Degree Inflation Of Another Sort, Ctd

A reader writes:

I've been in the K-12 private school world for nearly 35 years, the last 25 either running a school or serving as the chief business officer. The statistics presented in the chart about inflation and educational costs do not surprise me a bit. Here's my take on some of the reasons that underlie this tremendous rate of inflation in educational costs:

1. Unlike in the economy as a whole, it is difficult for schools to become more "productive" in the traditional sense. Increased productivity means increasing output per unit of input. Since the "output" of a school is "students graduated," the only way to get more "productive" is to graduate more kids with the same number of employees (i.e. teachers). This in turn means increasing class sizes or finding other ways (such as through online courses) to increase the number of students taught by a given teacher. The customers (usually referred to as “parents") we serve always swear they don’t want that. In fact, parents emphatically reject the offer of lower tuition if it results in larger class sizes or less access to teachers.

2. Unlike in other industries, technology does not result in greater efficiencies in schools. Alas, it's just the opposite. Computer technology has enhanced learning in many ways, but it also requires tremendous levels of expenditures.

3. A generation ago even very bright students with learning disabilities simply were extremely ill served by schools. Today, schools provide all kinds of support to students with learning challenges. This is clearly good for the students, as well as for society at large, but it has increased costs.

4. Today, schools employ (psychological) counselors; that was not done a generation ago.

5. There are many other services provided today that are either completely new or significantly enhanced. In my experience, this is usually parent driven rather than driven by schools wanting to get ahead of or keep up with the competition

I don't include the cost of the new facilities that private schools and colleges have added, because for the most part, the cost of erecting those new buildings is paid for through fundraising campaigns specifically for that purpose and not out of tuition dollars (though obviously increased operating costs come from tuition dollars).

I would like to elaborate a bit on the first factor above, because in my view it is the most significant in driving up costs. In the economy as a whole, it is possible for workers to receive wage increases above the rate inflation because of increased productivity. If I were making widgets and could find a way to increase productivity and produce (and sell) 5% more widgets that I could a year ago, all other things being equal, I would have 5% "extra" money that I could distribute it in the form of wages to my workers. If the inflation rate were less than 5%, they get ahead.

In the vast majority of educational institutions (I'm not including the very few that have truly substantial endowments), tuition represents, overwhelmingly, the primary source of revenue. In essence, to oversimplify only a little bit, to give employees an x% raise, we have to raise tuition by x% (actually more, since other costs go up as well). If the inflation rate is also x%, our employees are no better off next year than they were this year. Do that for an entire career, and teachers would find themselves in the position of retiring at exactly the same (inflation-adjusted) salary at which they started their careers in education. Who would enter a field with no possibility of after-inflation wage increases? In order to raise real wages, private schools must raise tuition more than the general inflation rate.

Alan Blinder (of Princeton and Federal Reserve fame) wrote an article in (I believe) the 1980s talking about just this phenomenon. He nailed it.

Pretty much everyone says that this is unsustainable into the future. The interesting thing is that people have been saying is unsustainable for over 30 years, and yet, the education “industry” has sustained this approach throughout economic ups and downs. Maybe this economic downturn is different. Then again, once again, experience may prove that the predictions of unsustainability are incorrect.