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Let the marketplace set higher education prices
Economics 101: The marketplace sets prices that balance the interests of those buying and selling a product; price controls don’t work; consumers are rational. Seems like our politicians and the media either didn’t take or forgot Economics 101 when it comes to public higher education.
State policy makers have moved from a bad idea, jawboning Michigan public universities to hold down tuition, to an even worse setting tuition caps and the media is constantly writing that Michigan parents and students are being screwed by too-high tuition at Michigan’s public universities. (Neither policy makers nor the media seem to care about even higher tuition and tuition increases at our private universities.)
For those interested in why college costs for in-state students at Michigan’s public universities is so high read the recent Bridge feature story. The primary reason – as they document – is state budget cuts to higher education over the past decade. Leaving Michigan in the bottom five in terms of state support per student.
What I want to focus on in this post is the issue of whether higher education – even with seemingly high tuition – is worth the costs or not and who should determine that value proposition: customers or government. The Bridge article features two cousins, one at the University of Michigan Ann Arbor paying $16,888 per year and the other at the University of North Carolina Chapel Hill paying $8,423. They describe the difference as a college user tax paid by Michigan families.
The assumption is that UM and UNC provide basically the same education. Back to Economics 101: the marketplace is telling us something very different. Non-resident tuition and fees (Bridge uses more than tuition and fees in their cost calculations) at UM Ann Arbor for incoming freshmen is $18,794 per semester, at UNC Chapel Hill it is $13,416. These prices are set by supply and demand based on paying customers – from anywhere on the planet – determination of what they get for their money from the two universities. Customers are telling us that UM Ann Arbor is worth a more than $5,000 (30%) per semester premium in price over UNC Chapel Hill.
Incoming in-state freshmen at UM Ann Arbor pay $6,220. A more than $12,500 (more than 65%) discount from the market price that students and parents from across the globe are standing in line to pay. Remember that UM Ann Arbor is turning away thousands each year who are willing to pay full price. For any other consumer purchase this would be considered a deal of the century price, not a tax! (Think buying a $50,000 luxury car at $17,500. Good deal or tax?)
And not only do in-state students get a huge discount from market prices they also are getting a terrific investment that pays high returns for a career (something like 40 years). As a recent Brookings study documents higher education is a far better investment than stocks, bonds or owning a home. Its not even close. As I wrote in a previous post, this is even true if one has to take out substantial college loans:
… taking out loans for college is a good investment. And for those who are dedicated to getting a college degree is a far better option than not going to college because they cannot afford the tuition. Somehow as a society we have decided that college loans are a burden but taking out a loan to buy a home is a good investment. We urge new college graduates to buy a home at the same time that we bemoan the so called crushing burden of college loans. … Now there is evidence (the Brookings study) that not only is that not true, but that college is a better investment than stocks and bonds as well.
Should Michigan policymakers increase state aid to higher education and therefore increase the in-state discount? Of course. We strongly believe the state should reverse the more than a decade of disinvestment in our terrific public higher education system. We have argued for years these cuts are stupid. How we could have fallen to the bottom five is mind boggling. College attainment is not only the single best predictor of individuals economic well being but also of state prosperity. It certainly is one of the keys to returning Michigan to prosperity.
But a lower in-state discount (its around 75% at UNC Chapel Hill) is not a tax. And certainly not a justification for price controls. Back to Economics 101. Price controls – tuition caps – long term will lead to one of two results, both harmful. For those institutions with more demand than supply, they will take more students from outside of Michigan. For those who do not have waiting lists of students willing to pay market rates, they will reduce quality.
The basic lesson we need to learn is that in a highly competitive market place like higher education – there are thousands of choices at all price points and quality varieties – prices are set most efficiently by customers, not government. Customers are far better at figuring out what price is a good value and what isn’t than government.
Progress on public investments?
Finally some good news on the public investment front. As you know, our research has led us to believe that public investments in preparing, retaining and attracting talent are the key to positioning Michigan and its citizens for prosperity in a flattening world. What has been so frustrating for years is that business and political leadership in the state talk about the importance of college attainment as a – if not the – key to Michigan’s future success and then advocate/adopt policies that take us in the wrong direction. Even worse has been the absence of anyone willing to put on the table an alternative to the tax cuts/small government agenda that has dominated our public policy for more than a decade. That may be changing.
Kudos to the Senate Democrats – led by Gretchen Whitmer – who have just released their Michigan 2020 plan. It makes college attainment the state’s economic development priority. It would provide substantial tuition payments dierctly to students to pay for a college education at Michigan’s universities and community colleges. The annual investment would be $1.8 billion. And it is more than paid for. The Senate Democrats should be praised for advocating for more revenues. Through closing tax loopholes that don’t produce jobs, collecting sales tax on internet purchases (a la Indiana) and reforming the state contracting process. A major step in the right direction!
John Austin, chair of the State Board of Education, in a Dome article lays out a more expansive public investment agenda in an article that provides ideas on how to use the state budget surplus to grow the Michigan economy long term. Worth reading! He proposes increased spending in the areas of education, innovation, infrastuture, cities and the outdoors. All of which are essential to preparing Michiganders for the economy of the future and creating Michigan as a place where mobile talent wnats to live and work after college. Austin writes:
But for long-term job creation, Michigan needs more than a “business-friendly” tax and regulatory environment. We need strategic investment in Michigan’s assets that are the foundations of economic growth, and that the private sector doesn’t pay for: well educated people; strong, affordable universities driving innovation; clean lakes and rivers; modern transportation and communications infrastructure; cities with vibrant arts, culture, parks and libraries.
Also, in a reversal of course, good news on M1. Governor Snyder and Mayor Bing are back on board to make the Woodward light rail line a reality. Detroit’s business leadership and the Kresge Foundation have been great in insisting that this is an essential element to Detroit’s and the regions’ economic revival.
Lessons to learn: California billonaires
A recent LA Times story is headlined “California billionaires plan to put big tax hike on the ballot.” You read that right: private sector leaders pushing for a tax increase! What do they want to do with the increased funds? Invest in education and local government. Why more funding for education – both k-12 and higher education – and local government? Because they are essential to growing the California economy.
The recommendations were developed by the Think Long Committee for California, a component of the Nicoloas Berrgruen Institute. In addition to Berrgruen, a billionaire investor, the Think Long Committee includes bi partisan heavyweights like Eric E. Schmidt, the chairman of Google; Gray Davis, a former Democratic governor; Eli Broad, a prominent philanthropist; and two former United States secretaries of state, Condoleezza Rice and George P. Shultz, both Republicans.
The report’s (found here) framework for growing the California economy:
- Create a positive business environment for job creation
- Reduce the personal income tax across the board while retaining California’s progressive tax structure
- Fund education by an additional $5 billion while fostering reform
- Provide $2.5 billion to the University of California and California State University systems to keep higher education within reach of California’s families
- Empower county governments and help reduce public safety costs by providing $1.5 billion in additional funding
- Provide $1 billion to California cities in block grants to meet their local needs
- Start paying down the state’s “wall of debt” and stabilizing the boom-and-bust budget cycle
- Give Californians real power to make government accountable
- Improve the process for making long-term economic policy
So an approach to growing the economy that includes lower business taxes and regulation, lowering the costs of and improving the quality of government services and a net tax increase to enable public investments in education, quality basic services and infrastructure. The plan would largely be funded by a sales tax on all services except health care and education. The report says:
While we tax the sale of a donut eaten in a coffee shop, we don’t, for example, tax the sale of legal, consulting, accounting or architectural services. In essence, those who produce goods such as donuts or machinery are subsidizing those who produce services and information. To address these issues, the committee proposes to broaden the tax base while reducing personal income taxes across the board and bringing the corporate rate down to a competitive level in line with other states. However, the new tax code will have to produce a sufficient increase in revenues to reduce the state’s budgetary debt and in the longer term provide stable and growing funding for the services that are essential to long-term economic growth such as education, public safety and investment in infrastructure. (Bold added.)
The plan is clear on the goal of economic development – a broad middle class – and why public investments in higher education, k-12 and local government are essential to that goal.
They identify the goal as: “A guiding objective of the state’s long-term strategy should be to build a vibrant, job-creating business climate that can sustain a solid middle class while continuing to make California a welcoming place where families and individuals will want to reside.”
On why higher education matters: “For decades, California’s higher education system has been the envy not only of this country, but of the world. More importantly, it has been the incubator for innovative, entrepreneurial thinking and has fueled the growth of cutting-edge technologies. In recent years, however, it has fallen victim to decreased funding from the state, which threatens its ability to attract and maintain quality faculty, provide accessibility and affordability for all students, and preserve its infrastructure.”
On the importance of k-12 education: “Quality K-12 education is the foundation of any solid middle class society, providing opportunities for upward mobility. This is especially so in a knowledge economy that faces stiff competition globally and where students in other countries from Singapore to South Korea to China outperform California’s students. To ensure the state’s long-term competitiveness, California schools must be brought up to global standards.”
And on state support for local government: “Returning decision- making power and resources when appropriate from Sacramento to localities and regions where the real economy functions and government is closer to the people – and thus more responsive, flexible and accountable.”
In Michigan we have been pursuing for a decade or more the cut part of the strategy. Both taxes and public investments. And we have experienced arguably the worst decade in post World War II Michigan. What this bi-partisan group of Californians – with heavy private sector leadership – understands – but we still don’t – is that you can cut business taxes and the cost of government at the same time that you are raising taxes to fund the public investments which give you a far better chance of growing your economy. It is both/and, not either/or. The sooner we learn this lesson the more likely we get back on a path to prosperity.
New high school(s) competition
Our Michigan Future Schools (MFS) initiative is taking applications for grants and support services to help launch at least one new high school serving students from the City of Detroit in the fall of 2013. For those interested in applying for a grant you can find the request for proposal here. All applicants must attend a mandatory bidders conference on December 21, 2011 at the Skillman Foundation.
As a reminder, MFS is designed to launch new high schools at scale with an initial goal of eleven new high schools by 2014. MFS expects that all students enrolled in the high schools it supports will succeed in college. It has committed to its funders that at least 85% of each schoolʼs students will graduate from high school, of those graduates at least 85% will enroll in college and of those who enroll at least 85% will earn a college degree. To date seven schools have received MFS grants averaging $800,000 over four years. Four have opened, three more are planned for 2012. You can find more information on the initiative here.
Worth reading
While I have been using this post to explore the findings in our new report, I have stockpiled lots of articles that I wanted to write about. Rather than wait until I get to them here is a list of recent articles that I think are worth checking out.
• Probably the most important education article I have read in a long time comes from the New York Times Magazine by Paul Tough. It deals with the essential question of what skill set students need to succeed in college. And suggests that character – actually performance, rather than moral, character – may trump academics. Built around the common learnings of an elite private school and a KIPP middle school.
• The Atlantic’s Can the Middle Class be Saved is highly recommended. It provides a good overview of how a changing economy is eliminating or lowering wages of formerly middle class jobs. Core to all of our work at Michigan Future is the belief that globalization and technology are mega forces – far more powerful than public policy – which are fundamentally changing our economy. This article raises all the right questions about winners and losers in that transition.
• A disturbing Yahoo News article deals with the widening wealth gap between the old and young. Now the widest it has ever been. The typical U.S. household headed by a person age 65 or older has a net worth 47 times greater than a household headed by someone under 35, according to an analysis of census data released Monday. While people typically accumulate assets as they age, this wealth gap is now more than double what it was in 2005 and nearly five times the 10-to-1 disparity a quarter-century ago, after adjusting for inflation.
• Another disturbing and thought provoking article comes from Bloomberg Businessweek. Its title and subtitle say it all: Why Americans Won’t Do Dirty Jobs: In the wake of an immigrant exodus, Alabama has jobs. Trouble is, Americans don’t want them.
• A terrific Ron Dzwonkowski column for the Free Press entitled: Forget taxes and regulations, Michigan must build it so they’ll come. Based on the Michigan Municipal League’s new book The Economics of Place. (I am one of the chapter authors.) Read the article, better yet if you have time, buy the book.
• Last, but certainly not least, another Yahoo News story. This one an interview with Erik Brynjolfsson and Andrew McAfee, the authors of the new book Race Against The Machine: How the Digital Revolution is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy. More on the constant change being driven by technology. Specifically the ability of machines to do more and more of the work humans used to.
Schools and cities driving economic growth
In a recent New York Times column Harvard’s Edward Glaeser wrote: “In the long run, America will be richer than China only by having smarter citizens, and that requires the skills that come from schools and cities, not dispersed factories.”
Rick Haglund in an insightful Mlive column reviewing Governor Granholm’s new book makes the same point:
Her prescriptions are heavy on government partnerships with industry, and a focus on “clean energy” and advanced manufacturing. But Granholm says precious little about the areas where most of the good-paying jobs in a changing knowledge economy are being created — information, health care, education and financial services. Nor does she say much about the need for an urban strategy and boosting state financial support for higher education — two areas that are critical in attracting and retaining the young talent Michigan needs. But state government has been cutting revenue sharing to cities and university appropriations for years, a practice Gov. Rick Snyder has continued. Reversing those trends will be hard at a time when Snyder’s fellow Republicans want to abolish as much government as possible. But if Snyder fails in his pledge to make our cities more attractive and our workers smarter, he may find himself hiding behind sunglasses and a ballcap as his days as governor wind down.
Skills that come from schools and cities. Think about how different that is from the normal approach to economic development. Most policy makers and practitioners would think you are from Mars if you suggested that schools and cities are the levers that matter most for economic success. They almost exclusively focus on retaining and attracting businesses.
The evidence, in an economy being constantly transformed by globalization and technology, supports Glaeser’s central conclusion: concentrated talent is the most important ingredient driving economic growth. And where are college educated adults concentrating? Big metros anchored by vibrant central cities.
We found in our just released progress report on Michigan’s transition to a knowledge-based economy that high prosperity is occurring chiefly in those places where knowledge-based enterprises across many sectors are concentrating. They are concentrating in areas with a high proportion of adults with a bachelor’s degree or more.
In 2000, at the end of the boom years, Michigan still ranked 18th in per capita income. We were 34th in four-year degree attainment. In many ways, 2000 marked the end of an era when you could have high prosperity with low education attainment. No more! In 2009 Michigan ranked 36th in college attainment and 37th in per capita income — 13 percent below the national average, our lowest since the federal government started keeping statistics in 1929.
Our basic conclusion: what most distinguishes successful areas from Michigan is their concentrations of talent, where talent is defined as a combination of knowledge, creativity and entrepreneurship. Quite simply, in a flattening world where work can increasingly be done anyplace by anybody, the places with the greatest concentrations of talent win. States and regions without concentrations of talent will have great difficulty retaining or attracting knowledge-based enterprises, nor are they likely to be the place where new knowledge-based enterprises are created. The knowledge-based economy is now the path to prosperity for Michigan.
Michigan has lagged in its support of the assets necessary to develop the knowledge-based economy at the needed scale. The assets that matter most: a quality and agile higher education system and big metropolitan areas, anchored by vibrant central cites, where talent want to live and work. These are two areas the state has been disinvesting in this decade. Not smart!
Talking with Lucy Ann Lance
Had an opportunity to talk everything Michigan Future with Lucy Ann Lance on her WLBY Business Insider radio show. We discussed mainly our new report on the Michigan economy, but also discussed our Detroit high school initiative. You can find a summary of the interview and a link to the entire interview here. It always is a pleasure to appear on her radio show. Lucy Ann asks insightful questions and gives you time to answer them in more than just sound bites. So if you listen to the interview you will get a good overview of our work.
Turns out that due to our high school initiative – in a quite a surprise to me – Michigan Future is one of three nominees for the Washtenaw County non-profit of the year by AnnArbor.com. Lucy Ann is a co-emcee of the award event. It is one of the topics discussed in the interview.
A couple of other media coverage of our work are also worth checking out. I was a guest on Dan Gilmartin’s WJR Prosperity Agenda radio show. You can listen to the show here. The show was co-hosted by Grand Rapids Mayor George Heartwell and explored the importance of quality of place in growing the economy. A central theme of our work.
Finally Chad Selweski wrote a great column for the Royal Oak Daily Tribune on the importance of a college degree for both individuals and the Michigan economy. Refuting the growing notion that because many recent college graduates are having difficulty finding a professional job immediately after graduating that a college degree is not all the valuable. What nonsense!
Our Governors on higher education
MIRS reports that former Governor Granhom “at her first book signing since A Governor’s Story was released, was asked what she would have done if the budget had run a surplus for just one of her eight years in office. Granholm said she would have “at least saved the cuts from higher education” because they were “almost the most painful” and were important to the future.”
Governor Snyder as candidate Snyder wrote in his 10 point plan for growing the Michigan economy:
Lip service has been paid to creating a knowledge-based economy, but that transition has been delayed by cuts in funding for higher education … The state needs to reverse recent trends of under-investing in colleges, universities and community colleges. Michigan spent decades building a world-class system of higher education. The system is arguably the most import asset the state has to develop the concentration of talent Michigan needs to be successful in the knowledge-based economy.
Both clearly understand that Michigan’s public universities are a key asset to Michigan’s future economic success. And yet what happened while they were in office? An 18% reduction in state spending during Granholm’s 8 years and the largest ever one year cut of 15% in Snyder’s first year in office. Add it together and state support for our 15 public universities is down by a 1/3 since 2002 from $1.8 billion to $1.2 billion. Michigan has fallen to 49th in state support per pupil. That’s right: next to last. Hard to imagine for a state with a legacy in the 20th Century of having built one of the best public higher education systems on the planet.
And the consequence of those cuts has been severe as Peter Luke demonstrated in a terrific MLive column. Luke notes for the first time ever the avearage tuition at Michigan’s 15 public universities is above $10,000. Making higher education unaffordable for more and more Michigan high school graduates. Pretty dumb!
There is a direct correlation between declining state aid and increasing tuition. As Luke writes
Average tuition since 2002 is up more than 110 percent. … If state aid had merely kept pace with inflation on an annual basis in the past 10 years, per-student spending by the state would be about $4,000 more than it was in 2002, a little less than the increase in tuition during that period. Instead, the 2012 budget chops it another 15 percent. On average across the 15 schools, state aid provides about a quarter of the money for general operating budgets. And on average, about three-fourths of those budgets comes from tuition and fees. Three decades ago, it was reversed.
Michigan is 37th in the proportion of adults with a four-year degree or more. As both Governors Granholm and Snyder know that is a recipe for the state getting poorer since college attainment is the best predictor of state per capita income. Not surprising we have fallen to 36th in per capita income. It is hard to imagine how we increase college attainment in Michigan if we continue the disinvestment we have made in our public universities the past decade. We need state policy makers while in office – rather than before or after their terms – to make higher education a – if not the – priority.
• Copyright 2009 • Twitter: #michiganfuture