Category Archives: cost

May 16

Think Big?

With all the chat recently about reducing unit costs through ever-larger instructional units (e.g. MOOCs), it occurred to me that the world already has a lot of models for this. They just aren’t in the developed world.

University World News recently carried a very interesting article regarding a new higher education master plan in Nigeria. One of the plan’s key elements is to construct a half-dozen “mega-universities” – each with 100-150,000 students – to soak up the rising demand for higher education. On the one hand, this plan is self-evidently mad: large Nigerian universities are already a violent and lawless mess, plagued with cults such as the Black Axe and the Supreme Vikings (I wrote about them a couple of years ago: here); surely these new, even larger campuses will face even bigger gang problems. On the other hand, you can sort of see where Nigeria’s coming from on this. Thanks to some truly staggering levels of corruption, the ability of Nigeria to use public funds to meet demand for higher education is quite small – currently just $1.4 billion to cover expenses at 33 federal universities. So the solution is simple – go big, and keep unit costs low. Just like MOOCs.

Actually, the way access has been increased in much of the developing world is through strategies like this. The world’s largest universities are Open Universities – Indira Gandhi in India (3.5 million), and Anadolu in Turkey (2 million). The largest residential schools are ones with multiple constituent campuses. The reigning world champion here is Islamic Azad University in Iran – a private school with 350 locations, 1.5 million students, and a very significant endowment of contested legality (I don’t buy the $200 billion number, but it’s substantial nonetheless).

What about single-campus institutions? On the Indian subcontinent, there are a handful (e.g. Delhi, Pune) which boast enrolments of 400K plus, but most of those students are not residential – rather, they study at a college somewhere, and simply take the Delhi or Pune exams. For really big schools, you need to go to places like the University of Buenos Aires (300K plus) or UNAM in Mexico City (250K plus). The University of Cairo, at about 150K, is the biggest in Africa; it’s also generally considered the continent’s best school outside of South Africa, which may explain Nigeria’s attraction to the model.

William Gibson once said that the future is already here; it’s just unevenly distributed. So it is. These mega-institutions can provide some lessons about the perils and promises of uber-massification through mega-universities. We probably shouldn’t ignore them just because they’re happening offline and in poor countries.

April 18

Students Aren’t Keen on “Disruption”

I don’t think there’s any doubt that the current proliferation of MOOCs is meeting an enormous demand for access to informal learning opportunities. Millions of people are signing up for courses which interest them, picking a few bits they wish to consume, and, in a few cases, even completing them – all at the low, low, price (to the user) of zero. Undoubtedly a great development.

But for MOOCs to be sustainable they have to eventually generate some revenue, and things aren’t going so well on that score. Coursera made a fuss last week about the $220,000 they earned last quarter by issuing certificates of completion; but given that they’re on $22 million of VC money, that’s still pretty anemic. At the end of the day, someone has to pay for this stuff. This is why some ed tech types seem to be pinning their hopes on governments changing the rules and, in effect, forcing universities to accept MOOCs and other not-necessarily-accredited courses – as is currently taking place in California and Florida.

There’s an important realization here: quite apart from faculty resistance, there are real regulatory barriers to institutions joining the techno-fetishist higher education revolution. And therefore, the debate about MOOCs is heading quite quickly from being casual banter within universities, to being an outright political fight. But on whose side should students fight?

Conceivably, students in places where colleges have been so ravaged by cuts that they are turning away large numbers, might actually be supportive of MOOCs for credit. But what about in Canada, where that’s not the case? We noted a little while ago that students didn’t seem to be banging down the doors to take MOOCs, but that’s not proof they’d actually oppose it.

We decided to test this proposition by asking our MyCanEd student panel members if they would feel moved to participate in public protests should their province or institution announce a plan requiring students to take half their courses in an online format. To calibrate the response, we also asked them a question we were pretty sure would elicit a strong response; namely, whether they would protest if their province or university announced a plan to raise tuition by $1000 every year, for five years. The results were… intriguing.

How Likely Would you be to Participate in a Protest in the Event of:

The short of it is that forcing students to take courses online is only slightly less unpopular than a $5000 tuition hike. This is something governments need to consider before they get too excited about the cost-saving potential of MOOCs. And it should be cold water in the face of anyone who thinks that there’s a demand among current students for this particular form of “disruption”.

January 14

Better, not Cheaper

If there is one clear meme concerning higher education coming out of America during this recession, it’s this: “higher education is too expensive and it’s delivering a sub-optimal product.”

Zeitgeist statements like this one have to be handled carefully. Even if you don’t agree with this meme, failure to engage with it can expose one to charges of being “defensive,” or “part of the problem”. So, for the moment, let’s accept this statement at face-value, and focus on how one might respond to it.

From a business perspective, there’s simply no question that in a quasi-monopolistic system like higher education, the choice between cheaper and better is obvious. Only a chump gives up the revenue. If consumers perceive that the quality – however that may be defined – isn’t there, that’s what needs to be fixed.

Given this, it’s absolutely astonishing to me how quickly the debate in America has focussed around cost. Everywhere, the mantra is about “bending the cost-curve” (tellingly, a phrase consciously borrowed from the health-care debate), and states like Florida, Texas, and California are all making serious moves to implement so-called $10,000 degrees (that’s not the price, it’s the cost). Faced with the proposition that, “higher education isn’t delivering the goods, and it costs too much”, the dominant reaction in America seems to be, “well, let’s make it cheaper, then”. Now, obviously, this response is being driven by political actors rather than educational ones, but it’s stunning nonetheless.

Canada hasn’t quite seen the same level of disillusionment with higher education, mainly because youth unemployment hasn’t spiked in anything like the way it has in the US (the irritating but inevitable fact: higher education will take blame, and credit, for preparing young people for jobs in direct relation to the amplitude of the economic cycle, over which it has zero influence). But the “cheaper-not-better” agenda could easily take root here, too; Lord knows, in Ontario, we’ve only recently escaped the clutches of a Minister who was in thrall to exactly that vision.

So, here’s a thought: let’s be proactive about this. Instead of waiting for the next crisis to pop-up, let’s get ahead of the curve by improving the value proposition of undergraduate education. As I’ve said before, what people really want are graduates who are effective, engaged, and innovative, so let’s find a way to deliver on that.

Put aside for awhile the pitches for more grad students and more research. Winning the battle for public trust in the system is going to depend first and foremost on how our system delivers on undergraduate education. Only by being better can the system avoid the call to be cheaper.

December 18

Baumol vs. Bowen

A fascinating paper came out recently on SSRN, which should be of interest to anyone concerned with the economics of higher education. Its purpose was to answer a most interesting question: is cost-inflation in higher education driven by internal factors, or external ones?

There are two leading theories about cost-inflation in higher education. The first, proposed by William Baumol (whose new book I mentioned last week), argues that external factors are to blame. Education, as a labour-intensive good, says Baumol, will always see its costs rise at a faster-than-average rate in an economy where constant productivity gains are the norm. Howard Bowen, on the other hand, suggests that the cause is internal: because virtually anything can be defended on the grounds that it increases “quality”, universities’ main impulse is to raise as much money as possible, and then spend it on a more-or-less infinite list of priorities. This is what’s known as the “revenue theory” of college cost inflation.

These two concepts are not mutually exclusive, but they do lead to very different policy remedies for the problem of cost-inflation. It would therefore be a good thing if we understood the extent to which the Baumol and Bowen effects contributed to the overall phenomenon; what’s cool about this new paper, Measuring Baumol and Bowen Effects in Public Research Universities, by Robert Martin and R. Carter Hill, is that it manages to use empirical data from 143 research universities to confront this very question.

Martin and Hill’s conclusion is that, for the most part, the Bowen effect prevails. For every $1 that the Baumol effect has raised costs, the Bowen effect has raised costs by $2. They also note – in a finding that engendered some amused/outraged comments from the American professoriate – that the most cost-effective ratio of tenure-track professors to professional administrators (no, I couldn’t find a good definition of what that term means) is 3:1.

I’m not familiar enough with the IPEDS database to critique the paper comprehensively, but it seems to me that the analysis ignores any kind of output related to research, which has been a significant driver of increased costs over the years. And the observation that 3:1 is the “most efficient” ratio is just odd: expenditures can still bring positive returns even if they are not maximally efficient (Economics 100: profit maximizes where Marginal Cost = Marginal Revenue, not where Actual Cost is lowest).

One should also be careful about assuming these results would hold in Canada. My initial impression is that growth in administration has been more restrained here than in the US. But we’ll never know for sure. Sadly, Canada has no IPEDS equivalent which would allow us to look at non-Academic staff numbers over time.

September 20

The Cost of PSE, 2030

One type of story which always makes the back-to-school news is the “what will PSE cost in 2020/2025/whatever” (the choice of year is usually 18 years in the future) story, which normally emanates from a press release from a financial institution trying to sell savings products of some kind. The problem with most of these estimates is that they are based on straight-line extrapolations of recent trends. Thus, all the stories from the late nineties assumed that 8% increases in tuition were going to continue on indefinitely; thus the headlines that the cost of an education by 2015 would be in the region of $125,000. Cue apocalyptic headlines.

I’m not here to engage in retrospective sniggering – heck, it was perfectly clear at the time that these projections were nonsense. Making decent projections isn’t tough: and just to prove it, you can do a walkthrough with us of our own PSE cost projections for 2030.

Tuition (40% of total expenditures): It doesn’t seem like we’re heading towards large tuition increases anytime soon. Governments have decided that universities are like utilities and need to be regulated in roughly the same way. That said, like all labour-intensive industries, costs tend to rise faster than inflation and it’s not as if governments will have the money to cover that. So, let’s say that tuition will rise, on average, by 2% above inflation, or 43% over 18 years.

Books and supplies (7%): In some industries, technology reduces prices, but not in this one. For the forseeable future, the model for publishing is going to involve giving students better products for similar or higher prices. Best guess: 1% over inflation, or 20% by 2030.

Rent (25%): This depends a lot on location: over the last decade, rent went up 46% in Saskatoon, but fell in Toronto. Best guess: no change in real dollars.

Food (12%): This could actually be the biggest problem area. Oxfam recently suggested that food prices could double by 2030 due to rising demand and climate change. Even at half that (which is what we’ll use), it would be a big increase.

Transportation (7%): This one’s tricky – does Peak Oil hit? Do fuel efficient/electric/driverless cars make a major difference? To be conservative, let’s assume a 50% real increase, as for food.

Other (9%): Almost by definition, everything else is going to rise at about the rate of overall inflation.

(Disagree with our guesses? Make your own! Then multiply out by the weights provided.)

Multiply all that out, and what you’re looking at is an increase in total PSE costs of 26.1% (or, about $4,700) over and above inflation over the next 18 years. Nothing to sneeze at, of course, but not exactly apocalyptic, either.

June 19

Europe’s Latent Strengths

I spent part of last week at the European University Association’s Funding Forum in Salzburg. Though it’s getting harder to see how you keep a European-wide conversation going when different countries are heading off in such different directions (small increases in funding in Germany and some Nordic countries, versus cuts of 35-45% in Ukraine and Greece), it was nevertheless a pleasant and productive event.

My job there was to give delegates a bit of a pep talk about European higher education, and why it may see better days soon. Sure, they have very big demographic and fiscal challenges, but these days, who doesn’t?

European universities have two big latent advantages over North American ones. The first is their cost structure. As we’ve seen before, European universities have done well to keep their labour costs relatively low. They also have room to squeeze a bit more productivity out of the teaching function by reducing the number of contact hours per degree. Though the numbers differ a bit from country to country, it seems that German and Austrian students, at least, have about 15% more contact hours on the way to a degree than do North American students. Close that gap, and that’s a lot of labour costs potentially saved.

Can this be done without reducing standards? Well, unlike universities here, European universities actually have some objective standards to uphold, thanks the widespread adoption of learning outcomes statements. As a result, I’d back their universities over ours every day of the week to engineer those kinds of efficiencies in a sensible way.

Public and Private Expenditures on Tertiary Education as a % of GDP, 2009

Then there’s the issue of income. European universities have an enormous untapped asset; namely, students. Even if EU members could close half the tuition revenue gap with non-EU OECD members, they would suddenly have enormous new pots of income which they can use to revitalize themselves. Almost instantly, they could go from having systems that are poor (if efficient), to having systems that are genuinely well-funded. The back half of this decade could be an exciting time in Europe, if governments and institutions have the will to grasp this nettle.

Of course, introducing tuition fees is a delicate thing, especially in countries where high unemployment is reducing the obvious payoff to higher education. Not surprisingly, I spent a lot of time there explaining what was going on in Quebec (most were shocked to find out how generous the Quebec government’s package really was). The lesson seems to be that introducing big changes in fee policy requires careful timing and – more importantly – governments with a lot of popular credibility. We might be waiting a while for that in Europe – and in Quebec, too, for that matter.

August 25

Why Angela Merkel Matters to the University of Windsor

I was interested to see the coverage in the Windsor Star of President Alan Wildeman’s recent note to staff about the 2012-2013 budget.

The Star focused on the gap between $12 million increase in new costs and the $6 million increase in revenue as a reason for a coming round of tuition hikes. To me, though, this misses the real story: namely, crappy pension fund returns.

Windsor, like many Ontario universities, is in a bit of a pickle about staff pensions. The fundamental assumption behind defined-benefit pensions in the 1990s and 2000s was that one could expect pension-funds invested in the market to make serious money. This meant that one didn’t need to fully pay for one’s pension obligations – the magic of economic growth and compounding interest would do part of the work for you.

But the Dow has been going sideways for a decade now and bonds yields are tinier than Brazilian bikinis – meaning that most pension funds haven’t been meeting their targets. At Windsor the gap between pension plan liabilities and the current market value of pension plan assets is about $50 million (could be worse: at U of T it’s $1 billion), meaning it has a “going concern” solvency issue which needs to be addressed by a $5 million annual payment starting this year.

There’s most of your tuition increase right there.

To put the pension problem another way, as you can see in UWindsor’s admirably concise and transparent budget documentation, institutional pension spending has had to rise by 78% over the past four years and now takes up almost 8% of institutional spending. Just to put that into perspective, the library only makes up 5% of spending. To put it yet another way, over the past four years the university has essentially has to reallocate a sum larger than the school’s entire IT budget just to deal with the pensions issue.

To repeat: this isn’t Windsor’s problem alone. Pretty much every university with a defined benefits pension scheme is going through something similar. And it could get a lot worse: if Eurozone bank problems cause credit markets seize up again this fall, equity markets will take another Lehman-like beating and university pension funds will be headed for serious solvency problems that will require more than cosmetic tuition fee increases to solve.

So when you see all those stories about Angela Merkel, Nicolas Sarkozy and Euro bailouts, don’t think of them as a foreign issue. Think of them as being possibly the cause of the next big Canadian university financial crisis.

August 23

Some Tropes We’d Like to Bury

It’s back-to-school time, which inevitably means we’re about to get a raft of journalists dubbing various things as “trends” (step forward, the Ottawa Citizen). Here are three that we should just ditch right now:

(1) Rising Costs Mean More Students are Working. Wrong, at least if we’re talking about the last ten years. In the mid-80s, the student in-school employment rate jumped from about 30% to 40%, where it stayed through to the end of the 1990s, when it jumped another few points to just over 45%. It has stayed there ever since.

(2) Rising Costs Mean Students are Working Longer Hours. Wrong again. Average working hours have bounced back and forth between 16 and 17 hours per week ever since 1997. There is absolutely no change at all over the past fifteen years.

The bottom line here is: recession? What recession? The student labour market doesn’t move in tune with the economy. It’s rock solid, with trend lines so flat you could shoot pool on them, regardless of the state of the economy. What seems to move it are large increases in participation; when the system goes through a major expansion (as it did in the first half of the 80s and again at the end of the 90s), it takes on a new group of students who – for whatever reason – are less likely to work.

(3) Rising Costs Mean Education is Less Affordable. The standard story will note that tuition and fees are currently running a little under $6,000, whereas in 2000 it was about $4,500. Hey! That’s a 33% increase! Must be a crisis!

Well, no. As we pointed out a couple of years ago, there have been some considerable increases in tax credits as well. And, of course, family incomes have been rising, too. Just looking quickly at data from the last decade, it seems that real net tuition (i.e., after tax credits) has increased by about 19% since 2000. Over the same period, average after-tax family income for two-parent families with children has risen by 16%.

In other words, net tuition as a percentage of family income has increased by 3% over a decade. Not much of a headline, is it?

HESA

Higher Education Strategy Associates