Budget woes and higher education

Because of the worst economic downturn since World War II, many state governments now expect revenues to fall in coming years — resulting in less public spending on higher education. Certain state revenue reforms could moderate the effects of economic slumps on colleges. But higher education institutions also must face reality and become more productive and cost-effective.

First, let’s put in perspective the growth of public spending on education. In 1925, the average American family spent 25 percent of its income on food. Today we spend less than 10 percent and get a more nutritious, varied and enjoyable diet.

Manufactured goods? A twin-bed mattress and box spring in 1929 cost an average-wage worker 161 hours. Today it is less than 24 hours, and the bed is more comfortable.

Communications? In 1915, a three-minute, long-distance telephone call cost 90 hours of average work. Today it costs less than two minutes of work, and you can make the call from nearly anywhere.

Such examples illustrate that technological progress and business innovation, which result from competition, drive down costs while improving quality, value and consumer choice. So, in the long run, each competitive sector of the economy takes a lower percentage of our nation’s resources while providing increased value.

But comparable progress has not been achieved by our colleges, the costs of which — in both public subsidies and out-of-pocket costs to students and their families — have continued to rise.

For example, many people in higher education complain of cutbacks in public support, but according to James Gwartney, Randall Holcombe and Robert Lawson in the fall 1998 issue of the Cato Journal, government spending on higher education as a fraction of our economy more than doubled between 1960 and 1992. And the National Conference of State Legislatures has reported that total spending on higher education increased more than 50 percent between 1991 and 2001.

Education has benefited from technological progress, especially in information and communications, but practical innovation has been much more limited. While other sectors have seen large drops in labor hours per unit of output, in higher education it is almost an article of faith that students need the same amount or more of live face time with professors from year to year. And administrative overhead seems to grow relentlessly.

Thus, spending on education, as a fraction of our economy, has increased over time, yet any improvements in quality and cost savings have been limited, at best. Further, although our colleges set the world standard and attract students from around the globe, the quality and value of some of what we offer is suspect, and our continued competitive position is not assured.

Those who argue for higher taxes to maintain or increase public spending on education should bear in mind that every dollar taken in taxes depresses economic growth and diminishes human well-being. The public interest is best served if public spending is limited to levels at which the social value gained exceeds the social damage done by raising that dollar via taxes. As Daniel J. Mitchell and Michelle Muccio wrote in “Tax Rate Reductions Strengthen the Economy, but Excessive Government Spending Threatens Long-Run Performance,” published by the Institute for Economic Policy Studies at the Heritage Foundation, the levels of public spending and taxes that meet that condition are much lower than current levels in almost every state, and more so at the federal level.

In fact, America’s total public sector, including higher education, has expanded from about 8 percent of the economy a century ago to 33 percent today. A lesser public-sector fraction would increase economic growth, with roughly a 22 percent public-sector fraction being optimal, according to Gerald W. Scully, a senior fellow of the National Center for Policy Analysis and a professor of economics at the University of Texas at Dallas, among other experts.

So, going forward, it would best serve the public interest to arrest the unsustainable growth of the public sector by slowly paring back its share or limiting increases in public spending to the growth rate of the overall economy.

When people blithely assume that education is entitled to public support at a growth rate above that of the economy (for example, when they ask to be held harmless in an economic downturn), they show they don’t understand the central facts and the public interest. Our advocates claim that higher education should be exempt from constraints on public spending because it not only benefits the person being educated, but also raises everyone’s quality of life. While spending on education does promote economic growth, so does other private and public spending: Improving one’s home raises the neighbors’ property values; spending on roads provides various benefits for many people; and so on.

The upshot is that we in education have no reasonable claim on increases in the rate of public support at or above the growth rate of the economy. Whines of “underfunding” and predictions of disaster if our wish lists are cut do not change that fact. Instead, we have a responsibility to do better than we have been doing.

A major reason that education’s share of the economy has not declined while the value that it has delivered has only modestly improved over the long term is the public sector’s inherently defective budget model. That model piles up cost increases for “maintenance” (inflation and scheduled cost increases), “head counts” (more students) and “enhancements” (often noneducational mandates of dubious merit), while ignoring needs for real gains in productivity (more output for fixed or reduced total inputs).

The rest of the world does not work that way. It works by continuously doing more with less — not just more with much more.

Colleges should take heed that technical progress in information and communications has driven innovation in recent years and been a highly disruptive force, devastating old business models as well as organizations and institutions. Just ask folks who work at newspapers or phone companies about this “creative destruction.” In each case, new services, products and delivery methods have allowed customers to bypass incumbent providers, many of which subsequently have collapsed.

Education at all levels could experience the same upheaval in coming decades. We have already seen signs with the rise of for-profit colleges and in certification alternatives to traditional undergraduate degrees, among other indicators. Unless we become more innovative and productive, all the whining in the world, all the pleading for more public support and all the protest demonstrations that can be held will not save us.

In response to the economic crisis, many states will probably cut or limit appropriations to higher education. In Nevada, Gov. Jim Gibbons, who has supported significant increases for education in the past, has directed all departments to submit budgets that broadly move with the state’s falling revenues. He recognizes that colleges should not be a privileged class exempted from the financial pain Nevada families and businesses are experiencing, and that we should not be allowed to add to everyone’s distress through higher taxes.

I agree that public interest requires education to absorb its share of the downturn. At the same time, two budget-reform opportunities should be considered.

First, Nevada and some other states have volatile revenue streams because they are highly dependent on particular sources — in Nevada’s case, gaming and hospitality. New York has a similar problem with Wall Street, as does California with its reliance on personal and corporate income taxes. And many states are like Nevada in that the most stable source of public revenues, property taxes, is mostly allocated to local governments, not the state. An improvement would be to reallocate the tax revenues between state and local governments so that both levels face the necessary discipline of revenue volatility more equally and in a way that better reflects their economies.

Second, states need to make larger contributions than in the past to “rainy day” funds so they can improve their abilities to cover any revenue shortfalls during future downturns.

At the same time, however, we in education should embrace the current budget challenges as an opportunity to begin, out of necessity, to do the things we should have been doing all along. We should reorient our efforts, change operational models, lower costs, improve our product and be more responsive to our changing markets.

We must shed the barnacles that have accumulated on our ships of educational enterprise and become efficient competitors. We should not waste time and opportunity looking backward and pining for how things used to be.

Ron Knecht of Carson City is an economist, former Nevada assemblyman and chair of the Budget and Finance Committee of the Nevada System of Higher Education Board of Regents. He also has served as an adjunct instructor at Western Nevada Community College. This essay first appeared in the Chronicle of Higher Education.

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