It's a
lesson I have to repeat every so often.
Third-party payers such as insurers and government-guaranteed lenders attenuate the pressure to discover prices. It's that phenomenon that causes me to cringe whenever somebody speaks of containing health care "costs." I still have no idea why a passive stretching device rents for $120 a month out of network but $40 in network, or what determines the network, but I sure got familiar with those terms and those bills, and a nice refund of a copay once the insurers sorted it out.
Matt "Dean Dad" Reed
gives me occasion to repeat it.
Folks who follow higher ed policy debates know that price and cost are not the same thing. But most people don’t. So, a brief foray into “explainer” blogging follows.
Price is what a college charges. Cost is what a college spends.
To a first approximation, yes, although in the absence of price discovery, both in the quoting of tuitions and in the hiring of deanlets, it's incomplete.
Perhaps, as Dean Dad puts it, you offer a discount on tuitions as a way to produce a larger cohort of Clear Thinkers, which
might have a spillover benefit or two.
[At state-supported colleges and universities] price is a fraction of cost by design. The point of charging less than the cost of provision is to provide access for people of modest means, and to encourage people more generally to go to college. It’s based on a judgment that higher education is enough of a social good that it’s worth discounting at the individual level. Given the way that income tends to track over the life cycle, discounting during the early low-income years is a practical necessity for many.
In addition, there's an information problem: there is no capital market that will underwrite
borrowing against future lifetime earnings, as nobody knows who the high earners will be fifteen to thirty years hence, which precludes creating a portfolio of contingent claims to underwrite student loans. On the upside, that makes it difficult for universities to quote tuitions in such a way as to
extract the present value of future earnings of the high earners, although the scramble to get into the Ivies might be creating conditions under which that's possible. Sometimes, the legislators who fund the state colleges and universities toy with
latter-day indentures, the
better to capture in the form of future taxes the current tuition subsidies inherent in those discounts.
Perhaps we can stipulate that on the revenue side, colleges and universities compete, in the form of amenities, financial aid packages, and reputation, all of which has at least some effect on limiting tuitions.
That competition, however, might be distorted precisely by the presence of third-party providers, whether of subsidies or loan guarantees or in the form of alumni donations. That's an effect the dean misses in his discussion of the follies of cost containment for its own sake.
I bring this up because I periodically hear that tuition increases are signs of out-of-control spending. They can be, but frequently, they’re efforts to compensate for losses in other kinds of support. Put differently, they’re attempts to save the quality of the institution from an austerity-driven death spiral. Contrary to popular belief, they may not be signs of bad management; depending on circumstances, they may represent responsible stewardship.
Perhaps that's true in the community college and regional comprehensive universe, where the out-migration of population and the continuing deterioration of the common schools are concentrating the minds of legislators and state boards of higher education, who might have to close entire campuses as a consequence of their counties or districts or states losing out in the competition among jurisdictions.
I submit, though, that there is no factor-minimal cost function for higher education, in part because there are insufficient incentives for the people in charge to discover them.