should do everything possible to guarantee that Central is meeting the academic level most of us have experienced in the past 75 years or more.

  5. Bill Albrecht '76 says:

    One can use the Consumer Price Index (CPI), the Higher Education Price Index (HEPI), or the Higher Education Cost Adjustment (HECA) as justification to argue either for or against the current costs associated with an education at Central.

    With unemployment and underemployment for all new college graduates nationwide hovering in excess of 50%; gone are the days, I think, where an engineering degree from MIT, a business degree from Harvard, or a chemistry degree from U of Cal – Berkley carries significantly more added value. And let’s be honest, in terms of name recognition, Central was never in that league.

    Traditional mortar and brick schools will always have a higher associated cost to provide an education then schools only offering online degrees. Though many online universities have costs per credit hour not significantly lower than traditional universities, one would expect the costs of online universities will decline as they continue to proliferate.

    As alumni, I would guess few of us would argue that the intangibles at Central; the total “Central College experience” if you will, was not worth the added costs whether it was us or our parents who had to pay for it.

    The cost of higher education is no longer affordable for many people and for those who it is; the cost/value ratio is looked at harder. I think the task ahead for Central takes either one of three paths or some combination:

    a.) Continue to appeal to alumni who can attach some type of monetary value to their “feel good” experiences they had at Central so they encourage their children to attend regardless of cost and also appeal to alumni that they continue to support it financially through gifts.
    b.) Demonstrate that an education from Central better prepares the student for the work place or the world ahead of them compared to an education from other institutions. I don’t know how that could be meaningfully demonstrated.
    c.) Investigate ways to either reduce or hold the cost of education at Central while not compromising the “Central College experience”

    Like the state of the current national presidential race, both candidates seem to know what the problem is, but neither candidate seems to have a definitive, specific plan moving forward. Hopefully in the future we can look forward to seeing President Putnam and the Board of Trustees outline what specifically is Central’s vision for the future, how they realistically intend to bring that vision to fruition, and how they will track it’s effectiveness.

  6. Chris says:

    This is an interesting debate, and it draws out some much needed thoughts on what the principles of “liberal arts” education is.

    Ross is right about the cost needing to come down. Small liberal arts colleges across the country are facing declining admission numbers. Those that are succeeding are those who have turned to new markets – the online course. The economic downturn has also forced students to think more pragmatically when deciding what type of higher education to pursue. I can’t find my sources on this, but in a recent survey that asked “why did you pick your major,” students overwhelmingly are saying “to get a good job.” Previously the highest response was “because it interests me.”

    All this doesn’t bode well for the liberal arts. Why study history, humanities, philosophy, and the arts, if it isn’t profitable?

    I see a great danger to learning here. The idea of being “well rounded” is being eroded; perhaps because we have lost sight of the value of higher thinking. Is profit the highest ideal of the institution? Are we creating a better society by catering to the idea of specialization, or do we lose something in the disregarding of a liberal education?

  7. Ed Ver Hoef '54 says:

    I don’t really know what a year at Central currently costs (apart from transportation and spending money, etc.). When I was a student (1950 – 54), tuition, room and board (if I remember correctly) was on the order of $600 per year). Transportation and spending money probably added another I had a work contract with Central to operate and maintain the amplifiers for the basket ball and football home games, to run the roller skating in the gym prior to and after the basket ball season, and for running the school’s radio station in return for which I received $200 per year. I was able to earn approximately $100 in summer jobs each year. This left me with a deficit of $300 per year. I offset part of that amount by driving a school bus for Pella Public Schools each morning and working for De Jong Florists each afternoon and on Saturdays. Nonetheless, I graduated indebted to my parents for well over $1000 dollars which I paid back after spending two years as a guest of the US Army and got a job.

    Was it worth all this effort? I think so, especially considering that Central was a residence school and therefor these costs included room and board. Classes were QUITE small. Once I got beyond the freshman year, the biggest class I had in physics was three students and in several I was THE student. In math (my other major), several of my classes were on the order of 10 students. Where can you get semi-tutoring like that? It was quite a contrast when I did my Masters work at De Paul University night school where the average class size was usually on the order of 30 students.

    Let me mention one other point. In my career I interviewed many applicants who were graduates of technical universities. One can’t paint them all with the same brush but, in my opinion, a large proportion of the grads from technical colleges had appallingly poor communication abilities, both written and oral, if you talked with them about anything outside their area of specialty. They were very qualified technically but outside their specialty area, they were WOEFULLY deficient in communication skills, both written and oral.

  8. Brian Peterson says:

    This is truly interesting…

    Ed and Chris raise some interesting points, and I’d like to try to synthesize them with some of my own.

    Why are “career preparation” and “liberal arts education” considered mutually exclusive outcomes? Can’t a college provide both? Imagine, if you will, two funnels superimposed over each other (but in opposite directions). A student begins at the fat end of “broad-based education” funnel, and at the narrow end of “career prep” funnel. As a student progresses through the funnels, their choice of major and educational emphasis reduces the width of their education funnel, while the career prep funnel begins to expand. In the end, the student has gone through both funnels at the same time, but the developmental emphasis on each was very different at any point in time. Not only are students prepared for a particular career/job/graduate school/service work, but they have received skills that will continue to benefit them long after they have left that first job (I’ve referred to liberal arts as “preparation for that which cannot be prepared for”).

    Ed wants students to have better oral and written communication skills: that’s something we do, and do well. Our alumni tell us that, while their major may have gotten them in the door of a particular job, it was everything else they did at Central that gave them advancement: proficiency in language (foreign, and yes, English), study abroad in a different culture, understanding of minority issues, etc. All of these things come not only from the liberal arts education we provide, but also from the residential living experience students have while they are here.

    We cannot subdivide what we do at Central into disparate units. In some respect, that’s what online education does…take these 40 academic units, and you’re done. How can one separate the benefits of study abroad and taking classes, when they are done simultaneously?

    BJP