Playing the Dunce

This morning I heard President Obama call for universities to lower their tuition rates so that “everybody in America can go to college”.

I am virtually certain that the President is not stupid enough to think that if tuition rates fell to zero, there would magically be enough room in the colleges for everybody in America. So I’ve got to believe that he’s purposely saying stupid things in order to appeal to stupid voters — the sort of voters, in other words, who probably don’t belong in college.

To believe what the President wants you to believe, you’d have to be not just stupid but badly misinformed. At the University where I teach, we do not lack for applicants. The reason we don’t have more students is not that they can’t afford us; it’s that we don’t have room for them.

The President’s proposal would make sense if universties were ordinary monopolists, artificially restricting enrollments in order to keep prices high. But universities, insofar as they are monopolists, are by no means ordinary — they are price-discriminating monopolists — and extraordinarily effective ones at that.

Every year, I tell my Principles students with confidence that “You and the student on your right are probably not paying the same tuition rate”. Universities have detailed information on students’ academic records (which tells them where else those students are likely to be admitted) and detailed information on student’s (and their family’s) financial statuses. They exploit this information to tailor individual aid packages.

That’s important here, because, unlike an ordinary monopolist, a good price discriminator doesn’t leave seats in the classroom unfilled just to keep prices high. Instead, the price discriminator fills empty seats at bargain prices while still keeping prices high for those who are willing to pay full fare.

The implication, then, is that we’re already operating at full capacity (in the sense that we’ve already got as many students as we want). Given that, you can’t send more people to college without creating more capacity, and lowering prices is not a recipe for creating more capacity.

It has always struck me as unfortunate that there’s only one Hearst Castle. If only they’d lower the price, then everybody could have one. If a President of the United States made that argument, you’d be entitled to suspect that he’s insincere — and to wonder what he expects to gain by playing the dunce.

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85 Responses to “Playing the Dunce”


  1. 1 1 Thomas

    I think you might be misinterpreting the intention of his statement, but please correct me if I’m wrong. I think it can be interpreted much more as a non-stupid statement if rephrased as: lowering the tuition fees so that people are awarded places at college on merit, rather than finance, enabling all people to have the chance to go to college. The difference is between everybody actually going to college and everybody having a realistic opportunity to go to college. Some fees are prohibitively expensive, preventing perfectly bright and able students from filling places that they would do well in.

  2. 2 2 Mike H

    “To believe what the President wants you to believe, you’d have to be not just stupid but badly misinformed”

    I would gently suggest that someone thinks that universities are ordinary monopolists, when in fact they are price discriminating monopolists, while misinformed, is not necessarily stupid…

    Good post :-)

    I’m wondering : is Obama proposing government funding programmes to create more university places?

  3. 3 3 Ron

    Yet, despite all of this, I note that California, which is famous
    for heavily subsidized tuition, has twice the number of students
    than the next highest enrolment state.[1] Maybe there are some other
    factors in play, too, but it seems to make at least a cursory case
    for price sensitivity.

    [1] Source: Degree-Granting Institutions, Number and Enrollment by State: 2007
    http://www.census.gov/compendia/statab/2012/tables/12s0280.pdf

  4. 4 4 ron

    As explained in this excellent blog post: http://ordinary-gentlemen.com/blog/2012/08/why-politicians-lie/ politicians will inevitably say things like this, because they need to in order to keep their jobs.

  5. 5 5 Ken B

    This isn’t an appeal to stupid voters. It’s an appeal to the amour propre of smart voters, those with advanced degrees or in academic settings in particular. See how good and caring we are, we want everyone to have a chance to be like us.

  6. 6 6 Steve Landsburg

    Mike H:

    I would gently suggest that someone thinks that universities are ordinary monopolists, when in fact they are price discriminating monopolists, while misinformed, is not necessarily stupid…

    Touche. But in point of fact, I’ve never heard Obama mention monopoly at all in this context. If he has no story about ordinary monopoly power, the only remaining mechanism is magic.

  7. 7 7 Mike H

    Or perhaps the statement is bereft of both economics and context.

    I’m also puzzled by the idea that universities in the USA form any kind of monopoly. Do they?

  8. 8 8 Mike H

    And I’m still wondering what either party’s policy is on government funding of university places. That would bring tuition down and create new places, potentially at least. Is either major party talking about increasing government funding for education?

  9. 9 9 Dave

    Ron – your post (number 4) was phenomenal.

  10. 10 10 dave smith

    @Thomas #1…I don’t know what Obama meant, but I would bet the farm he did not mean what you think he did.

  11. 11 11 nobody.really

    Nice points about perfect price discrimination. Ponder: What should an optimal tax look like, assuming government could price discriminate perfectly?

    This morning I heard President Obama call for universities to lower their tuition rates so that “everybody in America can go to college”.

    Does anyone have the quote? A source?

  12. 12 12 RPLong

    Two points:

    1 – Ken B is 100% correct.

    2 – Everybody *can* go to college today, free of charge. It’s called the internet. But, oops, reading and self-study requires personal responsibility, and the government freaks out at such things.

  13. 13 13 Ken B

    @RPLong: Words to live by! :)

  14. 14 14 nobody.really

    I think you might be misinterpreting the intention of his statement, but please correct me if I’m wrong. I think it can be interpreted much more as a non-stupid statement if rephrased as: lowering the tuition fees so that people are awarded places at college on merit, rather than finance, enabling all people to have the chance to go to college. The difference is between everybody actually going to college and everybody having a realistic opportunity to go to college. Some fees are prohibitively expensive, preventing perfectly bright and able students from filling places that they would do well in.

    @Thomas #1…I don’t know what Obama meant, but I would bet the farm he did not mean what you think he did.

    Ha! I’m intrigued at how differently we read things.

    To the contrary, I regarded Thomas’s statement as so obvious as to scarcely be worth saying. (No offense, Thomas.) For what it’s worth, Politifact assembled 18 Obama statements about “what Americans should do after graduating from high school.” These statements end up talking about making post-secondary education more affordable. So Thomas’s speculative interpretation seems like no big stretch to me.

    Indeed, after years of hearing Obama drone on about the need to make post-secondary education more affordable, I’m baffled that anyone would express skepticism that Obama might, once again, make a speech about making college more affordable.

    Which doesn’t mean that Obama couldn’t have adopted a different theme in this latest speech. But it would be nice to see/hear the speech in question. No citations, anyone?

  15. 15 15 nobody.really

    Everybody *can* go to college today, free of charge. It’s called the internet. But, oops, reading and self-study requires personal responsibility, and the government freaks out at such things.

    1. To be sure, reading and self-study have been available long before the internet – and long before any current government. For whatever reasons, people have nevertheless felt the need to attend schools instead (or in addition). Perhaps all these people have been fools. Or perhaps they know something about the circumstances that are most conducive to learning.

    2. Alternatively (or in addition), perhaps people have not been solely interested in education, but also in credentialization. Please advise where I can earn a Bachelor of Arts on the web for free.

    3. Alternatively (or in addition), perhaps people have not been solely interested in education and credentials, but also status. I suspect it may be very difficult to gain the status of an undergraduate degree from MIT simply by reading all the MIT materials online – no matter how good those materials are. And I very much doubt that the social connections are comparable.

    Which doesn’t mean that we shouldn’t move in that direction. My own kids are approaching college age. Should I advise them to forego college, move into the basement, and take all the MIT courses and accept whatever credentials MIT will offer in return? I suspect that my older kid would thrive on that. But we’d need to gamble that OTHERS will give the same regard to this type of education as a more traditional education.

    But why should I speculate? Surely there are many people on this blog with college-aged kids. Could I hear from all of those that advised their own kids to forgo traditional higher education and simply pursue free education on the internet instead? I’m curious to know how that has turned out.

  16. 16 16 RPLong

    nobody.really – In your pedantics, you have missed my point.

    If *everyone* has credentials, the credentials are meaningless (observe any southern European nation for real-world evidence of this). If *everyone* has “status” then… er, actually, everyone *can’t* have status because status is something that not everyone can have _by_definition_.

    It’s true that self-study has always been available, but never before has *so much* information been available *for absolutely free, not even for the cost of the book or the library card*.

    If you’re not interested in credentials or status, today is a golden age, where you can learn anything you want for the cost of an internet subscription. People like me exploit this as far as we possibly can. I’ve taught myself how to build guitar amplifiers and given myself knowledge of economics and mathematics that 30 years ago I simply would *have* to have paid someone to confer upon me.

    And since it is obvious that neither credentials nor status can be distributed equally without completely undermining their very essence, I feel my point is pretty strong here. If all you care about is knowledge, then you can get it in spades; if all you want is a piece of paper and a pat on the back, then providing education in unlimited supply will never accomplish this.

  17. 17 17 Tom

    It’s very difficult to evaluate what Obama meant without more information about what he actually said.

  18. 18 18 Bearce

    I have to agree strongly with this one, even though Dr. Landsburg and I disagree on what politicians we like.

    Ron’s post is also notable. I’d like to point out, being a student in California myself, one of the reasons you get a much higher enrollment rate is you get a lot of out of state/country students coming over here to fill enrollment seats due to low tuition rates. Also, CA junior colleges are the cheapest in the nation. This is good in the sense that it allows many the opportunity to get access to a good and affordable education, the con being that because it’s so cheap that you get a lot of deadbeats who hoard those spots.

  19. 19 19 TravisA

    I think Obama knows that you would need to expand supply in some way in order for prices to come down. The ordinary voter focuses on prices thus it would be much less felicitous to say, “We need to expand educational supply (through subsidies, accreditation easing, etc) so that prices for the final consumer will fall.”

  20. 20 20 Al V.

    Adding to nobody.really’s comments, I think there are three challenges that are being attached to each other here to support this argument:
    1. The unemployment rate is much lower for people with college degrees than those without.
    2. Business generally uses a college degree as a simple test to assess job candidates’ qualifications. This is a valid test, in that the average person with a college degree in say, computer science, knows more about computer science than the average high school graduate.
    3. College degrees are expensive, and degrees that are more expensive are also more valuable in the marketplace.

    Each of these points is legitimate, but Obama (and many other people) draws the conclusion that lowering college tuition will increase employment. The problem is in connecting 1 to 2 and 2 to 3. Steve and others have pointed out that lowering tuition won’t necessicarily cause MIT or Caltech to graduate more PhDs in Computer Science. nobody.really points out that attending college is a more expensive way to gain knowledge than getting that knowledge on your own. It’s just that businesses are lazy, and using a college degree as a filtering mechanism is easier and cheaper than actually testing a candidates subject area knowledge in detail.

    And finally, handing out more college degrees doesn’t mean more people will be qualified for the jobs that remain unfilled. My experience has been that many, many people graduating from college today have learned details in the areas of their degrees, but haven’t learned to think. And graduating more people won’t do anything about that problem.

  21. 21 21 David Wallin

    And, the universities have become even bigger price discriminators in recent years. They have realized they have been leaving money on the table—some can and would pay more. For the price-discriminating monopolist, the “fix” leads to higher profits. But, with a not-for-profit orientation, my university (along with others) has made a concerted effort to increase tuition faster than costs increase so as to allow them to offer more discounts (to price discriminate even further). For example, one year saw a 6% tuition increase with half of it going to financial aid.

  22. 22 22 Al V.

    @David Wallin, Planet Money on NPR did a program on this earlier this year. What they found matches perfectly to your position. Maximum tuition rates are increasing rapidly, but average tuition is increasing slowly, if at all. Planet Money interviewed two students at a private PA institution. One had low grades and test scores, but could afford to pay the full tuition. The other had excellent grades and scores, and was paying only about 40% of full tuition.

    And the most desirable candidates can go for next to nothing. A top candidate who would be accepted to Harvard or Princeton can get a full ride at a small private university. Several years ago, I spoke with the father of a girl who was accepted to Princeton, but was attending U. of Miami at no cost.

  23. 23 23 iceman

    Ron #3 & Bearce: I dunno, CA also has twice the population of every state but one so it looks to me like the enrollment #s line up pretty tightly (TX lags a little for reasons we could speculate on, but even including them the correlation of the top 10 is 97%). So if CA is attracting students *away* from other states does that mean the subsidization is crowding out their own?

    I agree ‘signaling’ by definition derives its value from scarcity. You used to ‘need’ a BA, now it’s an MBA…sounds like an arms race. Seriously, rather than subsidize higher ed would it be better to focus on *preparing* people for it at the K-12 level? It seems in any sane pricing environment this would then boil down to an investment decision where people who truly believe they can benefit from a tech or liberal arts degree can borrow against the incremental future earnings? (Although Milton Friedman did say the more efficient vehicle is an equity investment which isn’t practicable).

    For better or worse, this seems to be a case where the administration’s rhetoric doesn’t match its actions, at least vis-à-vis funding for for-profit colleges – the one area where we have seen a significant increase in supply. So it seems at best he’s only saying everyone should get to go to a non-profit college. Of course that also plays better to his base.

  24. 24 24 Matthew

    For everyone out there who was wondering what Obama would look like in a photo shopped dunce cap, we now know answer’s good. Damn good.

  25. 25 25 Bob_Mac

    There’s also another economic argument here I think.

    Isn’t the real question not affordability, but access to loans? After all, if everybody has access to loans, then the only question that remains is whether or not a college education is a worthwhile investment.

    If it’s “too expensive” and one has access to loans, then the truth is that you’ve made the decision that it is a bad investment. Calling for cheaper tuition just means that you’re asking for someone ELSE to make the bad investment instead.

    Even the uber rich are less likely to spend the money on their kids if the investment is a poor one.

    Or perhaps more importantly, if the investment really is a good one, people WILL make it as long as loans are available.

    Realistically, wouldn’t many general arts grads be better off being an electrician? Cheap tuition rates hurts these people no?

    Bob

  26. 26 26 iceman

    Bob Mac – yes my premise was that loans would be available (at *market rates*) for those for whom the ROI in terms of incremental future earnings looks appealing. I expect there may be real-world complications around this.

  27. 27 27 Bob_Mac

    @iceman

    Yes, and I think that if you have access to loans and yet decide NOT to go to college this turns out to be a better allocation and an economic gain in aggregate.

  28. 28 28 Twofer

    Can we get a source for the quote: “everybody in America can go to college?” Because when I google it, I can’t find anything except this blog. There was a variant claim about what Obama said by Santorum back in January that was fact checked to be false. So without context, it’s hard to understand what the intent was.

    But, if there is more demand for college than there are seats, and the only considerations are economic, why shouldn’t Harvard go all the way and simply auction the spots to the highest bidder?

  29. 29 29 Mike H

    From one of the speeches at the Politifact link posted by nobody.really:

    Because right now, actually, student loan debt is higher than credit card debt in this country. And it’s a huge burden on the next generation and we have to start relieving it.

    I have a colleague who called student loans the “next debt bubble” – because you can’t get rid of them by declaring yourself bankrupt, they are nigh risk-free for the lender, and are therefore far more freely available than other forms of credit.

  30. 30 30 Paul T

    SL: “This morning I heard President Obama call for universities
    to lower their tuition rates so that ‘everybody in America can go to college’.
    ….
    The President’s proposal would make sense if universities were
    ordinary monopolists, artificially restricting enrollments in
    order to keep prices high. But universities, insofar as they
    are monopolists, are by no means ordinary — they are price-
    discriminating monopolists…”

    Too bad this incident didn’t occur a year ago, this essay would
    have fit nicely into the new edition of your book -

  31. 31 31 Ken B

    Twofer has a point! I think we have a characterization not a quote. I did find this though

    “So tonight I ask every American to commit to at least one year or more of higher education or career training,” Obama said.

    http://thehill.com/video/campaign/212933-gingrich-obamas-call-for-higher-education-perfectly-reasonable

    Gingrich agrees. You know the idea is bad with *this* twofer. :)

    I think Steve is pretty good on the substance, close enough to justify the discursion on monopoly, but loses marks for execution.

    [Great name BTW Twofer]

  32. 32 32 Ken B

    Twofer: “But, if … the only considerations are economic, why shouldn’t Harvard go all the way and simply auction the spots to the highest bidder?”

    An interesting question. Of course Harvard gets a lot of gifts and bequests, so its economic incentives might not be easily discerned. Keeping up the snob appeal pays off I suspect. Donor power also explains how children of alums get preferential treatment. But for the bulk of entrants, are we sure it isn’t auctioning them off? A friend’s daughter was accepted but the cost was astounding. She passed it up. Looks a bit like an auction to me.

  33. 33 33 Steve LandsburgI

    Twofer (and others who have asked):

    Can we get a source for the quote: “everybody in America can go to college?”

    I heard it on the radio. I believe I’m quoting it correctly, but I suppose that (as always) there’s some small chance I misheard.

  34. 34 34 Nathan

    Of course, if you adopt Spence’s higher education model as a signalling mechanism rather than something that actually increases the inherent value of a worker, then getting everyone to go to university has the same effect as eliminating universities altogether.

    I tend to think the Spence model is pretty accurate – people do learn things at university, but not necessarily anything they couldn’t learn more easily and cheaply on the internet these days. The value of a university degree is in the fact that it is hard to get, and therefore proves that you are a disciplined, resourceful person and will have a higher marginal product of labour.

  35. 35 35 Paul T

    SL: “This morning I heard President Obama call for universities to
    lower their tuition rates so that “everybody in America can go to
    college”.

    I am virtually certain that the President is not stupid enough to
    think that if tuition rates fell to zero, there would magically be
    enough room in the colleges for everybody in America. So I’ve got
    to believe that he’s purposely saying stupid things in order to appeal to stupid voters… ”

    Probably. But not certain. Given his history, he’s a typical,
    economically illiterate pol.

    To hammer my point, let’s re-phrase the question: If all colleges
    suddenly lowered their prices, would college be more affordable?
    Is there any doubt Mr. Obama would answer in the affirmative?
    Yet, logically, isn’t this the same question?

    Another day, we might debate the qustion: is economic illiteracy
    beneficial to a political career, in a democracy?

  36. 36 36 Phil King

    Do you really think Obama is talking about expensive perfectly price discriminating highly selective schools.

    If this were what he was saying, it would be stupid enough for the reasons highlighted above.

    I fear though, that he means community/state/online schools should be cheaper and allow everyone the chance to go to these schools. Now, dont get me wrong – one can get a great education at these schools. But when you pack them to the gills it stresses the already stressed system, and talented students will receive less attention and will get a worse education. No doubt there.

    Also, since when did it make sense for everyone to go to college. He should have said prices should be low enough so everyone could have the opportunity to go provided they xyz. Not everyone should be able to go – that’s plain stupid. There’s a big difference there.

    Someone who can get into Harvard (generalization, I don’t care) can probably afford to pay twice the tuition because the degree should be worth much more than even that.

    When you drop the price, to think the value of the degree remains the same is stupid. You have to fall back on intrinsic value of university, which…let’s not go there.

  37. 37 37 Mike H

    @Phil #26“everyone could have the opportunity to go”

    Almost exactly the words Michelle Obama used in the minute or so of her speech that I caught on the radio this morning.

    Also @Me #2 I’m wondering : is Obama proposing government funding programmes to create more university places?

    The answer is “yes”

    I think, if Obama said “you uni admin guys, lower your prices! But the govt won’t do anything.” it would be pretty silly, or at least impractical. Nonetheless, one must concede that if unis lowered prices, demand would increase – unless one insists that university education is a Giffen good (!!!)

    However, it appears Obama is saying, instead, “you uni admin guys, we want to subsidise tertiary education. We want to create more places. Lower your prices!” then, it’s not at all unreasonable to think that increasing government subsidies would
    * increase demand and supply simultaneously,
    * lower the effective price paid by the student
    * raise the effective price received by the university admin
    all at the same time. Have I got the Micro 101 down pat here?

  38. 38 38 Harold

    Phil King. “When you drop the price, to think the value of the degree remains the same is stupid. You have to fall back on intrinsic value of university, which…let’s not go there.”

    In the UK, until recently there were no tuition fees paid by the student. The Universities were still able to discriminate perfectly well, Oxford and Cambridge degrees were generally worth more than other universities’. The price (paid by the student) had no bearing on the value of the degree.

    The tuition fees were paid from general taxation, so of course there was a real price somewhere. Oxbridge obtains extra income from endowments and land not available to other universities, so the real price of an Oxbridge degree may be higher than others.

    Recently, the maximum amount universities can charge for tuition was raised to £9000 / year. The Govt said that this would allow colleges to offer price competition; less prestigious / worse colleges could charge less, whilst the most popular could charge the maximum. In fact, all universities charged the maximum.

    This suggests that either charging less would be an admission of inferiority, and fewer would desire to study there – which would make University education a Giffen or Veblen good perhaps? Its positional value is destroyed by lower prices. And / or possibly the “real” price would be much higher than the maximum allowed by Govt., so this is actually a cap on prices.

    Higher prices presumably result in less social mobility (for the same number of places), so if you value social mobility, then lower pices are good. These places must then be subsidised in order to maintain their number.

  39. 39 39 Phil King

    @Harold:

    I’m not saying it’s a direct link – you drop prices and suddenly the value of the diploma loses value.

    The point was you drop prices to increase enrollment 50% or something that could shock the system and suddenly the diplomas have far less value.

    Obviously the elite schools would never admit many more students, part of their elite status is that the bar to entry is so high, and so the value of the Harvard diploma wouldn’t drop much. However, the value of say a UMASS degree could be wrecked.

    Because UK prices are low to begin with, and not the extreme barrier to entry they are here, it doesn’t make sense to compare.

    If UK cut its prices in half to double enrollment though, I think the diplomas (excluding Cambridge, Oxford, other elites) would also drop in value.

  40. 40 40 Harold

    Phil King – I wasn’t really disagreeing with you – sort of thinking out loud and making observations. I think the key is what is the price. If it is the total of what the college receives in direct payments plus subsidies, then there is presumably some correlation with quality. If it is just what the student pays directly, then this is meaningless if the fees are payed through subsidy.

  41. 41 41 Bearce

    If UK cut its prices in half to double enrollment though, I think the diplomas (excluding Cambridge, Oxford, other elites) would also drop in value.

    Ehhh…if all degrees were homogenous and the same level of difficulty you’d be correct. However, realistically, take into consideration majors such as engineering, which have high drop-out rates. Even more so for advanced degrees in the STEM category (Masters and Doctorate.)

  42. 42 42 Bob Murphy

    Good post, Steve; I had never thought of universities as excellent price discriminators, but you’re right, they’re probably *the* best.

    However, I am not so sure Obama is consciously lying as you suggest. I have worked a lot in “policy wonk” circles over the past few years, and my mental model of people has changed significantly. I think that especially in economic matters, both sides can throw up so many qualifies, caveats, assumptions for modeling convenience, blah blah blah, that you can justify any statement you want.

    So I really don’t think politicians etc. are consciously lying on a lot of these things. (I’m sure they *do* consciously lie, even in their own minds, all the time, however.) Rather I think that they observe economists from Chicago and Harvard argue with each other over really fundamental issues, and they conclude, “There really is no ‘fact’ of the matter in economic policy. So I might as well push the view that feels right to me, based on my value system.”

  43. 43 43 iceman

    Harold #38 — “Higher prices presumably result in less social mobility”

    I think this is a premise worth re-considering under liquid capital markets. At least in theory, the background of a prospective Oxbridge student shouldn’t materially affect the value of the incremental future earnings from a lender’s perspective…provided the student has demonstrated that (s)he is *qualified* to be there (which is why I think the policy focus should be on K-12).

  44. 44 44 David Wallin

    @AL V. Thanks. And, for others, here’s a link with data that makes my point:

    http://www.npr.org/blogs/money/2012/05/22/153316565/the-price-of-college-tuition-in-1-graphic

  45. 45 45 Jeff Guinn

    [AL V said:] It’s just that businesses are lazy, and using a college degree as a filtering mechanism is easier and cheaper than actually testing a candidates subject area knowledge in detail.

    Not laziness. Since the early 1970s, Civil Rights laws have prohibited employers from administering tests which had a disparate impact on racial minorities.

    Instead of testing, businesses have had to turn to diplomas as proxies for aptitude.

    Keeping the possibility of post-hoc reasoning firmly in mind, college costs started heading for the stratosphere in the late 1970s, because the need for a different proxy greatly increased the demand for diplomas.

    (O.T. somewhat, but why are college textbooks so darn expensive? Monopolist behavior seems a likely explanation.)

  46. 46 46 Ken B

    @Bob Murphy: I like your comment but I think Steve suggests Obama is “insincere” rather than lying. That’s not so far from your characterization.

    (But as I said this isn’t really an appeal to stupid voters at all.)

  47. 47 47 David Wallin

    BTW, if you’d like to hear NPR agreeing with SL on the price discrimination:

    http://www.npr.org/blogs/money/2012/05/11/152511771/the-real-price-of-college

  48. 48 48 Paul T

    Jeff Guinn: “(… why are college textbooks so darn expensive?
    Monopolist behavior seems a likely explanation.”

    yeah
    And why is popcorn so expensive at the movies?

  49. 49 49 Al V.

    @Paul T, Popcorn is expensive at the movies because that’s how theaters make their money. Theaters make little money on the actual tickets, except when a movie has an extended run. The distributers take 100% of the box in week 1, 90% in week 2, 80% in week 3, etc. Thus, the theaters need to maximize the amount they make on concessions.

    I learned this when I complained to a local theater manager that his theater never showed independent films. He explained that the theater doesn’t make money on independents, because (a) the runs are too short to make money off the box office, and (b) the people who want to see independent films don’t buy popcorn and soda. This explains why the only theater that regularly shows independent movies in my areas sells beer, cappuchino, and pizza.

  50. 50 50 Al V.

    @Jeff Guinn, thanks! Great point. That actually makes the point even stronger. @nobody.really made the point that one can earn the equivalent to a college degree on one’s own. However, how would companies test your qualifications if they are legally prevented from testing your aptitude.

    When my father attended U. of Chicago in the 50s, their policy was that if you could pass the final for a course, you could receive credit – whether or not you actually attended the class. Dad was able to skip his freshman year via this early form of advanced placement. That policy is long gone, I suspect.

  51. 51 51 Harold

    iceman: the factors involved in social mobility are complex and difficult to predict, so I would be cautious of claiming that such-and-such would definitely have such-and-such affect. However, it seems more likely to me that higher costs would decrease social mobility. Whilst it may be equally possible for students with lower socio-economic backgrounds to borrow large sums for education, they are more averse to taking on large debts. Also, they would need to take on the debt whereas their wealthier colleagues could be funded by family wealth. I do not see how this could do other than decrease social mobility, all else being equal. It seems that evidence backs up this view:

    From: http://research.dwp.gov.uk/asd/asd5/rports2007-2008/rrep450.pdf

    “Breen and Goldthorpe (1997) show that children from lower socio-economic backgrounds are rationally more conservative over educational decision-making such as participation in higher education, as a result of lower aspirations and enhanced perceptions of risk associated with failure, an issue addressed by the AimHigher campaign, for example. Esping-Andersen (2004:134,fn3) shows that participation might also be lower as a result of an equally rational decision on the part of poorer parents out of a desire to encourage financial independence among their offspring at an earlier point than higher education participation might allow.”

    “Factors discouraging people from lower class backgrounds from entering HE tend to revolve around employment and financial issues, including the cost of studying and the desire to earn money at an early stage.”

  52. 52 52 Advo

    It seems that the way higher education in the US is organized is tremendously inefficient and expensive from a macro-economic standpoint. In Germany, for example, which university you go to tends to have very little influence on your later employment prospects, the important factors being your grade (which derives from externally centrally graded tests, at least that is the case for law students) and your bio.
    Students are allocated to their university in accordance with their choice, given priority by grade, otherwise by chance, so there is usually little to be gained in aiming to get into a university in order to get into some elite networks (as in Harvard, Yale, etc.).

    In the US higher education is far more expensive than in Germany and puts students with a middle-class or poor background at a tremendous disadvantage, while making “connectedness” of the students of universities and the reputation of a university with employers the major factor in inter-institutional competition, rather than academic achievement.

  53. 53 53 Henri Hein

    @Advo:
    If higher education in the US is organized inefficiently, how come placement there is so sought after by the international student community? They must be doing something right.

  54. 54 54 Henri Hein

    About textbook costs, it is interesting that anytime someone thinks something is expensive, they immediately suspect monopoly. There are good reasons textbooks are expensive: they are costly to produce and it is a small market.

  55. 55 55 Ken B

    @Henri Hein:
    The Best Little Whorhouse in Texas can be inefficiently organized and yet still attract customers from out of state if it’s better than what’s available out of state. This is espacially the case if the product is subsidized.

  56. 56 56 Al V.

    My son’s experience with college provides a good example. He applied to four colleges, with total annual costs of $53K, $48K, $43K, and $38K. His desire to attend those colleges aligned to the cost – the most expensive was his first choice, the least expensive was his last choice.

    #1 ($53K) rejected him.
    #2 ($48K) accepted him, but provide no scholarship money.
    #3 ($43K) accepted him, and offered $14K/year in scholarships, making the total cost $29K.
    #4 ($38K) accepted him, and offered $19K/year in scholarships, making the total $19K/year.

    He (we) chose #3.
    $

  57. 57 57 idic5

    “everybody in America can go to college”.

    He obviously meant “everybody who wants to go to college and where the college will let them under their admission criteria and their space contraints”

    This obvious. Why pull quote out and then call someone stupid for not saying the the complete wholly qualified statement? Their are a ton opf the word stupid in this piece. Is this what you regular viewer like to hears – this level of discourse of distilled reductionist (and false) epithets?

  58. 58 58 Silas Barta

    I’m pretty sure your university can add some seats here and there …

  59. 59 59 iceman

    Harold #51 – thanks for the info. I’d just note I did say “in theory”, and also that it seems you’re referring more to (understandable) psychological / cultural factors than straight ROI considerations (note the opportunity cost of funding with family wealth vs. borrowing should still apply here). Perhaps this suggests some funding should be redirected to programs like AimHigher (not familiar with that one) rather than subsidizing whorehouses / I mean college tuition (dammit Ken B!). Personally I have given $ to a program that helps prepare disadvantaged HS kids for college. And even if I could cover all college costs for my own kids someday, I currently think having them take out a reasonable amount of debt against it would not be a bad thing, for their own sake.

  60. 60 60 Jeff Guinn

    There are good reasons textbooks are expensive: they are costly to produce and it is a small market.

    Since I have two in college (Freshman and Sophomore), I am far more focused on college costs than I would be, otherwise.

    Roughly speaking, over the last forty years, the number of dollars required to buy a hardback book has tripled.

    Over that same period, college texts are seven times more expensive (in numbers of dollars, based upon what I spent as a freshman, and what I am spending on my critters.)

  61. 61 61 Steve Landsburg

    idic5:

    “everybody in America can go to college”.

    He obviously meant “everybody who wants to go to college and where the college will let them under their admission criteria and their space contraints”

    This hardly helps. There still seems to be the assumption that lower prices will enable more people to go to college. Whether “more people” means “everyone” or “everyone who wants to go to college and where the college will let them in ….” is quite beside the main point, which is that lower prices will increase the number of people who can go to college by (at most) ZERO.

  62. 62 62 nobody.really

    “everybody in America can go to college”.

    He obviously meant “everybody who wants to go to college and where the college will let them under their admission criteria and their space constraints”

    This is obvious. Why pull quote out and then call someone stupid for not saying the complete wholly qualified statement? There is a ton of the word stupid in this piece. Is this what your regular viewers like to hear – this level of discourse of distilled reductionist (and false) epithets?

    This hardly helps. There still seems to be the assumption that lower prices will enable more people to go to college. Whether “more people” means “everyone” or “everyone who wants to go to college and where the college will let them in ….” is quite beside the main point, which is that lower prices will increase the number of people who can go to college by (at most) ZERO.

    1. Landsburg makes a perfectly (as far as I can tell) sound observation that, while many people see price as an obstacle to getting what they want, classical economics teaches that reducing price by fiat would not help more people get what they want.

    (Lowering prices might, however, help DIFFERENT people get what they want. That is, a lower price for post-secondary education might enable poorer, but more academically promising, students take slots that otherwise would have been occupied by richer, but less academically promising, students.)

    2. Landsburg seeks to make this discussion topical by attributing it to something Obama said. I have found no one else who reports having heard Obama say the things Landsburg reports, so I’m skeptical that Obama said it. But this takes nothing away from the economic point Landsburg makes, or from this engaging (and, ok, depressing) discussion about the economics of post-secondary education.

    In short, don’t let politics ruin a good discussion.

  63. 63 63 Kevin Donoghue

    It appears that the source for this quotation is Rick Santorum. So, do we get an amended post with Steven Landsburg wearing the dunce’s hat?

    http://www.politifact.com/truth-o-meter/article/2012/feb/27/did-obama-say-everyone-should-go-college/

  64. 64 64 iceman

    NR #62 – “Lowering prices might, however, help DIFFERENT people get what they want”

    Not sure…if we artificially cap the top-line rate, schools may realize wealthier families are still more likely to pay more in other ways like contributing to endowments, or donating all those lovely little trees and benches with their little personalized plaques. Alternatively, schools could selectively discount tuition based on need to achieve diversity goals (and/or meet other political image goals to ensure a steady supply of public research $)…which sounds like the system we currently have.

  65. 65 65 Ken B

    @Kevin Donoghue: http://www.thebigquestions.com/2012/09/04/playing-the-dunce/#comment-63430

    I think Steve is close enough for government work here. Obama certainly did say college or career training, both terirary education and both subject to the same kinds of considerations.

  66. 66 66 Emerich

    Guys,
    Universities are in fact exempt from antitrust laws in a big way:

    It shall not be unlawful under the antitrust laws for 2 or more institutions of higher education at which all students admitted are admitted on a need-blind basis, to agree or attempt to agree -
    (1) to award such students financial aid only on the basis of demonstrated financial need for such aid;

  67. 67 67 Everett

    Mike H (#8)

    Explain to me how governmnet funding is going to do anything other than change which pocket you are paying out of. Either a parent or a working student are paying out of pocket directly to the university, or they are paying indirectly to the government and then a bunch of expensive bureaucrats are sending what is left over to the school. It may be a fine way to redistribute the wealth, but it is not a very intelligent way to bring down educational cost.

  68. 68 68 Bearce

    I had this thought the other day.

    It’s uncontroversial that the cost of tuition has soared well beyond the rate of inflation for the past 30 years, while real wages have stagnated. It seems, at least amongst the UCs, there is a lot of scandal over how much of that extra cost is going towards extravagent salaries instead of increasing capacity.

    Are universities refusing to expand capacity (a form of restricting output) in order to keep your prices high? I would like to hear Dr. Landsburg’s opinion on this.

  69. 69 69 Steve Landsburg

    Bearce:

    Are universities refusing to expand capacity (a form of restricting output) in order to keep your prices high? I would like to hear Dr. Landsburg’s opinion on this.

    Did you read the post?

  70. 70 70 Bearce

    That’s important here, because, unlike an ordinary monopolist, a good price discriminator doesn’t leave seats in the classroom unfilled just to keep prices high. Instead, the price discriminator fills empty seats at bargain prices while still keeping prices high for those who are willing to pay full fare.

    The implication, then, is that we’re already operating at full capacity (in the sense that we’ve already got as many students as we want). Given that, you can’t send more people to college without creating more capacity, and lowering prices is not a recipe for creating more capacity.

    That doesn’t answer my question though.

    Say, hypothetically, it was possible to expand capacity to the point that you could admit all (qualified) applicants. I’d imagine if you restricted this capacity, then the candidate willing to pay more would be admitted if his qualifications were equal to his/her poorer peers. So are universities doing this in reality?

  71. 71 71 paul roscelli

    Again, amen baby amen.

  72. 72 72 Harold

    Picking up Bearce#’s point. there is an argument that numbers could be expanded at the same cost – or costs lowered, but it depends what we want from our universities. They keep up “quality” by paying eminent profs huge wages. I suspect that much more actual teaching could be done by paying loads more teachers instead. This would reduce the research output of universities.

    Currently, there is an assumption that good research or high profile profs = good teaching. I think that is clearly not the whole story.

  73. 73 73 nobody.really

    [T]he cost of tuition has soared well beyond the rate of inflation for the past 30 years, while real wages have stagnated. It seems, at least amongst the UCs, there is a lot of scandal over how much of that extra cost is going towards extravagant salaries instead of increasing capacity.

    They keep up “quality” by paying eminent profs huge wages. I suspect that much more actual teaching could be done by paying loads more teachers instead. This would reduce the research output of universities.

    Currently, there is an assumption that good research or high profile profs = good teaching. I think that is clearly not the whole story.

    I am not aware that increased salaries for tenured faculty are a major factor increasing the cost of higher education. I am under the impression that, in an ever-escalating competition for prestige, institutions of higher education have poured more and more money into high-profile sports teams, and into buildings. Even in the depths of the recession, you could find a college campus by looking for the construction cranes.

    In addition, these institutions have added more non-teaching positions – administrators, groundskeepers, etc.

    I’d be surprised if faculty salaries were much of a factor here. Even if the pay for tenured faculty has increased, the institutions are finding cheaper substitutes — itinerant laborers known as “adjunct faculty” or “lecturers” that are now teaching an ever larger percentage of classes.

    Does this substitution affect the quality of the education produced – who knows? As others have observed, the fact that someone is good at research and publishing is not a strong indication that she is good at teaching.

    For what it’s worth, I had the pleasure of attending a small liberal arts college which emphasized teaching over publication. The typical lecture ended with the tenured professor sitting on the desk while a scrum of students fired off follow-up questions for 20 minutes. I encountered only one professor – a guy with a jillion advanced degrees in French literature – who let me know how tiresome it was to be stuck teaching me grammar. Needless to say, I had a rude awakening in grad school: “My office hours are on Tues. and Thurs. from 3-5pm; please make an appointment.” Only then did I come to reflect on how profligately we had squandered the time of those powerful minds back in college – and how wonderful that experience had been.

    Thanks to Landsburg for bringing back a bit of the good ol’ days.

  74. 74 74 Ken B

    “I am not aware that increased salaries for tenured faculty are a major factor increasing the cost of higher education.”

    My father was a prof, so I can assure they were underpaid decades ago. Some of my oldest friends are profs, so I can assure you they are overpaid now.

  75. 75 75 David Wallin

    The picture being painted here by some is not in line with the data. In constant 2011 dollars, the average per person state subsidy for higher education at public universities fell by $1,877 in the last decade and a half. During the same time, the average price paid by public-university students grew by just $580. The “sticker price,” which is certainly paid by some, went up $3,960. This supports SL’s assertion of price discrimination in the main note and my contention that universities are getting better at it (i.e., discrimination by wider margins).

    BTW, for private universities, the “sticker price” went up by $9,800 with the net increasing $2,340 in the same fifteen years. Note that the net increased by $2,020 in the last five years of the time frame; it has grown by only $320 in the last decade. The “sticker price” grew by $6,290 in the last decade.

    Oh, and if you think increased investment in college athletics plays a part, you’d better look at how they are funded.

  76. 76 76 David Wallin

    The Chronicle of Higher Education at:

    http://chronicle.com/article/faculty-salaries-barely-budge-2012/131432

    reports average full-time faculty pay at $82,556 which makes it just a bit over the $76,000 the striking Chicago teachers are reported to make on average:

    http://www.usatoday.com/news/nation/story/2012/09/10/chicago-teachers-to-strike-after-talks-fail/57720772/1

  77. 77 77 David Wallin

    re 75
    This
    Note that the net increased by $2,020 in the last five years of the time frame
    should be
    Note that the net increased by $2,020 in the first five years of the time frame

  78. 78 78 GHTSDy

    He has also argued that he is not cutting benefits in Medicare by reducing reimbursements to providers by $700,000,000.

  79. 79 79 Mike H

    @Everett

    “Explain to me how government funding is going to do anything other than change which pocket you are paying out of.”

    Government funding changes who owns the pocket. Only a small minority would be completely unaffected if the government levied an extra $120M tax to lower net tuition costs by $50M, pay $50M to create extra places, and pay $20M in salary to public servants.

    If the government did this, low income education seekers would find themselves better off, high income individuals who spurn education would find themselves worse off. (And some public servants would be better off, too).

    The net short-term financial impact is $0.00, except for some deadweight losses from higher taxes.

    The net effect on education would be : more places and more students – especially, more students from low-income backgrounds.

    This would probably have a positive effect on the economy in the long term. This positive effect could easily be big enough to make the initial cost worthwhile.

    The goal of the policy is, it seems likely to me, not to bring down the cost of education, but to increase participation in education.

  80. 80 80 Ohio libertarian

    I may be old fashioned, but isn’t the correct way to “lower tuition” if one seeks to slake expanding demand to expand supply?

    “Commanding” tuition be lower just creates shortages, and subsidizing tuition just increases the “supply” of tuition, not education access.

    Market innovation (e.g. on-line education opportunities, et al) will do far more to lower cost and expand access than political intrusions.

  81. 81 81 iceman

    Mike H – “This would probably have a positive effect on the economy in the long term.”

    Well that’s surely an argument for why we have public funding in the first place, but whether to increase it at the margin requires a sharper pencil (most things are subject to diminishing returns at some point). And I maintain that perhaps the same $ would “probably” have a more positive effect if used to better prepare students at the K-12 level instead (or better yet, start by spending existing K-12 $ more effectively).

    “The goal of the policy is…not to bring down the cost of education, but to increase participation.”

    Again begs the question how we know greater participation (from current levels) is not just a smart political slogan but a good economic investment. Also sounds much like the real goal of the ACA for health care – I mean “insurance” — reform. The problem is the real costs (as opposed to price) remain and eventually create pressure to do things that limit real access and/or decrease quality. (The ACA actually creates disincentives to supply as well.)

    Ohio Libertarian – Of course as you’ve probably noticed the for-profit education sector (the main source of an actual increase in supply) is under attack (i.e. under much closer scrutiny for cold hard ROI results than the non-profit sector).

  82. 82 82 David Wallin

    @ Mike H (#79)

    And, I think we’d be better off if the young experienced other cultures. So, I’m proposing a tax to pay for one international trip for each person between the ages of 18 and 22. Higher income youngsters who would have spurned their parent’s attempt to pay for such a trip are worse off. Lower income youngsters are better off. I predict a positive impact on the economy in the long term and a short-term zero financial impact.

    Whether it is education, travel, health care, or Hearts Castles, prices serve a useful purpose and reducing the price can have undesired effects.

    BTW, to all, I would find it very useful if posters would use the term price to refer to price and cost to refer to cost. Lower the price of tuition does not reduce its cost.

  83. 83 83 Ken B

    David Wallin: “I would find it very useful if posters would use the term price to refer to price and cost to refer to cost.”

    Just as long as you don’t ask any politician to!

  84. 84 84 Paul T

    SL: “This hardly helps. There still seems to be the assumption that
    lower prices will enable more people to go to college. Whether
    “more people” means “everyone” or “everyone who wants to go to
    college and where the college will let them in ….” is quite beside
    the main point, which is that lower prices will increase the
    number of people who can go to college by (at most) ZERO.”

    Holy Adam Smith, Batman!
    Let’s see… increase in supply of a product, causes a reduction
    in price; therefore, an artificially induced LOWER market price
    must cause supply to INCREASE!?!?

    What’s astounding, is that on econ board, where presumably the
    participants are better informed than Joe Spud, we still see such
    an error.

    We see it even among the pseudo-intellectuals. Check this piece,
    from Christina Romer, ex-chair of the emperor’s CEA, the Economist General:
    http://www.nytimes.com/2012/09/09/business/cutting-the-deficit-compassionately-economic-view.html

    I tried counting the asininities, but my abacus overflowed.

    And you still think the emperor MUST have been pandering, he
    couldn’t possibly be thick enough to believe his words?

  85. 85 85 David Wallin

    @Paul T
    I don’t know this Joe Spud guy, so he’s probably a lot smarter than I. But, when you condition the SL quote you offer on the situation he describes in the main note (that universities are very successful price discriminators) it makes perfect sense to me (and I assume others here). A “regular” monopolist could serve more by lowering price. They don’t, because they make more profit by charging higher than a competitive price, even with empty seats (or the equivalent). A price-discriminating monopolist leaves no empty sets. So, how can forcing their prices down bring about more seats?

  1. 1 Everyone in America Can Go to College » EppsNet: Notes from the Golden Orange
  2. 2 Some Links
  3. 3 Maggie's Farm
  4. 4 The Other Dunce at Steven Landsburg | The Big Questions: Tackling the Problems of Philosophy with Ideas from Mathematics, Economics, and Physics
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