Towards the future of higher education economics

Yesterday a group of us presented on the future of, well, everything.  Brilliant people spoke to the future of the book, of food, and of work.  In contrast, I gave a short presentation on the future of higher education economics.

I’ll share it with you now, starting with the slides:

Like Gaul, it’s in three handy parts.

I. How higher ed financing currently works.

I distinguished between private, public, and for-profit institutions (an audience member rightly added military and corporate training), then outlined different ways we pay for high ed: state support (for publics, and in decline), federal loans, third party aid, and above all tuition.  Tuition really means financialization, given the enormous expansion of student loan debt.  Pointed out that “tuition-dependent” describes nearly every college and university, with the exception of the richest campuses who have big endowments (naming two represented in the room).

Next I broke down where that money goes at institutions, emphasizing that personnel costs loom largest, since higher ed is a service industry.  In addition there are research costs, “administrative” costs (in quotes because the term really covers all non-teaching staff), student social and academic support, and physical plant (which varies widely between institutions).  Why does this structure look the way it does?  I introduced Baumol’s Cost Disease, our ethos of care (for students especially, but also for research and the institution through service), and, for some, the amenities arms race.

Academia’s finances have changed in other ways.  I noted the rise of adjunctification, which reduced instructional costs while shrinking tenure.  I also explained the rise of the discount rate, which seems like it was news to many in the audience.  This famously makes actual tuition costs harder to grasp, even using the metric of net tuition.

II. Drivers of change

Having established the current high ed financing situation, we then turned to present-day forces driving change.

Income inequality led off, springing from tuition discounting (because as the wealthy peel away from the rest of us, schools can build finances strutures around that gap).  I ran through Thomas Piketty’s work, Pew research on the shrinking middle class, and income gaps exacerbated by race., and the rise of the gig economy.  We touched on a variety of causes, including globalization, the shift from manufacturing to service jobs, the decline of unions, automation, neoliberal ideology and policy, and financialization.

Another major driver is demographics, with American society aging and its geographic distribution.  The latter was especially urgent for the audience, as they were drawn from New England (which is aging rapidly).  We discussed the economic impact in terms of public higher education competing with Medicaid, Medicare, pensions, and other senior-focused state expenditures.  I touched on problems of a shrinking workforce in terms of tax revenue and potential income inequality.

The third major driver is politics, starting from policy uncertainity about the upcoming Trump administration, which could include changes to federal student loan structures, pressure on schools with the largest endownments to alter their spending, and defunding certain academic projects and fields (i.e., climate change studies).  Political change could also come from insurgent students and perhaps campus staff, such as in resistance to deportation efforts. This can lead to hostile reactions from state and/or federal officials (for example).

III. Possible futures

For discussion I offered several scenarios for higher ed economics.

PIKETTY IS RIGHT Income inequality continues to grow, reaching Gilded Age levels.  Adjunctification increases.  Campuses spend more resources to attract wealthier students and their families.  Student debt exceeds consumer mortgages.  Technology skews by class, with the 1% preferring face-to-face instruction, the middle class taking courses online, and MOOCs reserved for everyone else.  Leading majors reflect the economic change: political science (because of political instability), finance, human resources, computer science and engineering.

I offered a sketch of eighteen-year-olds in this world, obsessed with the 1%’s conspicuous consumption.  These teens have already participated in the ” sharing economy”, and think the middle class is a relic of the 20th century.

PIKETTY IS WRONG Income inequality ceases to grow, as America reacts against it.  The 1% commit to high levels of philanthropy, governments invest more in social services, globalization ceases encouraging a race to the bottom for wages.  States end the localization of K-12 funding and take steps to break up racial segregation.  Campuses partner with K-12 schools, adjuncts organize and are recognized, faculty teach and research inequality, and economic aid shifts from merit to economic need.

PEAK HIGHER EDUCATION I reprise my now-familiar argument about declining enrollment.  I added Brian Mitchell’s precise, quiet, and devastating observation:


The premise is that student-generated revenues will expand to offset increasing operational expenses of the institutions. However, the decline in per-student net tuition revenues and the backlash against higher student loan debt have pushed this core assumption off the planning table. At the same, time, higher education faces evolving demographic, political, and economic trends that will constrain revenue, and produce smaller and more diverse admission classes.

Good discussion followed these slides.

Being a book obsessed person, and also not a professional economist, I had to issue a reading list:

Archibald and Feldman, Why Does College Cost So Much? (Oxford)
Cappelli, Will College Pay Off? (Public Affairs)
Christensen et al, Disrupting Class (McGraw-Hill)
DeMillo, Abelard To Apple (MIT)
____, Revolution in Higher Education (MIT)
Massy, Reengineering the University (Johns Hopkins University Press)
McGee, Breakpoint (JHUP)
NACUBO.  Everything they produce.
Newfield, Unmaking the Public University (JHUP)
____, The Great Mistake (JHUP)
Piketty, Capital in the 21st Century (Harvard)
Stevens and Kirst, eds., Remaking College: The Changing Ecology of Higher Education (Stanford)
Wildawsky et al, eds., Reinventing Higher Education (Harvard Education)


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3 Responses to Towards the future of higher education economics

  1. Frederick Beshears says:

    Nice report. I’d add these two books by William Bowen to your reading list:

    1. Higher Education in the Digital Age
    2. Locus of Authority: The Evolution of Faculty Roles in the Governance of Higher Education

    Bowen is an economist by training and president emeritus of Princeton University.

    For reviews of these two books, see:

    Two Books on the Cost of Higher Education by William Bowen

    • _Higher Education in the Digital Age_ is a very useful, important, and short book. Agreed. My copy’s very marked up.

      I’ve been meaning to get to _Locus of Authority_. Thank you for the reminder, Gary.

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