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The High Cost of Knowledge

Niraj Choksi runs the numbers and finds something interesting: Education costs have been rising even faster than medical costs:


Per capita spending on health care is more than $7,000. It's nowhere near as high in education, and so this is less of a problem. But it's still interesting. More broadly, I'd like to know what experts think is driving the numbers. Is this hiding a relatively benign story, in which a lot more people are going to college, or graduate school, or even just choosing a private school? Is it just the cost of human labor rising quickly? Or is it more problematic? Or both?

By Ezra Klein  |  August 24, 2009; 6:02 PM ET
Categories:  Charts and Graphs , Education  
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Or does the federal government play a part in increasing education costs by offering subsidized student loans, grants, and generous compensation to the unionized work foce, etc. Just like the gov't encouraged home ownership thru Fannie and Freddie, they encourage post-secondary education.

Would be interesting to see if an increasing % of tuition is paid by third parties??

Posted by: mbp3 | August 24, 2009 6:15 PM | Report abuse

In one day you've hit on both of the necessary parts of democracy: education and virtue. Virtue is the much more difficult concept.

As you state in your previous message, "We have a system dependent on consensus but we have a country characterized by polarization. One of the two has to change. And the problems we face won't wait until we figure it out." And your citation ("'But they have been overwhelmed by nihilists and hypocrites more interested in destroying the opposition and gaining power than in the public weal.'") underscores the point.

For my part, a person of public virtue might [for example] adore France, enjoy the company of prostitutes, and even hold slaves... provided that he works -- actually works -- for the public good. The current health insurance reform efforts provides an opportunity for legislators to demonstrate such public virtue and I hold hope that they will do so.

Our education cost problems can be remedied, but not as long as funding is spent in a futile attempt to educate those who simply do not wish to be educated: as a practical matter, there are teachers cannot do, even if provided with an unlimited budget. We can try to cultivate education by demonstrating that it's needed for all members of a viable society; sadly, though, there comes a point where one has to stop wasting resources on those who do not lust for learning.

Posted by: rmgregory | August 24, 2009 6:29 PM | Report abuse

Politically, when dealing with state colleges and universities, it's easier to raise tuition than to raise taxes. It's certainly true in California.

The total spent for childcare also rises as more families, deciding they need two wage earners to survive, spend more money on childcare.

Of course, it would also help our understanding of this graph if we knew more about how the cost of education used in this graph was measured. How much is public, how much is private? What costs does it include and where did the information come from?

Posted by: friscokid | August 24, 2009 7:05 PM | Report abuse

I think there are several factors

(1) professionals' salaries in a number of fields -- law, some hard sciences, mathy disciplines where you can go into wall street -- have gone up quickly.
(2) Universities and schools are doing more stuff.
(3) Universities have started hiking tuition as away of ensuring their applicant pool is more upper middle class and therefore has more parents that can donate.

Combine this with Baumol's Cost Disease and there you go.

Posted by: NicholasBeaudrot | August 24, 2009 7:09 PM | Report abuse

The prices of different goods and services inflate at different rates.

Posted by: bluegrass1 | August 24, 2009 7:26 PM | Report abuse

Keep in mind that the healthcare and education of today are not the same good as the healthcare and education of 1980, whereas the basket of goods used to calculate CPI ostensibly is.

Posted by: bluegrass1 | August 24, 2009 7:27 PM | Report abuse

I've been wondering about exactly this question for years, ever since the days when I read that Bennington College had breached the $20,000/year barrier (and that's a while ago).

As an example, the college (a well-regarded school in the Twin Cities) I attended for a year and a half starting in '72-'73 cost about $3,500 per year then. Now ('09-'10 year) tuition plus fees plus room and board is $47,564. And to think I left this college for a reasonably well-regarded state school partly because I couldn't see putting my Dad through writing such big checks every year (and also because the atmosphere was, well, kind of snobby). Were I applying for college now in the same situation (father making a comfortable but not extravagant income), there's no way I could justify applying to a private school or to an out-of-state state university. University of Michigan, for example, costs $25,000-30,000 for an out-of-state student, depending on school and living situation.

Seems to me private schools are pricing themselves to ensure their student bodies consist of primarily children of the upper class (at least one parent with Senior VP or higher behind their names) with a scattering of poor kids (of any race - I don't think this is a racial thing) on scholarship to make themselves feel good. Middle class (or even upper-middle class) kids won't be able to afford it or get any meaningful financial aid.

Posted by: donkensler | August 24, 2009 8:14 PM | Report abuse

I think when you pay tuition, what you are buying isn't access to academic expertise (which is pretty commodified at the undergraduate level), so much as access to the networking effects of spending four or five formative years with ambitious, intelligent, future-professionals. After all, the reason that people want to get into Yale isn't because Yale has awesome teachers or facilities--it's because you're guaranteed to become lifelong friends with future Senators and CEOs. And it is these connections that give you the opportunities necessary to make it big in politics or business or whatever.

I imagine that with the onset of the information age, these personal connections are more important than ever--after all, in a world of many similar resumes, having that one contact that gets you an interview is often the crucial differentiating factor that lands you the job. And as more of the workforce turns to these kinds of jobs, more universities are serving this social networking function. They're prestige factories.

In any case, this is all just a theory--but I wonder how you could test it. One thing would be to check the increase in tuitions for universities of different levels of prestige (as determined by, oh, say, US News and WR rank). I bet the higher up the list you go, the larger the increase in tuition; and I bet the lowest increase has been in community colleges or vocational schools. This would be consistent with the theory that "prestige"--the networking effects of going to a college--is the scarce resource that is driving up costs.

Posted by: thedavidmo | August 24, 2009 8:22 PM | Report abuse

Oops--to this

"...the networking effects of spending four or five formative years with ambitious, intelligent, future-professionals."

I probably should have added in bold letters, "privileged" and "from-a-rich-or-influential-family".

Posted by: thedavidmo | August 24, 2009 8:28 PM | Report abuse

I went to a state university in California for about $250/year, full time, about 22 years ago.

Now it costs I think between 6 and 8 K.
This is a direct result of loss of state support for higher ed in California. There are also plunging enrollment stats for working class and minority youth.

Posted by: mminka | August 24, 2009 8:40 PM | Report abuse

This chart is interesting and it is ‘more problematic.’ Colleges and universities have been loosing federal and state funds for some time now. One way of compensating for the lack of funding is to raise tuition, thus increasing the cost. However, over at least the last decade, schools have also been decentralizing their administration. Individual departments and programs increased staffing because ‘central’ was not going to provide the support. The idea behind decentralizing was/is tied to market competition: departments/programs would compete against each other for funding and students and those that couldn’t compete would be weeded out.

Harvard is a good example of this process. Department and program administration and staff increased massively. When it looked like the money was never going to run out, decentralization seemed like a good thing. Tuition would increase but the majority of the costs were offset by scholarships, loans, and grants. High tuition was perceived as an indicator of high quality education.

There is a lot that needs unpacking regarding the crisis in higher education: private student loans bundled in ways similar to mortgages, schools building facilities to lure students that have little or nothing to do with their education, schools selling the idea that a degree will increase the money one can earn rather than the virtues of an educated citizenry, over-reliance on adjunct rather than full faculty, etc.

However, now the important thing is that while the bubbles and finacialization were all the rage, schools were investing their endowments in many of the same ways as other organizations that have lost so much recently. Some schools have lost more than 50% of their endowments. As schools try to rein in the decentralization, staff are being cut to meet budget needs. The ability to offset tuition costs are mostly gone. And tuition is again increasing, not as a marker of ‘better quality,’ but because schools are in need of the money.

Of course, the problems facing higher education (not to mention education generally) are not treated with the same degree of importance as the war, health care, the environment, or banking and Wall Street. Yet the fear and lies being promoted by the Republicans and the Right cannot be simply fixed by Obama giving speeches, the media calling BS, and Democrats explaining the policies. We also need a population that balances the rational and the reasonable, that thinks critically and responsibly, i.e. we need an educated population.

Posted by: derikbru | August 24, 2009 9:08 PM | Report abuse

mbp3: I think you hit it on the head. We as a society have deemed that *everyone* should be going to college - and our government has decided they will subsidize it.
It's the graduates who suffer - I mean, for an UNDERGRAD degree, some of them take out $100k loans. It's a little crazy.
Realistically, the idea that EVERYONE should go to college is not a good idea. We have cultivated that in our society - so to differentiate people, companies simply say: college degree required for so many positions that one should not be needed.
Yes, education is a great way to get ahead, to better ones self, etc, but there is not one way to be educated (and the whole idea that everyone who goes to the ivies are so privileged is crazy, but I digress).
Have any of you been back to college campuses lately? It's absurd the amount of money they have spent on those campuses - the luxurious dorms, the student unions, etc. I don't think those tuition increases are going to education.

Posted by: atlmom1234 | August 24, 2009 9:10 PM | Report abuse

I've lived around Universities my entire life. From my experience the extra cash goes into several things:

1) New buildings. U of M Ann Arbor was constantly building things while I was there. Everything was state-of-the-art except the Dorms. We still got one room, and a communal bathroom. Nonetheless buildings were always being upgraded.

I've lived 50 ft from Wayne State University Campus in Detroit my entire life. They're also always expanding.

2) Benefits for employees. I've not seen huge salaries among professors or administrative staff. What they do get is great benefits, which they never cut. So when their health costs increase their spending increases.

3) State budget cuts always hit higher education. It's a stealth tax increase on anyone who has kids, but it's a tax increase that's off-budget, and can be blamed on other people.

Posted by: NickBenjamin | August 24, 2009 9:17 PM | Report abuse

"It's the graduates who suffer"

Well, it's certainly the case that postgraduate study has become a requirement for a wide range of professional jobs -- you can argue whether that's through the devaluing of the undergraduate degree -- and the subsidies that make in-state public universities affordable for a bachelor's don't really apply to graduate study. How much are those masters' and doctorates costing these days?

Posted by: pseudonymousinnc | August 24, 2009 9:30 PM | Report abuse

It's another industry, like healthcare, where the barriers to entry are so high that the market can't work properly. Sad because parents will make any sacrifice to send their kids to college, and some private schools are profiting from that.

Public schools, to their credit, have helped hold prices down. Which just proves the public option can work in health care.

Posted by: bmull | August 24, 2009 11:37 PM | Report abuse

mbull: "It's another industry, like healthcare, where the barriers to entry are so high that the market can't work properly."

It is like health care, but I don't think it's because of barriers to entry or the market not working properly. It's because market competition does not always lead to higher quality and lower prices.

Schools are competing for the same professors and students, which forces prices up. They bid for the same professors, which raises their salaries and adds costs. When one school builds an expensive new science lab, the others have to do so as well to keep up. Student lodging and food are way ahead of where they were 20 or 30 years ago; they're not expected to suffer anymore. So it shouldn't be a surprise that education costs increase faster than inflation.

Having many institutions with the same business model can force prices up, not down. A paradigm shift where resources are delivered in a different way can reduce costs. In education, online delivery for some aspects of the experience may eventually have that effect. In health care, costs might be reduced by farming out tasks to less expensive providers (RNs) with the assistance of technology that are now done by more expensive doctors.

But in both systems, those who are making money will have little incentive to change the paradigm to make it less expensive to consumers. When the Invisible Hand leads to increased prices, it will take a guiding hand to institute reforms.

Posted by: dasimon | August 25, 2009 12:46 AM | Report abuse

"The prices of different goods and services inflate at different rates"

Quite. But we expect services to have a higher inflation rate than manufactured goods.

Look up "Baumol's Cost Disease" either in wikipedia or at John Quiggin's blog.

Posted by: timworstall | August 25, 2009 4:51 AM | Report abuse

At least there has been innovation in health care to account for the increase.

Posted by: buster4 | August 25, 2009 7:47 AM | Report abuse

pseudo: I read an article recently (ny times? dont' remember) about how professors/educators are not being fair to their students - how they graduate far more phDs in psychology, english, whatever than there is demand for - and those people can hardly earn a living, let alone pay those thousands (tens of thousands?) back in loans.
(not so for the sciences/engineers, etc).

Posted by: atlmom1234 | August 25, 2009 8:43 AM | Report abuse

atlmom: Nope, scientists and engineers too.

I work at a college (physics professor). When I was looking for my first academic job out of graduate school, it took two years just to get an interview. The average number of applicants for each job I applied for was around 300. The record (Amherst College) was over 900. Back then you would get actual rejection letters and they always marveled over the number of applicants.

I think what you're seeing here is mostly part and parcel with rising health care costs, rising costs for custom furniture, rising costs for everything that is made by hand because education is essentially a handicraft industry. It requires a direct interaction between a teacher and a pupil to effect conceptual change.

There are, however, several complicating factors. For one, diagnosing an illness or building a table can be considerable speeded up through the use of technology. Conceptual change is limited by the ability of the human brain to change the way it thinks. There are techniques to make this more likely, but not any to make it a whole lot faster.

Working in parallel doesn't help. A 300 person lecture is not the equivalent of 10 30-person classes. There are things you can do in one environment that you cannot do in the other (such as interact personally with each student, give non-multiple choice exams, or complex projects). There are no economies of scale.

Universities have large fixed costs in the form of buildings, libraries, and the utilities to keep them all going. Libraries in particular are stupidly expensive. To hold down tuition (and yes they are doing their best to do so), all colleges now demand of their faculty significant amounts of externally funded research or scholarly activity. However, this necessarily involves release time from classes, which in turn entails the hiring of additional faculty, mostly adjuncts. Or the doubling up of classes. In the long run, it is somewhat counterproductive because the more release time you have, the more likely the department can argue for the hiring of additional tenure track faculty.

All these factors contribute to the economics of higher education, but are not issues at all in any other industry.

Posted by: pj_camp | August 25, 2009 9:40 AM | Report abuse

Uh, but the CPI only measures out of pocket costs - so in the case of health care we're talking co-pays, deductibles, etc. Not sure if the health insurance CPI is included here, but that'd also be out-of-pocket only. So any increase in government paying is missed here, for instance. Same story for education - there's list price and there's scholarships and 'discounts' and all of that which the CPI doesn't well cover (by design). And, of course, government payments (esp. toward universities) - if the gov't 'subsidy rate' to public universities drops, the CPI would rise. Sound like the 1980s to anyone else?
Not sure how persuasive this is.

Posted by: damnpost1 | August 25, 2009 10:31 AM | Report abuse

The overall inflation rate is kept down by outsourcing labor to countries with lower wages. Universities hire largely college educated US residents. I wonder how the increase in education costs compares with the increase in wages for this class of workers.

Posted by: jbw4 | August 25, 2009 12:30 PM | Report abuse

" how they graduate far more phDs in psychology, english, whatever than there is demand for - and those people can hardly earn a living, let alone pay those thousands (tens of thousands?"

Psychology's especially problematic: it can run to over $100k to get you a masters' and doctorate, but nobody gets told at the outset that most states get by on masters-level public mental health staff, with only a few doctoral hires. Even for those hires, you're not likely to get yourself to a six-figure salary, which the ready reckoners regard as essential to pay off that kind of loan without spending another decade on ramen.

So if you want to work in public mental health, you're basically never going to pay back the full amount of your loan, and will instead end up competing for the few state and federal loan forgiveness grants (for people working in hard-to-fill jobs) while on the capped repayment plan. The 10-year public service forgiveness program introduced by Congress in 2007 may have an impact, but who knows whether that'll be around in 2017.

Posted by: pseudonymousinnc | August 25, 2009 1:49 PM | Report abuse

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