MORTARBOARDED BY THE COLLEGE EDUCATION MARKET

We should be brave with our talents. ~ Caroline North 

I have thought more about the market for college education now that graduation season has ended and the 2.92 million new college graduates have celebrated and tossed their mortarboards into the air this spring. We spend lot of money on college education. The latest data show that postsecondary institutions’ total expenses for the 2013-14 academic year were approximately $517 billion; public institutions accounted for 63% to the total, private nonprofit institutions spent 33%, and private for-profit institutions account for 4% of the total. This 3-year old total expenditure is within 10% what the federal and state governments now pay for Medicaid.

I’ll start by returning to basic microeconomics and examine the market for college (aka, tertiary) education. I’ve used the term “college” here to include every type of post high-school (post-secondary) education, including elite and non-elite 4-year private institutions (e.g., Harvard, Stanford, Cal Tech, Denison, Willamette and Shimer College in Chicago that has just 97 students), elite and non-elite 4-year public institutions (e.g., UC/Berkeley, Univ. of Arizona, Western Washington Univ., West Chester Univ.) and public and private 2-year institutions (e.g., Berkeley City College and for-profit schools like DeVry University). Broadly speaking, these are the 3 distinct types of colleges that comprise the “supply” side of the college market. California has the largest number of colleges of any state, 1,246, and is home to colleges in each of these 3 supply tiers. There are 3 major stakeholders in the market for college education; (1) the college suppliers of this education, (2) the students who “demand” education services of the colleges, and (3) federal and state governments who finance large parts of both the suppliers and demanders.

The demand side of the market is the students who apply to, enroll in, attend and hopefully graduate from the over 4,700 higher-education institutions (aka, colleges) in the US. The latest information indicates the total student enrollment in US colleges is more than 20.5 million in 2016. College enrollment has been steadily increasing since post WWII, when the federal government enacted the Servicemen's Readjustment Act of 1944 (aka, the G.I. Bill). In effect, the G.I. Bill helped create the 20th century version of the “American Dream” and augmented it to include not just a house but a college education. In 2015 the college graduation rate was 59% at public institutions, 66% at private nonprofit institutions, and a depressing 23% at private for-profit institutions (about one-third the rate for private nonprofit institutions).

From 1950 to 2016 student enrollment in US colleges has increased about 740% and represents an unqualified, first order achievement that has benefited not only the millions of college graduates themselves but our nation as a whole. These undeniable collective benefits are why Econ 101 teachers like me use college education as a prime example of an economic activity that provides positive externalities. This laudable, long-term increase in people having a B.A. or more is illustrated in the following chart.

Percent of US adults with a B.A. or higher degree

Source: NCES.ed.gov. Adults are defined as people between 25 and 64 years.

This market for college education is now and has been out of balance; we are nowhere near “market equilibrium” in any white-board classroom sense. Some of this imbalance is the result of public policies, as well as policies created by the colleges and finally consumer behavior. The economics of this market are, to no one’s surprise, largely demand driven.

I now examine how college supply and demand have changed during the past decades. Total enrollment in “Higher Education Institutions” (HEIs) is a National Center for Educational Statistics (NCES) term referring to what ordinary folks call colleges and universities) grew by 76.1% from 1980 through 2013. Currently, 2013 is the last year of info for HEIs – but not enrollment in HEIs – those data go through 2015.

The number of HEIs from 1980 through 2013 grew 49.9%. HEIs include both 2-year and 4-year schools. Using 2000 instead of 1980 as the “base” year for growth through 2013, HEIs grew 13.0%, enrollment grew 33.1%. The number of HEIs in 2013 was 4,724 about 2/3rds of which are 4-year schools; number of enrolled students in 2013 was 20,376,000.

Interestingly, these NCES data indicate the growth in the number of 4-year HEIs was about twice as fast as that of 2-year schools, 41.9% vs 19.5%. My expectation, based on information presented in the media, was that 2-year schools’ growth would be stronger. From 1980 through 2000 the growth in the number of 2-year colleges exceeded that of 4-year colleges. But starting after the Obama administration took office, the federal Education Dept. launched a fairly extensive “review” of degree-granting schools (especially private for-profits) to better regulate them and improve their woeful graduation rates. As a consequence of these reviews and regulations, the number of 2-year HEIs declined by 2.1% between 2000 and 2013. Nevertheless, some 2 million students are enrolled in for-profit colleges, up from 400,000 in 2000. The Trump administration is now weakening and removing such regulations. Remember Trump University, it may be back in business? In contrast, 4-year HEIs grew by over 22% since 2000.

What’s happened to college faculty salaries during this time of tremendous enrollment growth and increases in the number of HEIs and tuition? Not much. The table below shows average real salaries for full-time faculty between 1971 and 2010. Faculty salaries have increased, but only nominally and far less than one would expect given the market growth. Look at the drop in real salaries that happened after 1971.

College Faculty Salaries, 1971-2010

	Average Salary	Average Salary
Year	All Faculty	Professor
	(2008-09$)	(2008-09$)
1971	$68,677	$97,035
1976	$64,479	$87,667
1980	$59,029	$78,495
1990	$67,847	$89,277
2000	$70,865    (3.2% fr ’71)	$94,350            (-2.8% fr ’71)
2010	$73,910     (4.3% fr ’00)	$102,691 (8.8% fr ’00)

Source: NCES. Figures in parentheses indicate percent change from indicated year.

From these data, it took the all faculty average salary until 1997 (not shown in the table) to get back to what it was in 1971. For professors the 1971 average salary level didn’t return until 2002. There’s no pre-1971 data so I can’t tell if this year was atypical for hiring faculty; that newly-minted PhDs were in abnormally short supply pushing salaries up, but average faculty salaries dropped after 1971 through the ‘70s, ‘80s and much of the ‘90s as shown in the table, despite large increases in enrollment. Also note the percent change in the 2000 and 2010 salaries. The average professor’s real salary actually shrank by 2.8% from 1971 to 2000, and grew a very modest 8.8% over the ten years ending 2010.

The 2015 average salary for professors from another source is listed as $114,134. This source shows the minimum/maximum salary spread for professors in 2015 from $55k to $207k. NCES data show that the full-time instructional staff at HEIs has increased over 20% since 2015 to over 620,000 people.

For the San Francisco Bay Area, Glassdoor.com states the average professor salary is $155,077, with a spread from $94k to $244k. The 2015 median “postsecondary teacher” salary is listed by the Bureau of Labor Statistics as $72,470. The BLS says they expect a humble 13% projected 10-yr growth in this college faculty salary level.

These data provide solid evidence that despite significant growth in the demand for college attendance and growth in the number of HEIs, college faculty real salary growth has been bleak. Faculty salaries’ increases do not embody the continued strong demand for the services faculty members have provided. One trend that has contributed to this low growth of faculty salaries is the increased use of non-tenure track, adjunct instructors. Or perhaps the majority of that tuition and fee revenue growth has gone to administrators, as anecdotal data seems to indicate. This information suggests that, on average, college faculty members have picked the short straws in the college market for quite some time.

College-going has deepened and broadened in the US. This is a very good thing from several perspectives. The demand for college education has increased significantly, and will continue to. The NCES now projects that awarded B.A.’s will increase 14% between 2010 and 2021, up from the 7.1% previously forecast. But the growth of supply (or capacity) of colleges to accommodate ever-more students has increased but lagged demand’s huge growth.

The bottom line regarding our college education market is that the demand for college enrollment has grown almost 3 times as fast as the number (supply) of HEIs has (33.1% vs 13%). It’s mostly a sellers’ market. 

What happens in a market when the quantity demanded exceeds the quantity supplied? Prices rise, as indeed they have in the college market. Tuition and fees have followed an upward, ballistic trajectory for quite a while. In the 15 years from 2002 to 2017 college tuition, fees and room & board have increased 40.4% in real terms (after accounting for inflation) for private, nonprofit 4-year colleges and 63.9% for public 4-year colleges. This is principally demand-pull tuition inflation that colleges are happy to oblige.

Tuition and other costs have risen for colleges, especially public institutions, because federal tertiary education funding has steadily declined since 1965; state funding of colleges has contracted since the late 1970s. Tuition revenues surpassed federally-supplied funds after 1965. In 2011 tuition revenues surpassed state funding for the UC system in 2011. Between 1996 and 2016 both in-state and out-of-state tuition at UC/Berkeley practically tripled. According to the College Board, national yearly costs for private, nonprofit 4-year colleges currently average $45,370; for public 4-year colleges it’s $20,080.

Although colleges have been fiscally pressed to raise tuition and fees since other funding sources have declined, how can they keep raising tuition and fees so dramatically without suffering a loss of customers (aka, students)? They can because the demand for college education is very price inelastic (insensitive). The economic assessments I found of the price elasticity of demand[1] (PED) for college education range from -0.44 to -0.85. In non-econ speak this means that students don’t really reduce their demand for education much when tuition and fees increase, despite their protests. Enrollment demand decreases much less than tuition price increases. Why? Because there aren’t any real substitutes, other than going to another college or a lower-tier one that has lower tuition.

Colleges don’t really compete on price; they compete on reputation and expected benefits. This lack of substitutes differentiates college education from a host of other retail services and products, and strengthens the colleges’ ability to raise tuition, especially when federally-subsidized college loan funds have increased. Exactly how colleges determine what their tuition and fees will be is far beyond the scope of this analysis. Adam Davidson wrote an interesting, insightful article several years ago that examines the tuition-setting process and expressed his belief that the top elite private colleges are probably underpriced.

Students and their families know that the only thing more expensive than a college education is not getting a college education. As one woman put it that is supporting her 2 sons with a part-time manufacturing job, “If you don’t have a college degree, your job choices are fast food or factory.” So students begrudgingly take out larger loans and/or apply for greater financial support with all fingers crossed. Given such numerically low price elasticities, increases in tuition and fees provide increased revenue for colleges. The price elasticity of demand is likely even lower for elite public and private colleges, as ever-lower acceptance rates demonstrate.

College students and their professors have been mortarboarded by this market. Students are always paying more, faculty members aren’t gaining much financial benefit and educational institutions rule the academic roost.

Given these substantial increases in college tuition and fees and the rising demand for tertiary education it’s easy to see why promises by liberal politicians to make college “free” have such wide appeal among young people. The “free” part of no-tuition public college is a chimera, especially for taxpayers. Bernie Sanders’ 2016 free-tuition program for all could have cost well over the $75 billion per year that he suggested. He hoped it would be paid by a new financial transactions tax. This April, he renewed his utopian legislative efforts to create free public-college education in America. Good luck with that, Bernie.

Last week’s surprisingly strong results for the British Labour Party were in no small part due to Millennials voting for Jeremy Corbyn, who pledged to make British colleges tuition-free. Unlike America where only 17% of Bernie’s young followers actually cast a vote for their free-tuition man in the presidential primaries, 57% of British young adults voted for Mr. Corbyn last week and rejuvenated the Labour Party.

Will free tuition rule? As a taxpayer, I hope not. A good friend of mine says that one of the most expensive services that government can provide is “free” stuff. Expanding Stafford loans and Pell grants is a much better policy option, though far less poltically entrancing.

Increased college graduation has greatly benefited individual graduates and our nation. Within the market for college education the process of getting such an education has become more complex, more time-consuming and more costly. The suppliers of this education – colleges and universities – excluding their faculty, seem to have benefited the most.

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[1] Formally, the PED is the ratio of the percent change in quantity demanded of the product/service (here college education) to the percent change in price of the product/service (here tuition), ceteris paribus. The PED is usually negative because for normal (non Veblen or Giffin) goods Q_d  is inversely related to P. PED = dQ_d/Q_d  / dP/P. If PED<1, it’s called inelastic and the percent reduction in Q_d will be less than the percentage increase in price. 

ON THE SUNNY, WINDY BUT BLEEDING EDGE

If there is a future, it will be green. ~ Petra Kelly 

Yesterday it was reported that Santa Barbara, California (SB) is joining 29 other US cities by committing to using 100% renewable energy. SB’s aggressive, completely renewable goal is to be met by 2030, with a 50% renewable commitment by 2020 (that’s only 2 ½ years away). The article stated that SB currently uses about 30% renewable energy; its principle energy suppliers are Southern California Edison and Southern California Gas. Other California cities that have similar 100% renewable energy goals (but not necessarily the same attainment year) include San Francisco, Palo Alto and San Diego.

Santa Barbara doesn’t now have a specific plan for getting to 100% renewable energy; its work plan won’t be completed until December 2018. Not having any plan likely makes the SB City Council’s decision about getting to 100% renewables far more straightforward, not being burdened with knowledge about the potential costs and consequences. 

Nevertheless, by New Year’s Day 2019 the city and its citizens will presumably need to be especially focused on very short-term mechanisms for increasing their renewable usage by something close to 10% in just 12 months to meet the 30% goal by 2020. Unfortunately, there aren’t many of those procedures. They’ll also need to implement their plan to figure out how they’re getting to the remaining 70% (to reach 100% renewable) in just 10 more years.

Can other very green-oriented cities like Berkeley be far behind in similarly committing to 100% renewable energy by 2030 (or maybe even 2025 just to be more committed to being on the solidly green but bleeding edge)? Of course not. Such public pledges appear worthy, but involve a fair amount of fantasy. They’re feel-good, no apparent strings-attached political statements that are indeed in way too short supply these days.

As I mentioned in a recent blog, I’m all in for increasing green energy (GE) usage. I spent the majority of my professional career advocating for energy-efficiency and conservation programs. Solar thermal and photovoltaic (PV) panels occupy much of our roof using time-of-use (TOU) prices. But even though these imposed, absolute (100%) promises like SB’s may serve doctrinaire political and genuine environmental purposes, they are divorced from important attributes of real-world energy supply, demand and technology. They are easy to state, especially without delineating expenses, and will be very challenging and pricy to implement.

Such vows fail to recognize any cost consequences that can be substantial and often require public subsidies to entice people to change energy sources and switch to more expensive GE technologies. The vows also don’t acknowledge any need for widespread behavioral changes on the part of every one of the affected constituents. Santa Barbara is apparently thinking about establishing its own renewable energy sources to meet its 100% renewable goal. That’s a very expensive proposition that will take some time. Getting to completely green will not simply happen by public diktat. Total reliance on renewable energy would require a major expansion of electric storage and transmission capacity for those times when the wind dies down and the sun fades, as happens every night. This is illustrated with the Duck chart in my earlier blog.

Elon Musk will be very happy to sell Santa Barbara and its citizens PV panels and battery storage capacity, and it’s more expensive than SCE’s electricity or SCG’s natural gas. This is despite decades of erstwhile R&D efforts to improve performance and cost-effectiveness of solar, wind and battery storage technologies. One knowledgeable energy systems engineer stated that “Lithium batteries [that Musk’s Powerwall 2 system uses] offer good potential, but they’re still not there.” Offering good potential probably won’t help Santa Barbarans in 2020. How expensive is current battery storage? Quite costly. If one uses solar PV power with TOU rates for daytime battery charging, the payback period is 31 years for storage. Only 1% of US residential customers now use TOU rates. Without a TOU PV solar system, it’s 38 years until payback. Mr. Musk’s Powerwall 2 battery system comes with a 10 year limited warrantee.

The city’s 100% pledge also will require all its vehicles to stop using nasty nonrenewable gasoline or diesel fuel and switch to electric vehicles (that would have to be charged all renewable electricity). The electric vehicle “premium” can often be recouped after about 50,000 miles of driving (a little over 4 years). The city’s public works department trucks would likely need to be converted to biodiesel. Biodiesel is 21% more expensive than diesel. Biogas is about 3 times more expensive than natural gas.

Will renewable energy prices decline? Very likely, but how content will Santa Barbara’s 91,000 citizens be when they start have to pay higher taxes for getting to 100% green, especially if our brown-energy president somehow actually cuts or removes the federal subsidies associated with solar, wind, storage and other renewable energy systems. Getting to 100% green in just 13 years will cost a lot of (green) dollars. Is it worth it? Possibly, but allowing a longer time to get there and setting a more realistic goal of say 75% or 85% will be more attainable, less expensive and still greatly benefit the environment. 
The appropriate geographic scope for such policies isn't municipalities, it needs to be much broader given the nature of the energy system. Optimally, strong renewable energy policies should be national, but at this point  that's not going to happen until (hopefully) 2020. So realistic state-wide green energy policies are where it's at now. But as I've mentioned previously, setting a short-term state-wide 100% renewable goal can suffer the same problems on a grander scale that Santa Barbara will soon be facing. 

I guess I’ve become a stick-in-the-mud realist GE guy who remembers several things related to achieving renewable energy commitments. First, how difficult and time-consuming it is to attain 100% of any personal or collective goal, especially for intrinsically-complex systems like energy production and consumption. Second, how slowly government and people change habitual behaviors, like using energy in its myriad of forms. Third, how “concerned” many people can become when their taxes, energy bills or living expenses rise. This characterization of me doesn’t please me 100%; so it goes with realism. Onward towards a needed, but realistic greener future. 

DUMBBELL HEALTHCARE POLITICS: The HCA and AHCA

It is health that is real wealth and not pieces of gold and silver. ~ Mahatma Gandhi 

“Dumbbell” politics is roiling America. Dumbbell politics is now present as two widely dissimilar healthcare policies are being espoused by equally widely-separated parties who aren’t interested in reaching any sort of middle-ground that most people can literally live with. Like a dumbbell, this one has a weight on the left-side that’s opposite to the weight on the right, connected across the US by a thin rod.

The latest example of dumbbell politics involves healthcare. On the far left is Sacramento, California and on the far right Washington, D.C. that are separated by more than just 2,733 miles as the digital crow flies. Either one of these weighty policies will be a very heavy lift. Dumbbell politics in healthcare policy involves much more than a shocking misdemeanor assault in the Nebraska portion of the rod. It involves every breathing person who uses healthcare and wants to maintain or improve his or her health. It’s a matter of health and life for all 326 million of us.

First, the left-wing dumbbell weight in California. Last week California State Senators Ricardo Lara and Toni Atkins introduced SB-562, the Healthy California Act (HCA), to their Democratic colleagues, who hold a supermajority in the legislature and to their outnumbered Republicans. Sen. Lara’s Appropriations Committee easily passed this bill that would completely revamp California’s healthcare market into a “single-payer,” state-financed universal healthcare system for every documented and undocumented resident. Progressives and many liberals were joyously beside themselves. There are commendable aspects of this legislation, but totally re-doing our state’s healthcare system would be very expensive and very disruptive. Indeed, some of SB-562’s proponents’ happiness should have diminished after the committee estimated the costs of implementing such a fundamental restructuring, a fiscally injurious $400 billion per year. For perspective, the State of California’s total budget for everything it provides to us 39.5 million citizens will be $183.4 billion in coming fiscal year. SB-562 would compromise the fiscal health of California. Do you see a problem?

Sen. Lara apparently doesn’t. He wants to have his dumb-bill quickly passed – by tomorrow – before his fellow senators and assemblymen figure out how the state will actually pay for California’s version of Medicare for All. Few if any Sacramento Democrats can remove his or her very rose-tinted glasses about SB-562’s costs, disruption or consequential public pain. The political principle of single-payer healthcare seems more important than its costs and who they are imposed on. Sen. Lara’s perverse desire for haste in passing this giant change to California’s healthcare system strangely parallels the Congressional Republicans’ rush to pass their AHCA without any public hearings.

The California Appropriations Committee’s fiscal assessment assumed two illusions: first, a new 15% payroll tax would be implemented on every Californian’s wages, in addition to adding other new taxes as sources of required funding; second, the state would continue to receive the same transfer funding from Washington for Medicaid. Sen. Lara hasn’t apparently gotten the ubiquitous message that the president’s just-issued federal budget proposal will amputate Medicaid funding — the national umbrella for California’s Medi-Cal program — by $616 billion over 10 years plus $834 billion of Medicaid reductions in the Republican health care legislation (see below). Sen. Lara seems to have a serious case of real money illusion, something that isn’t cured by an optometrist.

Governor Jerry Brown hasn’t stated whether or not he’s in favor of SB-562. Being Jerry Brown, he offered a Latin phrase to describe his concerns, ignotum per ignotius, which translates to "the unknown by the more unknown." In less esoteric, more modern language, you have a problem (say, healthcare) and state, “I’m going to solve it with something that’s even a bigger problem.” Oops.

Now to the right-wing dumbbell weight in Washington that serves as a mirror-image of Sacramento’s left weight. Because Republican Congressional leaders’ primal goals for the past 7 years have been to void President Obama’s Affordable Care Act and reduce the tax burden of already rich/wealthy Americans, the Republican House of Representatives sprinted and passed their AHCA (American Healthcare Act) at near Olympic pace. The AHCA passed without public hearings or, for most Republicans, even reading the bill before their vote. This dumb-bill is now in the hands of people like Senator Mitch McConnell.

It is important to remember that the AHCA is legislation whose epidermis has something to do with healthcare, but its skeletal core provides several means for giving rich people a considerable tax cut. For Republicans, the most important number from the Congressional Budget Office’s (CBO’s) assessment of the AHCA is the expected reduction in the federal budget deficit, not the more publicized healthcare-related predictions. The CBO estimated that the Act would reduce the deficit by $119 billion over 10 years. This deficit reduction forecast will allow Sen. McConnell and Rep. Paul Ryan to offer tax “reform” legislation that’s heavily skewed to benefit the rich/wealthy. The AHCA’s prime purpose has much less to do with wounding our healthcare system; it has far more to do with ultimately reducing taxes for the 1%. These tax reductions have been estimated to be an unhealthy $1 trillion.

The AHCA’s healthcare consequences have been widely reported: 23 million people could lose healthcare coverage; it could destabilize individual insurance markets in some states; states would have to option to reduce the scope of coverage; people with pre-existing conditions will be paying much higher premiums, if insurance is available at all; and Medicaid enrollment would drop by 14 million principally due to increased premiums and lower funding.

Trumpcare’s potential winners would include people who are young, healthy and earn higher incomes. The far more numerous losers would include poorer Americans who use Medicaid, and older and/or lower-income people who buy their own insurance. Like folks who voted for the president.

The D.C. dominant Republicans have been obsessed with changing federal healthcare policy. The AHCA is a mutant tumor that will cast millions of people into slithery swamps of murky uncoverage to fend for themselves in the name of tried-but-untrue Republican fiscal policy. In sum, the AHCA would be a very unhygienic act of Congress. Republican Representatives and Senators don’t care about the health consequences; they’re in this solely for their other, misguided principles. No wonder I’m feeling ill.

These two dumb-bills comprise an injurious political dumbbell. With this West-East healthcare dumbbell, we’ll need to appeal to Asclepius and Ianuaria to see us through with our individual and collective health hopefully intact and somehow resist Washington’s growing kakistocracy.