The Growing Crisis in American Higher Education

I was a little surprised when David Mitch asked me to speak. After all, like David, I am an economist, and economists suffer from three deficiencies. First, they are often wrong. Second, they are usually very boring. And third, they have a reputation for being heartless and insensitive.

As to the first point, in 1798 the Rev. Thomas Malthus predicted that, as a consequence of human passions and the law of diminishing returns, living standards would stabilize at a bare subsistence level. Whereupon Britain completed an Industrial Revolution so strong that the typical Briton today consumes in less than a month what his 1798 ancestor took a year to consume. In 1929, the dean of American economists, Yale’s Irving Fisher, opined that “the stock market is on a permanently high plateau,” whereupon it fell over 85 percent over the next three years –the greatest decline in U.S. history, before or since. In 1985, Nobel Prize winning economist Paul Samuelson in his iconic textbook proclaimed, “the Soviet planning system is a powerful engine for economic growth,” whereupon the Soviet Union itself disappeared, and no one today believes the planning system was a great growth driver. Finally, in 2009, then Chair of the Council of Economic Advisers Christine Romer predicted that, if the Obama stimulus package were adopted, the unemployment rate would not rise above 8 percent. The package was adopted, and the unemployment rate went above 8 percent for 43 consecutive months, the first time it had done that since the Great Depression. So, in the interest of consumer protection, keep those examples in mind as you hear some predictions from me about higher education.

Thomas Carlyle called economics the “dismal science,” and after today’s presentation you will probably agree with him. I will argue today that there are several forces at work that mean that American higher education will undergo fundamental change over the next generation. Traditional universities will not disappear, and many of the things us professors do will continue to be done. But the changes will nonetheless be profound.

We often brag that we have the best system of higher education in the world, and it is true that in world rankings of universities, the U.S. dominates the top 100 schools. American universities are heavily involved in the training or the employment of Nobel Prize winning scientists, for example, and there is a huge global in-migration of students to avail themselves of the superior education available in this country.

While these things are true, a number of major problems facing higher education will force significant changes in coming years. Let me mention just three of them. First, the costs of attending college has been rising far faster than people’s incomes, something that is mathematically and economically non sustainable indefinitely. 

Second, the strong financial advantages from attending college are proving increasingly elusive for recent college graduates, with large proportions of them clearly being underemployed. As the perceived advantages of attending college begin to erode, more Americans are questioning whether to make the investment in a college degree, and others are even questioning whether the costs of entering some of the professions exceed the benefits.

 Third, there is growing evidence that students are learning relatively little while in college, showing only marginal gains in critical thinking and writing skills, and spending more time socializing and exercising their bodies through sports and sex than in exercising their minds. The countryclubization of the American university is proceeding apace, with learning increasingly becoming a secondary focus in many schools.

I plan to elaborate on these three points a bit, and then return to first principles and ask –what are the missions of the modern university, and how are we doing in accomplishing them? I will conclude with some tentative speculations about the future.

Rising Costs

From about 1910 to about 1980, tuition fees at American universities rose at an annual rate about 1.5 percent greater than the overall rate of inflation. Fees were initially very low, so this level of fee increase was quite sustainable, because the income of Americans was rising about 2 percent a year, adjusting for inflation. Indeed, for the average American, the burden of financing college in the late 1970s was actually lower than it had been a couple of generations earlier: the tuition cost to income ratio was falling, albeit modestly. In the last one-third of a century, however, tuition fees adjusted for inflation have risen around 3.5 percent annually, far more than incomes, which have been showing smaller growth in this century owing to an increasingly stagnant economy. The ratio of tuition fees to income has soared.

 Let me use my very typical state school, Ohio University, as an example. In the 1977-78 academic year, the tuition fee was $870, which was 11.7 percent the level of personal income per person in the Buckeye State. In the current academic year, 2014-15, the tuition fee is $10,536, which is 24.9 percent of estimated 2014 personal income per capita. The proportion of income devoted to tuition fees over doubled. That is very typical of the experience nationwide.

Why are tuition fees rising so much faster than prices or even incomes in general? I wrote a whole book on this once, as have others, so let me give a very abridged answer. First, we can say definitively that the demand for higher education has risen far more than the supply, leading to both rising prices and higher enrollments. But let me offer three more specific explanations. The first is the hypothesis put forth by William Baumol of Princeton in the 1960s, and recently promoted by Robert Archibald and David Feldman of the College of William and Mary. Higher education is a service industry, and service industries are inherently inflationary. It is difficult in universities to cut costs by substituting capital equipment for labor, unlike most industry. Think of teaching as being similar to acting: it takes as many actors to perform King Lear today as it did 400 years ago when it was written. We cannot automate actors or teachers.

There is some truth to the Baumol hypothesis, but it only goes so far. First of all, it is increasingly possible to automate the teaching function and increase the ratio of students to professors, as on-line education has demonstrated. Second, faculty salaries are, at best, only about one-third the budget at a modern research university. The explosion in non-instructional staff, including administrators, is not explained by the Baumol hypothesis. You can automate many of the business functions of universities. The Baumol thesis might explain much of the 1.5 percent increase in real fees before 1978, but cannot explain the majority of the much more rapid fee increase since.

The argument state university presidents use when asked to explain rising costs usually revolves around the declining share of university budgets accounted for by state appropriations. While around 1960 or 1970 the state typically put up 40 to 60 percent of funds spent by the typical public university, today the figure is typically somewhere between 10 and 35 percent, necessitating aggressive tuition increases. Again, there is some truth to the assertion, but it really explains at best a small proportion of rising fees. State appropriations for higher education are greater today in an inflation adjusted sense then in, say, 1985. Rising enrollments have meant that per student appropriations have remained roughly the same, rising in some years and, particularly from 2007 to 2012, falling in others. The reason state appropriations have fallen as a share of university budgets in considerable part is because it takes more dollars, even in an inflation-adjusted sense, to fund one student today than it did 30 years ago. Again, universities have chosen to add armies of administrators and build fancy, costly buildings and student amenities. Moreover, the tuition fees at private institutions over the long run have risen almost as much as those at public schools, and the private schools receive little or no state appropriations. The bottom line is state appropriation deficiencies are not the main cause of rising tuition costs.

That brings me to the Bennett hypothesis; Education Secretary Bill Bennett in a February 1987 New York Times op-ed opined that federal financial aid money allowed colleges to raise fees more aggressively, and that they have done so. The universities, not the students, have captured these funds.  Higher tuition fees have largely funded the academic arms race, allowing for million dollar university presidents, vast numbers of what Benjamin Ginsburg calls deanlets, fancy dormitories, climbing walls and now a $8.5 million “lazy river” at Texas Tech, where students can float on rafts while contemplating life or sleep, whichever comes first. Highpoint University reportedly has a luxury restaurant for students and offers valet parking.

The empirical evidence increasingly at least partly confirms the Bennett Hypothesis. One reason states have not raised appropriations aggressively for colleges is that they believe the schools can live off federally financed tuition payments. It is not coincidental, I think, that the acceleration in tuition increases almost exactly coincides with the rapid growth of federal student financial aid. I think rising federal student aid not only explains a large portion of the extraordinary rise in university fees –but also probably such other pathologies as declining academic standards, underemployment of students, grade inflation, and so forth.

Underemployment of College Graduates

The crowd that advocates postsecondary education for all correctly cites statistics showing that college graduates on average earn dramatically more than high school graduates. But if one confines the analysis to recent, newer college graduates, the picture is not so rosy. The New York Federal Reserve suggests that about 46 percent or recent graduates are underemployed—a few fully unemployed, others working part-time, still others working in low paid jobs where most workers have high school diplomas. The sequel to the Arum and Roksa Academically Adrift volume, called Aspiring Adults Adrift, suggests that a large majority of students two years after graduation still depend in part on their parents for financial support, and nearly one-fourth are living with them. The Fed shows that of those graduating from college in the bottom quartile of their class, average earnings are little different than that of average high school graduates. Going to college today is risky – remember also that 40 percent of kids entering college full-time fail to graduate in six years.

Little Learning, Lots of Partying

There are several surveys that are remarkably consistent in their findings: American college students on average spend well under 30 hours a week in class, studying, writing papers, and so forth, down about one-third from half a century ago. Indeed, I suspect the total academic time spent by college undergraduates is less than that spent by eighth graders. The amount of time spent in recreational activities –partying, physical exercising and the like exceeds the time spent on academics. The socialization dimension of college overwhelms the academic one.

It is no wonder then that Arum and Roksa report that on average college seniors have little more critical reasoning or writing skills than freshman. It is no wonder that federal adult literacy surveys show that today’s college graduate on average is less literate than his or her counterpart of a generation ago. It is no wonder that the Intercollegiate Studies Institute test on civic literacy shows seniors know very little more than freshman, and that there is abysmal ignorance about such things as when the Civil War occurred. It is no wonder that a large proportion of employers complain that new college graduates lack skills needed to function well in the workplace. Yet today’s student typically has a far higher grade point average than graduates of 50 years ago. Students work less for higher grades and spend more time partying then learning.

At the beginning, I told you economists were boring. Let me tell you a little story, related to me by a distinguished monetary economist and former president of a Federal Reserve Bank. A woman visited her doctor and got devastating news: she had brain cancer and had six months to live. She said, “Doctor, isn’t there anything you can do?” The physician replied, “There is nothing I can do for you medically, but I have some good advice.” She eagerly said, “What is it?” He replied, “Marry an economist and move to North Dakota.” She said, “Why on earth would I want to do that?” He replied, “You won’t live a day longer, but it will sure seem like a long, long time.”

Another way of addressing the coming higher education crisis is to return to first principles, asking “what is the purpose of a college education?” Alas, that is where the trouble begins. A university education means different things to different people, and the resultant confusion in determining the mission often leads to mediocre results –half-achievement of a half dozen sometimes conflicting objectives, specifically:

  1. The vocational goal. Given the contemporary zeitgeist, probably the most important motivation for many paying customers (students) for attending college is they think they will derive a greater income; college is allegedly an “investment in human capital” with big private payoffs;
  2. The moral goal. When American universities were founded in the 17th, 18th and early 19th centuries, they were perceived as a way of inculcating virtue –civic virtues and well as traditional Christian virtues like integrity, honesty, kindness, thrift, and industriousness;
  3. The egalitarian goal. Strongly influencing 19th and 20th century university expansion was the belief that universities were powerful tools in achieving the American Dream,  allowing persons of humble circumstances  to advance economically;
  4. The knowledge/critical thinking goal. But isn’t college about learning things –discovering truth and beauty, and how to think about complex problems?  A good college is one where graduates know a lot more about the world in which we live than they did upon entering four (five, six ?) years earlier;
  5. The research goal. At many campuses, however, an important, sometimes dominant interest is in the creation of new knowledge, not the disseminating of existent facts. Indeed, many university presidents eloquently proclaim the need of becoming a world-class university with massive research and graduate programs.
  6. The economic growth goal. Some believe universities are engines of economic growth, creating and expanding human capital through teaching and research, and by offering their superior wisdom to policymakers allocating public resources.


Any decent assessment of higher education asks, “How are we doing with regards to these goals?” But goal achievement comes at a cost –it takes considerable resources to run American higher education, and monies used for universities could be used for other things that we value as individuals and as a society. Are we getting good “bang for the buck?” If not, where are we getting low value for our expenditure? Why is productivity lower than it should be?

Also, we need to ask, who is paying for the education? Are large public subsidies of higher education justified –are universities really largely “public goods” that have huge positive externalities (or spillover effects) deserving of public support? Why do we tax “for profit” higher education that does similar things as subsidized not-for-profit universities? But first, let us look at detail at our success with respect to the varied missions of universities.

Are We Achieving the Goals of Higher Education?

First, The Vocational Goal

The Higher Education Research Institute at UCLA every few years conducts extensive surveys on faculty and student views on various aspects of higher education. On the most recent Freshman Survey, the proportion of respondents who said college was important to them for getting a good, high paying job reached an all-time high for the survey, surpassing 85 percent. It far out distanced other motivations.

I have already suggested that recent graduates are not getting good jobs. For example, far more college graduates work in retail stores for low pay than there are soldiers in the U.S. Army. We have over 115,000 janitors with bachelor’s degrees, and 25 times the proportion of taxi drivers with bachelor’s degrees today than was the case in 1970 when I was at the beginning of a long academic career.  When only 11 percent of adult Americans had college degrees –1970 – a degree almost always denoted an individual with very high cognitive abilities with large accumulations of knowledge. Even graduates of new state universities with dubious reputations were considered something special. Now that over 30 percent have degrees, employers are finding many college graduates do not have above average levels of intelligence or high amounts of discipline and drive. Hence, the graduates of mediocre universities are having huge trouble getting jobs relative to those attending the elite private schools that still command respect because most of their graduates have higher levels of cognitive abilities and greater drive. The gap between the Harvards and the Towson States have widened dramatically.

Second, The Moral Goal

It is true that typically college graduates have some virtuous characteristics. For example, statistical evidence suggests that they are less likely to commit major crimes, but more likely to volunteer to work for charitable organizations than high school graduates. College graduates tend to have higher levels of civic engagement, voting more than others, and being disproportionately elected to public office, etc. It is over 60 years, for example, since we had an American president without a bachelor’s degree. Again, it is unclear, however, how much of the increased “virtue” associated with these positive characteristics came from experiences associated with college life. Crime rates and divorce rates are higher than they were in, say, 1930, even though the proportion of adult Americans with college degrees has multiplied ten-fold to over 30 percent of the population. Childbearing out of wedlock has expanded dramatically. Rising college attendance has coincided with stagnant church attendance (even though college educated persons themselves attend church somewhat more than the population as a whole), and a notable anti-religious sentiment seems to pervade much of higher education.

It is not clear, then, that the move to increase participation in higher education has actually contributed to a society with less dishonesty, crime, substance abuse, and uncivilized behavior. If one examines practices on campuses, doubt about the moral dimensions of higher education are often heightened.  Indeed, many moral relativist professors and college residence life staffs routinely disparage traditional restraints on human behavior like the Ten Commandments, or time-tested institutions like traditional marriage.

Although an unscientific highly non-random sample, I looked at six of the most heinous criminals of the past half century: Ted Bundy, Jeffrey Dahmer, Ted Kaczynski, Adam Lanza, Charles Manson, and Timothy McVeigh. Between them, they killed scores of people and committed other hideous crimes like rape and body mutilation. One-third were college graduates (one from Harvard), educated at a time when a vastly smaller portion of the adult population received four year degrees. Only one (Manson) of the six never attended college at all – a below average proportion. At the highest levels of evil, college attendees are disproportionately highly represented.

Third, The Egalitarian Goal

University presidents claim higher education provides opportunities for all to reach the top of the occupational ladder and financial success.  From the Morrill Act of the 1860s up to the Higher Education Act of the 1960s, there was an underlying premise that higher education should allow able and meritorious people to achieve their dream regardless of financial circumstance. And, at the time the Higher Education Act was passed in 1965, there was some reason to believe expansion in college attendance had expanded income equality and economic opportunity. The Gini coefficient, the most commonly used measure of income inequality, had fallen rather noticeably from the 1920’s for example, concomitant with a rapid expansion in university enrollments.

In 1970, before Pell Grants, the federal government’s student financial assistance programs totaled well under two billion dollars; today, they are about $160 billion. In inflation adjusted terms, these programs have grown at more than six percent a year. Yet despite all of this, the share of recent college graduates coming from the bottom quartile of the income distribution has fallen. Meanwhile, as the proportion of the adult population with four year degrees has gone from 11 to 30 percent, measured income equality has fallen. Daniel Bennett and I, in a recent paper, suggest diminishing returns to income equality goals long ago came to higher education, to the point the “college for all” movement is probably on balance worsening equality in America.

Within higher education, the gaps between the wealthy, prestigious schools and the less expensive and selective state schools have grown over time. In 1988, eight state schools were listed in the top 25 in U.S. News & World Report rankings of universities; in 2014, only three were. Similar, the 2014 NACUBO/Commonfund Endowment survey showed that the top one percent of surveyed schools had over 30 percent of all endowment money, a sign of very high wealth inequality withinhigher education. While prestigious expensive selective admissions universities with relatively low representation of poor persons routinely graduate 80 percent or more of entering students within four years, the rate at open admission state schools catering to low income students is typically 20 percent or less. This likely promotes greater, not lesser, income inequality.

Fourth, The Knowledge/Critical Thinking Goal

Do graduating seniors know much more about our civic surroundings, our historical, economic and political milieu, than do freshmen? No, if the aforementioned test administered by the Intercollegiate Studies Institute has meaning. Do they think a lot more critically, making them better able to make perceptive judgments about complex sets of facts? No, if the extensive findings of Arum and Roksa are accurate. Some will say evidence like this is deficient and very limited in scope. Yet colleges, in the knowledge business and researching all sorts of esoteric trivia, simply do not know themselves how much “value added” is occurring during the college years, and, if they do know, they fail to tell the public out of fear of being shown inferior to competing schools. A lack of transparency is a major problem in higher education.

Fifth, The Research Goal

It is true that much very useful research has come out of American universities, improving both the quality and quantity of our lives. We are the envy of the world in collegiate basic research. We dominate the lists of winners of Nobel Prizes and other important scholarly forms of recognition.  Yet most college faculty are not scientists doing cutting edge research, and even within the STEM disciplines, the law of diminishing returns applies –some research is of no doubt pretty trivial value.

Outside the STEM fields, vast numbers of papers are written that virtually no one reads or cites, as Mark Bauerlein of Emory has pointed out on multiple occasions. Moreover,  professors are teaching less (the proportion of professors with teaching loads of four hours a week or less has over doubled since 2000), robbing students of experienced, knowledgeable professors. Incentives push professors to do ever more trivial research, while low paid adjunct faculty do more of the heavy lifting in the classroom. At most schools, professors with many publications are rewarded relative to those with fewer publications but good teaching reputations. However, did we really need 21,000 or more papers written on William Shakespeare since the mid-1980s? Wouldn’t 1,000 have been enough?

Sixth, The Economic Growth Goal

Politicians proclaim “investment” in higher education is necessary to remain globally competitive, and that greater university spending promotes economic growth. I have probably run over a thousand regression equations looking at the collegiate spending/economic growth relationship and I find either: more spending actually retards growth, or, that the correlation between university use of resources and economic growth is negligible. Again, diminishing returns are at work – taking funds from an efficient private sector to spend turning out persons taking jobs as taxi drivers seems intuitively counterproductive–there are better uses of those scarce resources.

Before continuing, I told you at the beginning economists are accused of being insensitive. Here is a story to illustrate the point. After 9/11, a Westchester County country club invited four heroic firemen from New York City who were blinded in the 9/11 fires to play golf at the club. Shortly after they started play, a threesome of a physician, a priest, and an economist were ready to tee off. The golf pro said to them “it will be slow going today, but please show patience, because three firemen blinded on 9/11 are in front of you.”

The doctor said, “Please let me talk to them! I know of a new procedure that in some cases can partially restore eyesight.” The priest said, “Let me, too, talk to them: I have considerable experience in comforting those who have undergone severe adversity.” The economist said: “What is wrong with all of you! Why don’t you make them play at night!”

Other Problems and Pathologies

The emphasis on evaluating outcomes, while useful, neglects many of the details that explain why colleges are excessively costly, delivering few benefits per dollar spent.  For example, resources are vastly underutilized, including often empty classrooms and offices, professors teaching little, and students doing little studying. Moreover, even when utilized, many resources are used ineffectively. Incentives are all screwed up –advising students brings little reward, but publishing for the Journal of Last Resort does.

Beyond economics, universities violate basic constitutional or human rights in other ways as well. On many campuses, speech codes restrain the ability of persons to say what they think –the very heart of a vibrant academy is the free flow of ideas, some of them no doubt unpopular.  Under pressure from the Obama Administration, universities are denying students due process in disciplinary proceedings involving allegations of sexual misconduct. Moreover, sometimes universities also ignore the intent of taxpayers or donors, and misuse resources.

University governance is typically archaic. It is often unclear who makes major decisions, and even where lines of authority are well drawn, much governance is by committee, which leads to slow decision-making, often non-innovative compromise solutions to problems needing prompt and radical innovation. The goals of universities are often nebulous and difficult to measure –there is really no clear “bottom line,” making evaluation of success difficult. Administrative bloat is endemic to many universities, with some schools having more administrators than faculty. A growing percentage of faculty do little real teaching. Big-time athletic programs are not only costly, but scandalously corrupt. Rent-seeking behavior is rampant, and excessive salaries paid some administrators are not only costly but reduce the moral high ground historically held by collegiate institutions. Colleges admit vastly too many underprepared students, as there are no negative consequences to the school from their dropping out.  And this list is not exhaustive.

Costs are rising rapidly in higher education. The economic and intellectual success of higher education must relate the benefits to the costs. It costs far more to educate an American college student than one in, say, Great Britain, France, Germany, Japan, or Korea, all major industrial peers. In inflation adjusted terms, the typical student today pays three or four times as much to go to school as his or her predecessor did 50 years ago. The share of the national output devoted to higher education has roughly doubled over that period, despite the substantial growth in that output. 

Is There Hope?

Plato was on to something when he allegedly proclaimed “necessity is the mother of invention.” As universities become both more costly and deficient in meeting basic goals, we look for alternatives. Enrollments are starting to fall.  According to the Census and the National Student Clearinghouse, total higher education enrollments fell roughly one million between 2011 and 2014. Moody’s Investors Service has issued progressively more negative assessments of the financial situation at American universities.

Back to Plato and invention. New technologies and innovations have spawned MOOCs (massively open on-line courses) and some for profit entrepreneurs are offering pretty high quality course content at reasonable prices. But the market forces that ordinarily would correct many problems are muted or offset by massive government subsidies that prolong inefficiencies and mediocrity. Even here, however, there is hope. Many states, increasingly cognizant of the problems cited here, have reduced appropriations. Huge federal deficits and irresponsible spending will probably eventually force a rethinking of the ineffective, dysfunctional federal student financial aid programs, arguably the largest cause of the senseless and wasteful academic arms race. My guess is that government tax exemptions/subsidies of universities will ultimately be curtailed, tenure will continue its slow death, and many expensive but mediocre schools will die, reflecting Schumpeterian “creative destruction.”

I would be surprised if fewer than 500 degree granting schools close their doors over the next decade. It is not talked about much, but the nation’s historically black colleges and universities are mostly in trouble, some of them very substantially so.  Even some state universities are reportedly financially challenged.

Let me give an example of how this problem may play out. Let’s take the Detroit metro area, which has been battered heavily economically over the last decade. There are five state universities within an hour’s drive of each other, including, in addition to the University of Michigan in Ann Arbor, Eastern Michigan University, Wayne State University, the University of Michigan at Dearborn, and Oakland University. Most of these schools deliver education of dubious value. For example, the four year graduation rate is 15 percent or less at all of these schools excepting the University of Michigan at Ann Arbor. Eastern Michigan, with a 6 year graduation rate of 38 percent, spends over $20 million annually subsidizing a pathetic intercollegiate athletics program located six miles from America’s largest collegiate stadium in Ann Arbor. Vast sums are being spent to promote academic and even athletic mediocrity. I suspect that is unsustainable, and at least one of those schools will almost certainly disappear. This example can be repeated many times using other major metropolitan areas.  

Government subsidies have shielded higher education from massive creative destruction. Of the top 10 companies on the Fortune 500 list for 1994, six of them have had traumatic changes since –undergoing merger, breaking up into smaller units, or entering bankruptcy. Huge corporations like Enron or Eastman Kodak are successful one day and disappear or go into bankruptcy the next. Markets dictate big changes in the real world of business.

 In the academic world, there has not been a major trauma to any of the top 10 US News schools of 1994 on either the university or liberal arts college list, and two of them have gone over 300 years without trauma.  But as public support for higher education wanes, those traumas will come –not to the Harvards and Amhersts with their vast endowments and undiminished prestige, or probably even to the somewhat less wealthy Johns Hopkins of the world. The marginally popular state school or lowly endowed private school with no national reputation – take, for example, the University of District Columbia with a four year graduation rate of 5.7 percent –however, will face severe challenges.  So change is coming, but not painlessly, for many in today’s academic establishment. Thank you.