Megan McArdle on Student Loan Debt and Tuition Increases

Megan McArdle Megan McArdle on Student Loan Debt and Tuition Increases

Megan McArdle

Ever since I ran across Megan McArdle (via Brad deLong’s blog), I’ve been impressed by her logic, use of data, and ability to write about these things persuasively. She calls herself an “ex-economist.” Anyone who reads even a few of her pieces will quickly realize that, no matter what she claims, the roots of economic analysis are still firmly entwined in her brain.  Yesterday I read two of her recent articles.  Taken together, they are Megan McArdle on student loan debt and tuition increases.

McArdle’s blog is “The Daily Fail.” For more information on the whimsical title of the blog, look at the end of this article.  Her nominal day job is as a columnist for Bloomberg.

Today I was attracted to A Little Student Loan Debt Never Hurt Anyone.” Megan argues that abrogating student loan agreements is a bad idea. As the best writers do, she uses herself as an example. She argues that subsidizing college graduates redistributes income in the wrong direction. Her proposal to use the funds to buy working cars for the working poor instead is brilliant. Its only problem is that it would actually work. In today’s Washington, D.C., a program likely to succeed is unlikely to get through Congress. (Those inclined to blame one party or the other should read what John Schindler has to say.)

That’s a long-winded introduction to what I really want to write about. In an article later today, Megan weighs in on the incredible rise in college tuition. She gives six reasons, none of which are mutually exclusive. Like her, I believe it is a combination of these factors that are pushing up college tuition. Where we differ is the relative weight we put on the various factors.

McArdle: Six Factors Pushing Up College Tuition

In what follows, I have kept McArdle’s original numbering of the six points. But, because I really want to spend time on one of those points, I’ve moved it to the beginning. Thus topic 3 is the first, followed by topic 1. If this confuses you, you probably didn’t read this far anyway.

“3. Chasing students: As the value of a college degree has risen, more kids are “shopping” for colleges using a wide range of must-haves, from academic prestige to sports teams to socializing opportunities. Colleges are chasing those customers by upgrading in all those lines: expanding high-visibility football programs, trying to move up the rankings, providing shiny new facilities that appeal to students. Buying everything from big-name professors to rock-climbing walls is expensive.”

Comment: McArdle misses the larger point. In the California State University system where I teach, each campus’s budget is based on one factor: full-time student equivalent registration (FTE). The economic theory of bureaucracy predicts that a bureaucrat will try to build an empire (see point 2 below). That means more people and a bigger budget. The only way to get a bigger budget is to get more students. (Exception: the very, very rare administrator in a public university who has some talent at fundraising from the private sector.)

The implications of this are quite staggering. Courses and majors thought to be difficult or those in which students are likely to fail will be demoted in hiring, course offerings, and other areas. By contrast, majors such as “Hospitality and Leisure Services” will be promoted. You don’t need math, science, or much more than high energy and a great smile to graduate in those fields. If you believe administrators don’t have that kind of influence on the academic curriculum, you have not lived the three decades in public education that span my career.

And this strategy has now been endorsed by none other than the President of the United States. From the College Fix:

President Barack Obama, perhaps one of the greatest BS-ers of all time, recently divulged where he fined-tuned his skills: college.

The Washington Free Beacon reports that during a Q&A hosted by Tumblr on Tuesday, one user asked Obama how America could “promote growth in STEM fields without putting humanities on the back burner.”

“First of all,” Obama began, “I want to say, I was a humanities major. So I majored in political science and minored in English.”

But according to Obama, those majors blossomed from a desire to slack off during high school. “I actually loved math and science until I got into high school,” he reminisced, “and then I misspent those years. And the thing about the humanities was, you could kind of talk your way through classes, which you couldn’t do in math and science, right?”

The incentive for bureaucrats is to admit as many students as possible and keep them in college as long as possible. That increases the university’s budget, allowing the hiring of more administrators. In the meantime, my student load has approximately doubled during the last 30 years.

“1. Baumol’s cost disease: We can make a car using robots, but it still takes one professor to provide one lecture. … as … Richard Vedder pointed out to me in 2012, arguably the reason that we’re still teaching classes in much the way that 19th-century professors did is that professors and administrators like it that way.

Comment: Recent experiences with MOOCs and other online learning environments seem to indicate high drop-out and extremely low course completion rates. San Jose State University had made a major commitment to MOOCs, only to shut them down when these facts were discovered.  An alternative to Prof. Vedder’s hypothesis is that we’re still teaching that way because it works. Ockham’s Razor says my alternative is the preferred explanation. From the Chronicle of Higher Education:

After two semesters of experimentation, San Jose State University has decided to take a “breather” in a project aimed at determining whether Udacity, a Silicon Valley-based company that specializes in massive open online courses, can help the university deliver credit-bearing online courses.

News of the break coincided with the leaking of a slide show containing preliminary data on the spring trials, which included three mathematics courses that San Jose State instructors built with Udacity. The courses were offered to a mix of students, some who were enrolled at the university and others who were not, including some high-school students.

The pass rates for the San Jose State students in those courses ranged from 29 percent to 51 percent. For nonenrolled students, the range was 12 percent to 45 percent.

Personal note: I have taught several courses that were 100 percent online (including one that I converted from classroom to online format myself). Done correctly, the workload on professors created by online teaching is incredibly high. During one quarter I taught two sections of 55 students each online. Without the assistance of my lovely wife (also an economist), I would never have survived.

“2. Administrative empires: The explosion of administrative overhead is both inarguable and universally abhorred. … [A]dministration … seems to fall into three categories: the professionalization of functions that faculty used to perform, such as admissions and disciplinary oversight; regulatory and legal overhead required by law, or required to keep the university from being sued; and the explosion of student services, demanded by students and/or the ideological and pedagogical commitments of the faculty. Swarthmore College professor Timothy Burke’s post on this is a must-read.”

Comment: Ms. McArdle needs to read Ben Ginsberg’s The Fall of the Faculty. In many universities, once a faculty member has hit the top salary level, the only way to earn more income is to become part of the administration. (I elected to do consulting in the private sector instead. But I understand this may not be an option for faculty in, say, English.) Ergo, many faculty decide they want to become administrators. And, of course, the administration is happy to welcome them. Bureaucratic empire-building means new members are always welcome. I personally know of one faculty-turned-administrator who has failed at every single administrative job. But this person has not returned to the classroom. Instead, said individual has become a free-floating member of the administration, collecting upwards of $100,000 per year for doing … well, not much of anything.

Fall Of The Faculty Megan McArdle on Student Loan Debt and Tuition Increases

“4. The rising cost of technology: When I was in college, a personal computer was a relatively new, fancy piece of gear. Many professors didn’t have them, much less blazing-fast Internet connections. Then, of course, there are the science, technology, engineering and mathematics fields, which require amazing amounts of pricey equipment. I do buy some of this argument, but science professors at Research I universities increasingly fund themselves with grants, so I don’t think we can put it all down to supercolliders.”

Comment: Technology use is more mundane and pedestrian than this. Every classroom on my campus has a computer, an internet connection and a projector. I teach all my classes using PowerPoint, Excel, and an internet connection. These are real costs and they are accompanied by one group of administrators who actually earn their income: the technicians and others who must cope with many faculty who have no idea where the power switch is, much less how to use the computer.

Note, however, that the hardware costs are fixed costs. Therefore, those costs have no impact on short-run decision-making.

“5. People are more willing to pay: Since I graduated two decades ago, the premium on a college degree has gone up, and student loans have become more common. In financial terms, the future cash flows available from an investment have gone up; students can now monetize more of those future cash flows and turn them over to colleges. So colleges are now collecting a big portion of the college premium as tuition.”

Comment: McArdle’s statement is way overly broad. I have degrees in chemical engineering, business, and economics. I was virtually guaranteed a job when I got my B.S. degree. See the earlier comment about President Obama BS-ing his way through college. It worked out OK for him, but is probably not a good career path for most people.

The courses and major students pursue matter very much. Today the California State University system graduates many people with bachelor’s degrees who cannot solve the simplest algebra problem (x + 3 = 5 for example). Students are supposed to know this before being admitted to any CSU campus.

“6. State contributions to public colleges have gone down: … [D]ata from the College Board show that state and local appropriations have gone down by a couple of thousand dollars per student (adjusted for inflation). That’s about 25 percent of the total, not the dramatic decline that you usually see claimed, and not nearly enough to account for the soaring levels of student debt we’re seeing. People claiming enormous decreases look at state contributions as a percentage of revenue or spending. But as revenue and spending rise, these percentages will fall, even if state funding holds steady. And revenue and spending have risen — a lot.”

Comment: I have nothing to add to McArdle’s excellent analysis.

Megan McArdle

Megan is the author of The Up Side of Down: Why Failing Well Is the Key to Success (Viking Penguin, 2014). Her entertaining and informative blog, “The Daily Fail” () combines a quotation about failure with an anecdote illustrating the point. Here’s an example using one of my favorite quotations:

Your Daily Quote: “Predictions are hard, especially about the future” ~ Niels Bohr

Your Daily Read: “A day after U.S. intelligence said there would be no Russian invasion of Ukraine, Putin’s troops started coming over the border.”

I’ve made some good predictions in my time. I noticed the housing bubble in 2002. In December 2012, almost a year before the federal exchange launched, I said that given how late they were making decisions, I thought there was “approximately a 0% chance” that it would be ready on time. I was a Groupon skeptic from the first moment the business model was explained to me.

But every time I’m tempted to break my arm patting myself on the back, I remember that I, like our intelligence experts, have botched more than a few important predictions. How about Google stock, which I thought was overvalued at the IPO? Or my confidence that we would find weapons of mass destruction in Iraq? How about my risibly low estimates of what that war would cost? Or my belief that Democrats would never pass Obamacare because doing so was so clearly political suicide?

If you ever look at Twitter you must follow her: @asymmetricinfo — a handle that belies her claim to be an “ex-economist.”

The Up Side Of Down Megan McArdle on Student Loan Debt and Tuition Increases

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About Tony Lima

Retired after teaching economics at California State Univ., East Bay (Hayward, CA). Ph.D., economics, Stanford. Also taught MBA finance at the California University of Management and Technology. Occasionally take on a consulting project if it's interesting. Other interests include wine and technology.