Health and Higher Education

We spend about twice as much as other developed countries as a fraction of national output. Yet our results are mediocre. Public and private spending is growing much faster than our income ― putting us on a course that is clearly unsustainable. It appears we are buying quantity instead of value. Outcomes vary wildly from state to state. And programs that target the poor seem to be backfiring instead.

I’m speaking of course about…Ooops. Did you think I was describing health care? No. I’m describing our system of higher education ― making some of the same points that President Obama made the other day. Yet even the president failed to note the obvious similarities between the two fields.

This is the only blog site I know of that frequently compares health care and education. The problems of inner city public schools, for example, are very similar to the problems of the health care system. In both cases, the people who are supposed to benefit are different from the entity that pays the bills. In both cases, the beneficiaries are the excuse to transfer billions of dollars every year from payers to providers. In both cases, the providers and the payers argue about how much is enough, engage in an unending struggle over “reform” and blather endlessly about how dedicated they are to doing better next year.

President Obama’s solution in both fields is eerily similar. “Let’s find out what works and then go do it,” he says. What he doesn’t say is that we have been trying this strategy without success for 25 years in education. We haven’t done much better with pilot programs and demonstration projects in health care. We don’t have any difficulty pointing to centers of excellence. We seem to have an insurmountable problem replicating what we like.

Now the White House has turned its attention to higher education. If past is prologue you know what to expect: some very good analysis of the problems, coupled with an inability to focus on the real culprit: third-party payment.

 But first a brief time out. What’s wrong with all the other health policy wonks? Can’t they look around their campuses and see the obvious? How can commenters go on and on year after year complaining about unsustainable trends in health care and not observe the exact same problem where they work and play? Am I the only one capable of abstraction? Or do wasteful systems look a lot better if they are the source of a paycheck? All those in academia are invited to defend themselves in the comments section.

Okay, let’s turn to some basic facts. Spending on higher education as a percent of GDP in the United States is about twice the OECD average (3.1% versus 1.5%). Yet our results are far from the top:

The U.S. once led the world in college graduates. As an example of this, Americans age 55-to-64 still lead their peers in other nations in the portion with college degrees (41 percent). But this number has flat-lined for Americans. In 2008, the same percentage of Americans age 25-to-34 and age 55-to-64 were college graduates.

Meanwhile, other nations have caught up, and some have pulled ahead. Among this younger age group, 25- to 34-year-olds, all of the following nations now have a larger percent of college graduates than the U.S.: Australia, Belgium, Canada, Denmark, France, Ireland, Israel, Japan, South Korea, Luxembourg, New Zealand, Norway, Sweden and the United Kingdom.

Our mediocre ranking is not for lack of funds. According to Richard Vedder in the Wall Street Journal on Saturday, the explosion in college costs began about the same time as the cost explosion in health care ― with the Higher Education Act of 1965:

In 1964, federal student aid was a mere $231 million. By 1981, the feds were spending $7 billion on loans alone, an amount that doubled during the 1980s and nearly tripled in each of the following two decades, and is about $105 billion today. Taxpayers now stand behind nearly $1 trillion in student loans.

And the trend is ominous. According to President Obama, over the last three decades, fees at public universities have risen 250%, compared with a 16% rise in average family incomes.

So where is all the money going? Again from Vedder:

  • Princeton [University] recently built a resplendent $136 million student residence with leaded glass windows and a cavernous oak dining hall (paid for in part with a $30 million tax-deductible donation by Hewlett-Packard CEO Meg Whitman). The dorm’s cost approaches $300,000 per bed.
  • Harvard’s $31 billion endowment, financed by tax-deductible donations, may be America’s largest tax shelter.
  • The University of California system employs 2,358 administrative staff in the president’s office alone.
  • Since 2000, New York University has provided $90 million in loans, many of them zero-interest and forgivable, to administrators and faculty to buy houses and summer homes on Fire Island and the Hamptons.
  • Former Ohio State President Gordon Gee (who resigned in June after making defamatory remarks about Catholics) earned nearly $2 million in compensation last year while living in a 9,630 square-foot Tudor mansion on a 1.3-acre estate. This Columbus Camelot includes $673,000 in art decor and a $532 shower curtain in a guest bathroom. Ohio State also paid roughly $23,000 per month for Mr. Gee’s soirees and half a million for him to travel the country on a private jet.

[Princeton? Hmm…isn’t that where Uwe Reinhardt teaches? And Paul Krugman?]

So what is all this spending doing for the students? As President Obama pointed out, the average borrower now graduates with more than $26,000 of debt, loan default rates are rising and only about half of those who start college graduate within six years. What about low-income students? We seem to be going backwards: only about 7% of recent college graduates come from the bottom-income quartile, compared with 12% in 1970 when federal aid was scarce.

Reflecting his unquenchable desire to tell everybody what to do, President Obama’s solution to all of this is top down all the way. He has already decided law school should be two years instead of three. You can think of his basic approach as pay-for-performance all over again. It didn’t work in health care, but what the hell? Why waste all the money we’ve invested in the idea without first trying it out in a few other fields.

My proposal is similar to what I’ve recommended for health care: a fixed sum voucher. Give students a bundle of money and let the colleges compete to see what they can provide for that sum. And give all the money to the students. The universities’ income will depend exclusively on how well they compete. I would also get rid of all the tax breaks for donors ― but as part of overall tax reform. The money we would save by eliminating those tax breaks is a potential new source of funds for the student voucher.

I would also insist on some pretty strict standards for the voucher. It appears that we are sending too many people to college these days. (There are 115,520 janitors in the United States with bachelor’s degrees?)

As for the pricing of the voucher, I would look carefully at fees charged for high quality, online courses. We certainly want the students to be able to afford those. Maybe we don’t have to spend much more, however. And with technological improvements, the value of the voucher may not need to increase over time.

When I was in school, colleges and universities performed two functions: (1) education and (2) parental guidance. The first task involved learning. The second task involved growing up, and it included restrictions on where students could live, the hours they (at least the women) could be out and about, whether they could own a car and other aspects of behavior. Fraternities, sororities, social clubs ― all were regulated (and strictly so) by the colleges. The schools operated under the doctrine of in loco parentis. There may be still a role for college as parent in the modern age. If so, I would let the parents pay for that. Restrict public subsidies to education alone.

Comments (24)

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  1. JD says:

    The “let’s find out what works and then go do it” attitude is such a cop-out. Isn’t that what everybody is doing in EVERYTHING?

    • Dewaine says:

      That is pretty indicative of Obama’s presidency. He doesn’t know what to do, so he keeps it vague.

      • Randall says:

        It is just open ended and allows him to stay very active and involved without much of a plan. Duncan is the one really working hard to do something about this, however, he is having to compromise with those that will keep the entire system broken.

  2. Dewaine says:

    Technology is the key. Already there are free courses offered online by the most prestigious universities in the world, myriad training sequences, and accurate instruction on everything you can think of (much more than what is offered through traditional universities).

    The best thing that we can do is set education free from government licensing. Let businesses worry about accrediting.

  3. Buster says:

    Another similarity between health care and education: how well you fare in our both health care and school is a function of your parents and your own resolve.

    It’s an uphill battle to overcome bad genetics. Likewise, it’s pretty hard to overcome bad parenting.

  4. JD says:

    I like the voucher idea, but I don’t think the “pretty strict voucher standards” will hold up under public pressure. I think we would slip into publicly funding every student.

  5. Andrew Thorby says:

    Excellent article although the voucher program would only address the lower income portion of the student population. The Australian system has several major differences worth noting. Firstly, the school year is 210-220 days versus the average 180 in the US – meaning that Australian high school graduates have done an additional two years of school before getting to college in the first place. That then allows high school graduates to go directly into medical school, law school, etc. so they are out in a total of 6 years instead of 8 to 10. Finally, the government covers the cost of college (tuition + stipend) at state schools for those students who can’t afford to pay for their own education provided the student maintains a B average. No student debt and everyone has the chance at a college degree. Seems to be working reasonably well.

    • Howard says:

      You are correct! Well planned voucher an tax credit program would really give the money to the students and allow schools to compete. Dr. Goodman only touched on the abuse of schools funds. Something much bigger than what the president proposed needs to be done. The college ranking system is about the best thing he is planning, oh well.

  6. Ken says:

    Excellent. No one else makes this connection.

  7. Perry says:

    2 year for Law school? Just what we need, more lawyers!!!

    • Greg Scandlen says:

      Next we can do six months for Med school and have lots of doctors!

      • Studebaker says:

        I’d agree with this assessment if the six-month programs are restricted to foreign medical graduates who have complete residency elsewhere and have practiced for several years.

  8. Calvin says:

    According to an article posted in the Washington post:

    “You can’t walk out on medical care for your spouse or education for your child. In the case of medical care, your spouse might die. In the case of college, you’re just throwing away your kid’s future (or so goes the conventional wisdom). Consequently, medical care and higher education are the two purchases that families will mortgage everything to make. They need to find a way to say “yes.” In these markets, when push comes to shove, consumers meet the demands of producers.”

    • Duveaux says:

      Another article that speaks on this is a Becker-Posner blog:

      “To evaluate the President’s proposal, we need to step back and consider what ails our higher-education system. It is helpful to note the affinity between its rather doleful situation and that of our health care system. The top institutions in both systems provide world-class quality of service, mainly to children of the affluent and nearaffluent—the top tier of American universities and colleges is generally considered tops in the world. Both systems provide indifferent quality at the bottom, the bottom-tier universities and colleges being worse than the bottom-tier hospitals and clinics. Both systems are very expensive, with much of the tab picked up by the taxpayer—both are very expensive in part because of poor quality control by the federal government. The government is not a very competent financier, in major part because it is buffeted by interest groups wielding formidable political power.”

  9. Uwe Reinhardt says:

    I agree with John that the whole tax treatment of charitable contributions should be revisited. In fact I have blogged on it here and

    As to 501(c) institutions, such as Princeton and the NCPA, it is not clear to me why they should be tax exempt. All such organizations should also be required to disclose exactly where their funds come from, not just give a total revenue sum on their Form 900.

    Finally, many Princeton professors, Paul Krugman and I included, cannot understand why certain people at a certain fully tax-sheltered think tank in Dallas, Texas should receive a higher salary than a full professor at Princeton.

    But, as Jack Kennedy, put it, life is not fair, so we carry on cheerfully.

    • Allan (formerly Al) says:

      Uwe, I do not wish to devalue your personal accomplishments, but I don’t think John Goodman gets tenure. On the other hand that is what higher education is all about, tenured status and a good deal of that status is paid for by the American public with not only tax free dollars but with grants and other benefits as well. Not only that, but what we seem to see more and more is a club where like minded professors get together and determine who can enter the club. This appears to be elitism without boundaries and is bad for the nation. The NCPA provides a bit of balance, a pebble compared to a giant boulder.

      One thing we should all recognize and Jack Kennedy who you mentioned recognized it after the Bay of Pigs: “All my life I’ve known better than to depend on the experts. How could I have been so stupid, to let them go ahead?” Today we place far too much trust on the experts many of whom never had considerable work experience outside of academia and have the label professor. We have to remember when an upcoming professor makes a politically correct mistake he may very well be promoted and given a higher salary. When a businessman makes a similar mistake he is frequently fired or loses a lot of money.

      I place my bets on the man whose future is on the line and that man is not dependent upon tenured status.

  10. John Goodman says:

    Uwe, as an economist you must know that people tend to get paid their marginal product.

    • Uwe Reinhardt says:

      Then I feel quite good about myself, as my salary is quite good and yet determined in a highly competitive labor market, unlike yours, which is heavily composed of rent.

  11. John Goodman says:

    Uwe: Sadly, you and Paul may not be worth very much.

  12. Vince says:

    Hard to determine the value of a professor or an academic program. As an employer I see the struggles of young professionals trying to re-pay their loans. I also see the tricks used to delay/defer their loans which will leave us tax payers on the hook. The cost of the education is way too high and this is in a profession that pays newer grades well so the value is not there. Imagine what it is for professions that do not pay as well. The costs keep rising only because the schools can charge more. There is far too much money thrown into the system and the schools know that they can charge whatever they want because the kids will just barrow more to pay. They have their re-payment capped and the ability to defer and after a period of time it just goes away. What difference does it make if they borrow 50K or 200K the results will be the same, only the tax payer gets the final bill. We need to add more value to the system and have the costs reflect what it costs to educate the student. If not student loans will cause the same thing the housing market did

  13. Paul Nelson says:

    Ah yes, now I remember: Parkinson, C. Northcote. PARKINSON’S LAW. Ballantine Books. New York. 1957. “Chapter 1 Parkinson’s Law or the Rising Pyramid” begins: “Work expands so as to fill the time available for its completion.” A contemporary adaption might be: In complex organizations, work expands to consume the resources available.

    As an accountant for the British Admiralty during WWII, he noted that the number of ships under the British flag had remained the same for each of the two wars. But, between the two wars, the number of administrative personnel had increased by 500%. It represented an increase of 7-8% annually, compounded.

    I propose that an institutional state of copendency has developed since 1965 between the providers of Complex Healthcare and its payors – as driven by Parkinson’s Law. The result is poorly capitalized Basic Healthcare that is neither equitably available, culturally accessible, justly efficient nor reliably effective for each citizen. Real healthcare reform will require a strategy to separate the Social Mandate from the Economic Mandate as the organizational structure for the healthcare of each citizen.