History

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.
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.
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.
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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