Friday, March 22, 2019

Universities Should Put More Skin in the Game

I thought that, once again, I would delight readers with an earlier draft of a piece published online elsewhere. This is partly cya on my part (sometimes important stuff has to get cut for word length reasons) but also shows all the work that goes into polishing pieces for publication. My name is not R.E.Wright for no reason! Finally, some readers might find this simple list easier to follow.

The published piece just came out on the Martin Center blog and is called "Universities Should Invest in Their Students, Not Securities."

Seven Reasons Universities Should Invest in Their Students, Not Securities


Tuition-driven universities should lend their students the money they need to attend their institutions. There are seven major reasons why they should do so.

11.      Skin in the game
Warren Buffett’s billions stand testament to the wisdom of ensuring that people and institutions stand to lose if they don't deliver as promised. Alas, misaligned incentives plague higher education because major players have little “skin in the game.” Most professors and administrators are good people but that means little at schools that need student tuition payments in order to survive. The existential imperative at many American universities is to get -- and this is a direct quotation I have heard more than once in my quarter century in higher ed -- “asses in classes.” What happens to students once they leave is of little concern to such schools, the majority of America’s institutions of higher education.
22.      The Economics of Information
Universities know more about their students than banks or the federal government ever could. They are therefore in the best position to make loan decisions, on which more below. In the securities market, by contrast, universities hold no advantages.
33.      Leadership in the Incentive Revolution
Many universities purport to educate business, political, and social leaders but often fail to lead reform movements themselves. Instead of preaching from their Ivory Towers, universities can show other lagging sectors that meaningful improvements can be had by changing root incentive structures.
Healthcare providers, for example, get paid for performing services, needed or otherwise, effectively or not. In the absence of robust competition based on price and quality, their profits are maximized by keeping people sick, not restoring their health. Misaligned incentives also plague government, the agencies of which are rewarded for accomplishing tasks like keeping endangered species endangered, wasting travelers’ time without improving their security, and ensuring that Indians living on reservations remain impoverished.
Doctors and bureaucrats aren't any worse people than the rest of us. Most work hard to provide for their families, but even saints could not overcome the backwards incentives baked into how they do their jobs. That’s why the government itself admits that the Department of Education is a failure and why the healthcare sector sucks almost 1 in every 5 dollars of GDP into its gaping maw while producing lackluster results.
If higher education can lead an Incentive Revolution that shores up the economy’s weakest sectors, it should be able to recoup some of the social prestige it has lost in recent decades.
44.      Precedent
Many manufacturers of big ticket goods designed to the increase the purchasers’ income, like General Motors and General Electric, directly or indirectly lend the purchase price of their products to their customers. Many could obtain financing elsewhere, but the loan binds the interests of the manufacturers to those of their customers because if the products are not worth the price, purchasers are more likely to default on the loans. Extending a loan therefore serves as a sort of quality guaranty.
The same holds for universities, at least one of which, Hillsdale College, indirectly lends to its own students through private loan funds. (At least two dozen well-endowed universities provide all or most students with outright grants. Bully for them and their students but they are far from the norm.)
55.      Independence from Washington
Hillsdale and other colleges and universities do not allow their students to receive federal financial aid so they can remain free of federal bureaucrats. Many tuition-driven universities are now also beginning to pine for the freedom to teach their own students as they see fit. The backstory here is important, if you do not already know it.
Superior programs that meet real world needs fill the seats with good students but creating such programs is difficult and expensive. So many schools opted instead for the illusion of quality combined with shrewd marketing. They filled seats by telling parents that their kids will be safe and get a job after graduation while convincing prospective students that fun awaits.
If and when Joe and Jane graduated, often without the skills or knowledge necessary to contribute much to businesses, graduate programs, or nonprofit organizations, however, they didn’t land high paying jobs and felt burdened by debt. They complained, as did parents eager to reclaim their basements and employers desperate to hire quality workers.
Even when the economy booms, more than one in ten graduates, and perhaps as many as one in three, default on their student loans, which their alma maters never prepared them to understand, much less pay off. Taxpayers heard about the worst abuses and rightly sought redress. Most Americans, though, swilled down the “everybody must get a college education” Kool Aid, so instead of ending federal subsidies for higher education they called instead for “accountability,” which Uncle Sam translated into increasingly onerous regulations.
This being Murica, the Department of Education didn't dare tell professors what they could do in their classrooms. Instead, it told state regulators and regional accreditors to pressure university administrators into accepting “the assessment agenda.” Administrators, in turn, now threaten faculty members with accreditation or job loss if they do not comply. Yes, job loss. Most faculty members are now untenured, contingent faculty who can be terminated for any reason.
If the “assessment agenda” had been scientifically constructed and carefully implemented, higher education might improve. But it was not. A charitable interpretation is that the directions set forth by the good, hardworking bureaucrats at the Department of Education got garbled as they worked their way down to poor professors, many of whom were blindsided by demands that they have to create “student learning outcomes” and then “assess” them. That of course is what they have been doing for centuries, but apparently not in ways sufficiently “legible” to government bean counters.
Some administrators and professors welcome the assessment dictates, supposing that it will induce older professors to retire and lazy ones to finally update their courses and get off the bottom of Bloom's revised taxonomy, i.e. to move away from rote memorization and towards analysis, evaluation, and creativity. Other professors believe that while assessment might inspire positive change at some margins, under the imperative of filling seats most reforms will remain cosmetic, or even counterproductive because the lower levels of Bloom’s are the easiest to assess.
Most importantly, though, the regulatory push for assessment shows that the federal government wields the proverbial “power of the purse” over all institutions of higher education dependent on tuition dollars and their consort, federally guaranteed student loans. Rather than blithely jump down Orwellian and Veblenian assessment rabbit holes into Wonderland, universities could go back to first principles and rearrange their incentives away from merely filling seats. To do that, they need to invest in their own students, not in the stock, bond, or derivatives markets.
66.      Polycentric Regulation
Once properly incentivized by placing their own skin in the game, universities would soon do whatever it takes to enable, and induce, their students to repay them. If their students repay, schools will continue to exist; if their students default, schools will fail, sooner or later, no monolithic, top-down regulation necessary. Importantly, schools that fold or downsize will free up resources (like professors) to try something new.
Similarly, the proposed reform would eliminate the need for stringent entry barriers into higher education. Students and their employers, not accreditors (Who are those people anyway? If they are such pedagogical experts, why aren't they teaching or administering?), will decide which schools pass muster and which do not. Professors unable to find good jobs at existing universities would be free to establish their own institutions, perhaps by pooling their resources in professional partnerships.
77.      Ease of Implementation
Universities should find investing in their own students instead of in securities markets relatively easy. Some already have the basic infrastructure in place because they provide grants that revert to loans if students leave before graduation or fail to fulfill occupational requirements after graduation, like teaching in a public school or practicing medicine in a rural area. Loan offers would come as part of the financial aid package. All students should have to put up some cash, their own “skin in the game,” but the amount, as well as the major loan repayment terms (interest rate, maturity, default penalties, etc.), should be a matter of competitive negotiation.
Each university will develop its own plan, but I suspect you'll see much more curricular emphasis placed on ethics and personal finance. With investments in the form of loans rather than income sharing, I would not expect to see a dramatic move away from the liberal arts or preparing students for lower-paying careers like teaching or the ministry. Financially successful alums can still be urged to donate, but to stay viable universities will only need their graduates to service their debts.
I suspect that universities that choose to invest in their students will learn how to integrate the liberal arts into career-oriented majors like business, education, nursing, or the performing arts. In other words, instead of forcing students to take random “general education” classes in anthropology, economics, history, or philosophy and merely asserting that they are relevant to various professions, professors will demonstrate their relevance by teaching courses in business history, the philosophy of education, the anthropology of nursing, the economics of entertainment, and so forth. Some schools will find other paths to success (or failure), creating the diversity at the heart of polycentric approaches to complex problems.
New universities, or existing ones with endowments insufficient to fund operations for five or more years, can invest in their own students by borrowing money, relending it to their students at a higher rate, and capturing the gross spread, like a bank. State governments might consider endowing schools with enough cash to allow them to invest in their own students in lieu of annual appropriations. Generally speaking, a one-time subsidy for a specific purpose causes less distortion than annual subsidies.
In any event, it is high time universities took direct responsibility for the quality of their product by funding their own students and telling Uncle Sam his deep pockets and meddling ways are no longer welcomed.

Robert E. Wright is the Nef Family Chair of Political Economy at Augustana University in Sioux Falls, South Dakota, and the author of 18 books on U.S. business, economic, financial, and policy history.

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