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Education: Public vs. Private Models

From The Economist:

On the other hand, American universities really are the best in the world, and the European model of taxpayer financing of higher education really is going through a massive and inevitable restructuring. This makes figuring out what to do about higher-education cost inflation harder, to my mind, than figuring out what to do about health insurance. There don’t seem to be alternative models that sustainably deliver equivalent value at lower cost. ”

I am not sure if there is a bubble in higher ed. There certainly seems to be a lot of evidence to support a bubble: skyrocketing tuition, inelastic demand, relatively high unemployment for recent college graduates. Part of the problem is definitely related to the structure of education model.

Berkeley Economist Brad DeLong agrees that something strange is afoot:

“I do observe that education and medical care are the two large sectors in which the private market did not have a strong presence a century ago and are also the two large sectors where market competition does not seem to produce lower prices. And I feel that there must be some connection.”

The reason that education and heath care behave this way is because of consumers’ disconnect with the real costs and benefits. It is a consumer knowledge problem, not a regulation problem or enterprise model problem. When someone is dying of cancer, it is seldom the case that this patient and their family make a financial calculation to see if it worth while to receive treatment: “Sorry, Pops, but your best earning years are behind you, and even though I played around with the discount rate a little bit, we still don’t see a justification for treatment because of a negative NPV.” That’s not how it works. Patients and families often spend WAY too much money because it is presently impossible to accurately measure the marginal benefit of any given treatment ex ante.

Similarly, higher education has a mystical role in the American Zeitgeist. My parents, and many of my friend’s parents, told us to do the best we could in high school and apply to the best colleges possible: they would figure out a way for us to pay for Harvard (worth it?) or USC (probably not worth it?) if we got accepted. My grandfather applauded by choice to go to Santa Barbara City College first before transferring to UCSB. Essentially, the savings I enjoyed is the premium students pay for the “college experience”, i.e. living in a dorm, attending freshmen success seminars for 3 easy units. The instruction I received at the CC was leagues better than what I received at the UC. Unfortunately, Higher Ed isn’t entirely about education. Going to Harvard is as much about being around smart people and making connections with the future leaders of the world as it is about learning and scientific inquiry. Ivy Leagues might be worth the 200K it costs to attend them (this would be an easy regression to do, looking at differences in lifetime earnings. While someone is at it, also look at the net worth of the student’s families, to see if the elite gain more of an advantage going to Harvard than “regulars”, due to the elite families having connections in business and politics). The elites will always support Ivy League caliber schools because it is where elite attitudes and cultural memes are incubated and distributed.

Ultimately, I think the correct model is a mixture of private and public. The public model in the USA is surprisingly strong: considering all the other government sponsored endeavors that become politicized, American public universities are among the best in the world. This is partially due to state governments acting as intermediaries between Federal money and the schools themselves. The private sector’s role is to step up and fill the gaps created by the public model. All the negative talk about for-profit universities ignores an important fact: these universities are popular because people want educations. Some of the more predatory tactics that these companies use to “seduce” potential students are reprehensible, but ultimately they are just marketing and advertising. College also gets a bit of a subsidy from High School guidance counselors who pressure students into going to college regardless of the students financial means or aptitude. If students and their parents understood more about the value of a college degree, rather than just believing the narrative meme that “college is important and always worth it”, consumers would make better choices and maybe they would rethink the $60,000 MBA from the University of Phoenix if they knew the job prospectives facing them after graduation. Ultimately, I believe that it is always better to put the onus on consumers to consume responsibly (caveat emptor) than to regulate an industry and destroy consumer choice.

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