Published on Tuesday, October 02, 2012
by Jay Prag
The rising cost of college education has joined the cost of health care and the unrest in the Middle East as a talking point in the presidential campaign.
And unfortunately so: Politicians are rarely able to reduce the realities of a complicated market to sensible debate points or comprehensible policies for political speeches.
Why does the price of something rise faster than all other prices?
Economics has this really neat little model that explains this - the market model, or "supply and demand." The market model says that if demand rises faster than supply, prices rise. So if the price of college education has risen, relatively speaking, it must be that demand increases outpaced supply increases.
And that's certainly part of what's been happening.
When you try to increase access to college to more people through low-interest loans and grants and admission policies that extend beyond academic qualifications, you increase the demand for a college education. This isn't a bad thing.
But using the market model, if the supply of a college education cannot rise as quickly as the demand, its price will rise. While it's easy to change admission standards and to give students access to loans, it's not so easy to provide the structure that will service their needs: College professors almost always need a Ph.D. and decent college classrooms cannot be built overnight.
Increasing access without increasing supply must increase prices or cause shortages or both. There's no third choice.
In addition, when you expand access for those who previously had little chance to get into college, you will admit students who are less prepared for college. Again, this is not a bad thing, but it is expensive. Using college professors to teach remedial classes is more expensive than teaching those classes in high school.
The biggest culprit of rising higher education costs, however, is the array of subsidies that sustain the system. In California, the state-run university system is highly subsidized. Although the subsidy is different at the University of California, California State University and community college levels, the tuition that students pay for a class at any California college or university is nowhere near the true price of providing the class.
Price is an allocator. Why do people buy many more Toyotas than they do Rolls Royces? Toyotas have a lower price and more people can afford them.
But what if the government decided to pick up 80 percent of the price of a $100,000 Rolls Royce, so that a Rolls Royce would cost the same as a Toyota? The purchase of a Rolls Royce would be subsidized, which would allow many more people to buy one. Among the many problems this subsidy would create is that over the long run, people no longer know that a Rolls Royce is actually more expensive than a Toyota. The subsidy has confused the automobile market.
So the state government subsidizes, say, 90 percent of the cost of a college class. A class that should have cost the student $10,000 per semester only costs her $1,000. The government paid the rest. But the true cost of that class is $10,000, not $1,000. The customer, the student, doesn't see that larger price and so she wants more of it.
As long as the government can continue to pay the subsidy, there's no problem. But what happens when the government runs low on money and has to make difficult budget choices? Some of the subsidy goes away and the students are told they have to pay more of the true cost.
Saying that the cost of college has increased because of this is saying that the correct price of that college class was $1,000. It was not.
And the reality behind a lot of the "rising cost of a college education" is that the customer is simply seeing what this product actually cost all along.
Jay Prag is a professor at the Peter F. Drucker and Masatoshi Ito School of Management at Claremont Graduate University. Prag also serves as academic director for the school's Executive Management Program, and can be heard weekly on "Inland Empire News Hour" on KTIE-AM 590.