Where Does the Tuition Money Go?

George Leef of the John William Pope Center for Higher Education Policy discusses Charles Murray’s recent book, which I reviewed here. Mr. Leef ends with a sentence that raises an interesting question - where does all the bloated expenditure on higher education end up?

For decades, America’s higher education establishment has been riding high. It succeeded in persuading most of the populace that more education—that is, formal education—was an unalloyed benefit for both the individual and the nation. That may have been true decades ago, but it no longer is. Instead of trying to preserve the notion that college is good for almost everyone, the education establishment should face the reality that many young Americans would be better off if they didn’t go to college right after high school.

Economists refer to the return going to an asset’s owner because of the asset’s permanent scarcity as a rent. The term derives from rent to land, which was seen to be the most meaningfully finite resource in the days of Smith and Ricardo, but can apply to any asset whose lack of good substitutes, including from competition from new entry, generates high returns for its owner. This can accrue to the owner of an unusually good voice, an unusually attractive face, the ability to write unusually elegant economic models, the ability to obtain special government privileges (whence the term “rent-seeking”), and so on.

Higher education ought to generate substantial rents. State universities are heavily subsidized, so that the cost to the student is considerably less than the expenditure on resources made by the school. This should generate ample opportunity for faculty/administration chiseling. Private and, to a lesser extent, state universities are able to price-discriminate by calibrating financial aid. After demanding, and getting, a slew of financial information from potential students, schools calculate their willingness to pay, and give them financial aid for the rest, which is just a convoluted way of charging each student a different price. By doing this, the school extracts most of the gains from trade between school and student. Competition through entry is possible, and does exist through University of Phoenix-type arrangements, but heavily subsidized first movers are difficult to compete against.

But if universities generate such tremendous rents, where do they go? Administrators are arguably very well-paid relative to the opportunity cost of their time. (If an English professor becomes a university president, what is his next-best alternative?) Some professors, especially science and engineering stars at research universities, and professors in business colleges (who tend to have better private-sector alternatives) are paid pretty well, but many, especially in the humanities are not (as they would be the first to tell you).

I think that much of the rent is taken not as money, but as leisure and vanity indulgence. The faculty member who retires (often at a relatively young age), having brought the same crumpled lecture notes into class for 20 years, is legendary. Few middle managers in the private sector could get away with such a lack of dedication to continuing education. Many faculty take a huge chunk of the year off – summer and Christmas season in particular. Compared to private-sector managers, they have a large amount of time available even during the workweek, often not having to be on campus unless they are teaching. Faculty and administrators alike are tremendously creative in creating fads (“critical thinking,” “civic engagement,” “assessment,” etc.) to justify conferences, which are often held in nice hotels in pleasant cities and for which the university often picks up the tab. The tenure system itself contributes to this leisure rent, by making it almost impossible to dismiss faculty for anything other than gross misconduct outside the classroom. It is an artifact of earlier times, but is retained by the sort of uncompetitive system Messrs. Leef and Murray describe. (I say this as someone with tenure myself.) Faculty are not under threat for being fired for what they say, which is the nominal justification for tenure. If anything, tenure serves to strengthen the ideological cartel of the existing faculty, another form of noncompetitive rent – the ability to propagandize students with little competition.

Administrators too have ways to vent the rents, most famously through the indulgence of the edifice complex, the construction of probably unnecessary buildings with the current administration’s names suitably immortalized in stone. Other methods undoubtedly exist. These methods, in combination with the grossly inefficient way in which faculty structure their work schedules, raise the cost of education, in ways a supermarket could not get away with.

College work ain’t digging ditches. It is rather nice work if you can get it, which is why the competition for faculty positions, particularly in the humanities, is so high despite the low pay. (If sociology professors are underpaid, why do hundreds of people often apply for a single opening at a decent university?) The rents from the tremendous inefficiency of the higher-education market are often not taken as cash, but that does not make them small.