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The Political Economy of Cost Control on a University Campus

The Clark Kerr Lecture, Delivered April 20, 2017, The University of California at Berkeley


Few issues in higher education have commanded more attention in recent years than escalating costs. Indeed, it is hard to pick up a newspaper these days without reading about yet another increase in tuition (typically in excess of the rate of inflation) or an opinion piece railing against college administrators for their inability or their unwillingness to stem the tide of rampant cost increases.

I have a confession to make. I am one of those administrators. From 1998 until 2001, I was Chancellor of MIT, one of the Institute’s two most senior academic officers. From 2001 until 2011 I was President of Tufts. And since 2011 I have served as a member of the Harvard Corporation including chair of the University Finance Committee. In each of these positions, I barely laid a glove on rising costs, and it was not for lack of trying. In this lecture, I would like to reflect upon why cost control is so difficult.1

I would like to make four arguments.

  • First, that the greatest challenge facing higher education is bending the cost curve.
  • Second, that doing so is incredibly hard for a variety of reasons not the least of which is that there is no natural constituency for cost control on most university campuses. This is the essence of my argument.
  • Third, in those instances where college costs have been successfully moderated it is almost always due to exogenous constraints on revenue that have forced institutions to cut back.
  • And finally, if we wish to see progress on cost control we need more cooperation among colleges and universities, or to put it more sharply, we need to limit competition among higher education institutions that tends to drive costs inexorably higher.

The biggest challenge facing higher education

I used to believe that access posed the most significant challenge to higher education. By access I mean the need to ensure that talented students could obtain a first rate education regardless of their ability to pay. Traditionally, higher education has served as the primary means for achieving social mobility in this country. College functioned as an escalator onto which talented but poor students would enter, and in one generation, they would often be projected into the upper socio-economic ranks of society. To put it another way, college enabled the American Dream which is why higher education has traditionally enjoyed widespread political support.

Unfortunately, access remains a challenge. Not only is it still hard for many talented but poor students to get the education they need to succeed, recent research by David Autor, Raj Chetty and others suggests that higher education may actually be contributing to income inequality.2 Stated simply, in an economy that increasingly values higher level skills, the disparity between lifetime earnings of high school and college graduates is growing. Because college graduates are disproportionately drawn from the ranks of higher income families, higher education is amplifying income inequality.

So if access remains problematic, why do I believe that bending the cost curve is the biggest challenge facing higher education?

If we fail to curb college costs, we will not only price many students and their families out of the market, we risk all of public support for higher education. And lacking that support, we will never make progress on access. We may also jeopardize the financial foundation on which our colleges and universities rest.

Some data: In 2001, the average tuition, fees, room and board for an in state student at a public four year college or university represented 21 percent of median family income. By 2015, that number had climbed to 35 percent.3 Now admittedly these numbers focus on sticker price. But it is sticker price that gets the attention of legislators, op ed writers, and increasingly the electorate. It is also true that during this same period we have seen a shift away from need based aid to merit aid. Put another way, financial aid to the middle and upper middle classes is growing at a faster rate than financial aid for the poor.4

Higher education costs are rising at a rate even faster than health care costs and have been for some time.5

This situation cannot go on forever, and things that cannot go on forever eventually come to an end.

To be sure, much of the increase in tuition and fees over the past 15 years represents the withdrawal of state support and the shifting of costs from the taxpayer to students and their families, but that is my point. Public anger over rising college costs makes higher education an easy political target especially in tough times.

Note that even the wealthiest public and private institutions are enormously dependent on public support that goes beyond state appropriations. For example, every research university is dependent on the federal government for research support, indirect cost recovery, Pell Grants, and federally guaranteed student loans. Colleges and universities are also tremendously exposed to changes in tax policy that would limit the charitable deduction, potentially subject university endowments to taxation, or would challenge the tax exempt status of college and university real estate holdings.

My point is that we continue to let college costs rise at our peril. Every institution has an interest in trying to bend the cost curve. This is especially true of the most elite institutions that receive a disproportionate share of federal research support and media attention.

So why is cost so difficult?

In their classic study on the performing arts, William Baumol and William Bowen observed that in any industry in which productivity growth lags that of the economy as a whole costs will rise faster than inflation.6 Absent productivity gains to offset rising labor costs, overall costs inevitably will rise.

Higher education is a classic example of just such an industry. The production function for a college education has changed little in the last few hundred years. To a first approximation, we are still educating students the same way we were hundreds of years ago with chalk and talk or what has sometimes been described as the sage on the stage. In fact, this event is a good illustration of the durability of the lecture format. Ask yourself, “Why did many of you travel some distance to attend in person when you could have viewed my talk online?” As attendance at sporting events, rock concerts, and even symphony orchestras suggest, participating in an event in person is still quite different than participating digitally.7

Now there is some hope that online learning will radically transform the educational production function but the jury is still out. While I believe that online education will only get better over time, I am skeptical that it will bring about the massive transformation and cost savings that some of its proponents advocate.8

Beyond Baumol-Bowen Cost Disease, I would like to argue that it is difficult to control costs in a university setting precisely because there is no natural constituency for cost control on a university campus.

But before I get to the crux of my argument, I would like to tell a story. Shortly after I was named President of Tufts, Paul Gray, the former President of MIT, pulled me aside to tell me what my new life would be like. He said running a research university was like trying to navigate an 18 wheel truck down an icy, hilly, mountain road with multiple switchbacks, no guard rails, and thousand foot drop-offs. If that were not hard enough, he said, faculty had their hands on the wheel, students had their feet on the accelerator, and alumni and the board had their feet on the brake. He then pointed at me and said, “Of course you are responsible for the outcome!”

While this story always gets a chuckle, I think it illustrates the core of the problem.

Every university president needs to pay attention to three major constituencies: faculty, students and the board. To be sure, there are others who matter including alumni for which the board is a proxy, staff, neighbors and government officials but faculty, students and the board are always front of mind.

As a university leader, to bring about any kind of meaningful change requires that you agitate at least one of these groups. A leader with goodwill in the bank can afford to have one of these groups upset with them at any point in time but rarely more than one simultaneously.

As we explore the interests of these constituencies what becomes clear very quickly is that on many issues that bear on cost control, the interests of students and faculty align quite closely and as we will see, trustees are not far behind.

Consider the question of curriculum.

One driver of costs is what I call curricular entropy – the pressure to expand the curriculum to include more courses, more majors, more minors, and more flavors of particular subjects. Each such expansion places additional demands on faculty staffing and classroom resources by committing the institution to offer and staff subjects needed to satisfy the curriculum. Curricular entropy also creates additional demand for student advising and may lead to increases in the average time for completion of degrees as students switch majors among a myriad of choices, or worse yet, become confused about their choices and make bad decisions.9

Not surprisingly, students tend to favor more curricular options (as do their parents.) Indeed, in my experience, this generation of students embraces curricular optionality in part because it allows them to differentiate themselves from their peers, hence the number of students graduating with multiple majors and minors.

Faculty are often more than willing to support curricular expansion in part because it creates additional demand for faculty slots or demand for ever more specialized faculty.

Students and faculty interests are also perfectly aligned when it comes to issues of class size. Students generally prefer to take smaller classes and faculty generally prefer to teach smaller classes.

Consider class scheduling: More than one observer has noted the paucity of classes scheduled on Fridays. Students don’t like to take Friday classes and faculty don’t like to teach them. Both prefer to restrict classes to Monday through Thursday thus providing for extended weekends. The result is underutilization of our classroom resources. The same alignment of preferences tends to create excess demand for classrooms during the middle of most teaching days.

Now I do not mean to suggest that student and faculty interests are perfectly aligned. They are not. But they are sufficiently aligned around a set of core decisions regarding the curriculum, class size, and class scheduling to make it difficult to reduce instructional costs by rationalizing both the curriculum and the scheduling of classes.

Let’s take a closer look at the individual interests of students and their parents, the faculty, and trustees as they bear on issues of cost.

Students and their parents

While it is not unusual for students and their parents to rail against the high cost of tuition, one rarely hears either group advocate for specific efforts to reduce the cost of a college education other than by advocating for lower tuition.

We know how to make higher education cheaper. It is not that difficult. It involves:

  • Bigger classes
  • Less student-faculty contact
  • Fewer curricular options
  • Less in the way of costly hands on learning
  • Simpler facilities
  • Less support for athletics and co-curricular life

I could go on. In all of my time as President of Tufts or Chancellor of MIT not once did a student or their parent come into my office, bang the table and request that I take any of the above actions so I could then lower their tuition. To the contrary, there was always pressure to do more.

Now there are a number of explanations for this behavior. Most importantly is competition. Competition in higher education drives costs up. It does not reward the least cost provider. Institutions actually compete by advertising their relative inefficiencies. Promoting low student –faculty ratios is just another way of advertising that you are the most labor intensive institution around. Note that institutions rarely promote the fact that they have the best learning outcomes but they do advertise small classes; easy access to faculty, lavish facilities, and multiple opportunities for students to engage in an endless number student organizations and activities.

The way that we price higher education also decouples price from cost. Because of public subsidies and endowment support, even full pay students and their families pay only a fraction of the true cost of their education. For example, Robert J. Birgeneau, the former Chancellor, estimates the true annual cost of educating a student at Berkeley is on the order of $35,000. By contrast, tuition and fees are only $13,518 annually for an in state student.10 The same pattern holds at most private institutions. For example, Harvard estimates that tuition, room, board and fees covers only 58 percent of the true annual cost of educating a student.11

Financial aid further insulates students and their families from the linkage between price and cost. With an average discount rate nationwide of 48.6 percent at private colleges and universities, only a modest share of students or their families pay full tuition.12 Most get some financial aid.

Please understand, I am not arguing against financial aid. Far from it. I just want to make the point that if you fix the price that any student or their family will pay out of pocket for their education, you dull the incentives on the part of students to restrain their demand for more whether it is enhancements to the curriculum or to the overall student experience.

At the margin, the way we price higher education is a classic case of third party payment. In effect, the share of total educational costs paid for by a student or his or her family is the equivalent of an annual deductible. Once paid, there is little financial incentive to economize or avoid further consumption. So if a school has ten study abroad programs, there will always be student demand for eleven often supported by their parents. If there are 24 varsity sports (or club sports) students will argue that the place would be better off with one or two more. Moreover, any effort to save money by economizing on the student experience is likely to be experienced by students as a take away even if it is accompanied by a promise to restrain future growth in tuition and fees.

It is also true that egalitarian traditions on our campuses sometimes frustrate efforts to introduce lower cost alternatives for students and their families. For example, Tufts charges all students the same amount for room and board regardless of where they live on campus. So students pay the same room fee if they live in a single in the newest dorm as they do if they live in a double in an older, less desirable dorm.

The rationale for this policy is that if housing were rationed by price, only rich students would live in newer dorms thus segregating students by wealth. But another consequence of this policy is that the inability to charge a premium for newer housing makes it difficult to generate incremental resources to both modernize and increase the on campus housing stock. Because this policy has produced underinvestment in on campus housing as well as scarcity, many students move off campus in their junior and senior years where the private market still segregates them by their ability to pay.

By contrast, MIT does not charge uniformly for housing, and there are some low cost options that are very popular among students who wish to minimize their cost of attendance.

Also note that our collective desire to educate more talented but financially needy students comes with a cost. This cost is not just limited to financial aid expenditures which are substantial on most campuses.13 We now understand what it takes for first generation students to succeed academically and socially. They typically require more intensive advising, they also require investments to ensure that they not only matriculate, but they thrive and achieve their full potential. For example, at Tufts we redesigned our first year advising program to ensure that our neediest students, typically first generation college students, were routinely assigned our best first year advisors. We also provided financial aid to our neediest students so that they could attend summer school during one of their four years at Tufts.14 We also provided funded summer internships for our neediest students so that they could afford to volunteer in labs and other non-paying summer activities that strengthened their background for applying to graduate school. Each of these programs cost money.

To close the conversation about students and their families, we should not be surprised that they are rarely advocates for cost control because they do not see how they benefit from such efforts given the weak linkage between cost and the price of their education. Indeed, the US News and World Report rankings of colleges and universities are almost perfectly correlated with expenditures per student. So students seeking to maximize prestige are rational in selecting an institution that maximizes the difference between what they pay out of pocket and what the institution pays to educate them. And our commitment to equity in higher education also comes with costs.

Bottom line: University leaders should not look to students or their families for support in controlling college costs.

The Interests of Faculty

I had a colleague at MIT, David Marks, who used to joke that faculty were people who think otherwise. While this comment almost always gets a laugh, I think there is more than a bit of truth to it. While this inclination to “think otherwise” can be maddening to academic administrators, I think it is also what makes faculty great scholars.

It is what empowers them to challenge conventional wisdom in their scholarship; in their search for truth. It is what leads them to focus single-mindedly on their scholarship and to treat any distraction from their work as an assault on their professional identity.

It is what also leads them to be professional skeptics and critics, and to be articulate ones at that especially when they apply their skepticism and critical skills to pronouncements by administrators on the subject of cost control.

In pursuing their scholarship, most faculty jealously guard their control over the scholarly process. Most just want to be left alone to do their work often in an artisanal or craft like way. And here is where efforts to achieve administrative efficiencies encounter most faculty resistance.

Very few colleges and universities were designed with a goal of achieving administrative efficiency. In fact, most institutions have evolved over time in response to opportunities both intellectual and financial.

Schools, colleges, departments, institutes, programs, and centers have emerged often to capitalize on a particular moment in time and perhaps optimized to achieve a specific intellectual agenda. At the three institutions I know best, MIT, Tufts and Harvard, some research centers have evolved with the goal of recruiting or retaining unusually talented, creative and productive faculty. I suspect you have them at Berkeley as well.

The administrative structure that supports each of these academic units has also evolved to serve the faculty within it, and it has also been optimized to serve faculty within these academic units. Inevitably this process produces redundancy – whether redundant libraries, purchasing, IT or HR systems to just name a few to say nothing about additional claims on space. (It is quite common for faculty to have multiple offices –one in their home academic department and another in a center.) But these redundancies often serve individual faculty well. The faculty understand these legacy systems which have often been designed specifically to make work in their specific field or department easier. Moreover, these systems are managed by people who are known to the faculty personally and the staff who manage them know the faculty as well.

In this context, efforts to achieve administrative efficiency often involve centralization and reengineering of work. In fact, most consultants engaged by universities to identify administrative efficiencies focus on the same set of recommendations: centralize purchasing, IT, and administrative support. From the faculty’s perspective, this means giving up something that is familiar for something that is not. It means dealing with new people. It means learning new processes. It means accepting on face value a claim by the administration that better service will be delivered in the future and at lower cost. Most importantly, faculty fear that any efficiency gains will come at the expense of their own personal time, time they believe is better devoted to their scholarship. So skepticism and resistance to this kind of change should not be surprising. When viewed through the eyes of an individual faculty member t is not irrational although it may be self-serving, globally inefficient and very expensive.

Faculty also frequently engage in guild like behavior to protect faculty employment. Perhaps the best example of this that I have ever seen was at MIT. MIT requires every first year student, regardless of their major, to take among other things, a year of physics and a year of calculus. The physics and math departments jealously guard their privilege in teaching these courses. They insist that only subjects offered by their faculty in their departments should be accepted to satisfy these Institute requirements. In fact, they have successfully thwarted efforts of engineering departments to offer subjects that would satisfy these requirements even when those subjects were taught by engineering school faculty members who held PhDs from the MIT physics or math departments. So the issue is not whether engineering faculty are qualified to teach these subjects.

We have seen similar guild like behavior by faculty at a variety of schools objecting to efforts to expand online education on the grounds it will reduce faculty employment. For example, faculty at San Jose State objected to the teaching of an online version Michael Sandel’s Justice course on precisely these grounds.15 And at Harvard, some faculty have voiced concern over the creation of online content to be used elsewhere because it might reduce employment opportunities for Harvard trained PhDs.16

Most of us who have been in academic leadership positions have experienced resistance to efforts to reallocate faculty slots freed up by retirement to better reflect current enrollments or intellectual challenges. Faculty in certain fields will routinely defend department level staffing in the face of declining enrollments, declining research support or increased intellectual excitement in related fields.

This guild like behavior reduces flexibility in deploying faculty resources and further drives up instructional costs.

There is another dimension to faculty behavior that also contributes to skepticism about centralized efforts to control costs. In the 40 years since I became a junior faculty member at MIT I have noticed a steady drift in identification of faculty away from their home institutions and more towards their disciplines. I also have observed this trend towards stronger disciplinary association at Tufts and at Harvard. I think this disciplinary identification stems from a number of factors

As tenure has become harder to obtain, faculty have understandably invested more of their time seeking to establish their reputations among colleagues within their own disciplines. To put it another way, they are less likely to be citizens of their institutions than they are to be members of their own disciplines. And as resources have become scarcer, universities have had less in the way to offer individual departments.

Since cost control usually entails more centralization, this disciplinary focus has made it harder to get faculty to adopt a more school or university wide perspective. To put it more colloquially, this disciplinary orientation makes it much harder to get people to “take one for the team.”

It is again worth noting that faculty interests exactly parallel student interests when it comes to class size, schedules, curricular expansion, improved teaching and research facilities, support for graduate students, etc.

Bottom line: Faculty are rarely, if ever, allies in efforts to curb costs.

The interests of trustees

So if faculty and students are unlikely to be allies in support of cost control, what about trustees? Surely as fiduciaries they have a legal obligation to ensure that a university lives within its means.

In thinking about trustees it is important to recognize that they are rarely selected because of their higher education subject matter expertise. Most know relatively little about the nuts and bolts of running a university. They often do not understand academic culture. They don’t understand or appreciate shared governance. They have little knowledge of what faculty do on a day to day basis. They don’t understand the fact that research, graduate education and undergraduate education are joint products so they do not appreciate that they cannot economize in one area without having serious consequences in another. They are mystified by the complexities of fund accounting.

I could go on. My point is that while trustees may be sympathetic to the need to realize efficiencies and control costs, they often lack the organizational sophistication to understand how contemplated changes may actually affect an academic institution. Moreover, they are often naive in recognizing the constraints under which university leaders operate. For example, when confronted with faculty resistance to centralization of certain administrative services, a common trustee response is to suggest that the president just order the faculty to comply. Such orders tend to make for brief presidential tenures.

Trustees also have interests other than simply balancing the budget. They are the stewards of a school’s reputation, and most care passionately about their institution. They devote personal time, resources and expertise to try to advance its interests. Consequently they are highly motivated to enhance their university’s reputation and would be mortified if it declined on their watch. This is why trustees are often willing to back a president who wants to make substantial investments in faculty, students and facilities even in relatively challenging economic times. In this sense the interests of trustees align quite closely with students and faculty.

It is also why they are inclined to look for other ways to address budgetary pressures than simply engaging in cost control. Revenue enhancement, often through fundraising, tends to be their first line of defense.

But fundraising, if not carefully done, can be very expensive. Rare is the gift that pays 100 percent of the marginal cost of a new activity. There are always additional expenses including support staff, space, overhead, IT, as well as demands on the curriculum. Gifts that don’t go to support core needs often wind up taxing the unrestricted resources of the institution. And even when a gift endows a new activity completely, there may still be shortfalls. Endowments go up and endowments go down. When they decline, the institution is left with 100 percent of the liability to the donor and only a fraction of the resources needed to support the new activity.

To put it another way, if you are not careful, capital campaigns can actually weaken institutions financially. The true measure of success is not how much money you raise. In fact, if you raise money for the wrong purpose, the more you raise, the bigger the hole you may dig.

Rather, to be successful, a campaign must accomplish two things simultaneously: it must strengthen the institution intellectually and it must strengthen it financially. The latter requires raising support for core intellectual activities that the institution is committed to offering regardless of the preferences of donors, or alternatively, raising resources that are either unrestricted or budget relieving.

Another way to enhance an institution’s reputation (and revenue) is to increase its research volume. However, because of under-recovery of indirect costs, research also does not pay its own way. So as trustees support efforts to enhance their institution’s scholarly reputation by building research volume, they may also build gaps into their budgets that need to be filled from other sources.

Beyond fundraising, the only revenue source trustees control directly in most institutions is tuition. In most research universities, there are five or six major sources of revenue depending on whether they are public or private:

  • Tuition, fees and revenue from auxiliary operations (e.g., room and board)
  • State appropriation
  • Research support
  • Income on the endowment
  • Gifts for current use
  • Intellectual property revenue

Currently, all of these revenue sources are under economic, political or market pressure.

In good economic times, there is relatively little pressure to rein in tuition. This statement better describes private institutions that are relatively insulated from political pressure but it is also true to some degree for publics. Trustees may fear that if they forgo a tuition increase in a given year that the revenue increment “will be lost forever” due to the impact of compounding. Also, unlike markets for other goods and services, the higher education market (especially among highly selective colleges and universities) is notoriously price insensitive. So there is little advantage competitively to underpricing one’s competitors in good times.

By contrast, in tough economic times when trustees and administrators are trying to close a budget gap, tuition is the only revenue source controlled directly by the board so there is pressure to raise it to produce incremental revenue.

So in good times or bad, tuition tends to go up.

Now one important distinction between public and private universities is that in the case of the former, trustees or regents are either appointed by the Governor or elected directly on party affiliated ballots as they are at the University of Michigan. By contrast, trustees at private institutions are either selected by a self-perpetuating body or directly elected by the alumni.

In the case of public university regents or trustees, a common pathology is for some of these individuals to view themselves as more fiduciaries of the taxpayer and less of the institution. Some campaign for their positions specifically on a platform to cut waste and inefficiency and reduce the cost of higher education. These individuals are the relatively rare exception to my argument that trustees have priorities other than cost control. But it is also true that these individuals can be very disruptive to institutions and their boards as our colleagues at the University of Texas have recently learned. Such trustees have very narrow agendas and often have little respect for the scholarly mission of higher education. In fact, they tend to focus exclusively on the price of undergraduate education without understanding the complexities and interrelationships between undergraduate education, graduate education, and research. Furthermore, they tend to undervalue the public mission of higher education.

Economists (present company included) are sometimes accused of knowing the price of everything and the value of nothing. Trustees who only care about balancing the budget or reducing costs are also sometimes guilty of this conceit.

* * * *

I have argued that one important reason that cost control is not a higher priority on most university campuses is that there is not a natural constituency for it among students, faculty, staff and trustees with some notable exceptions.

It is also true that external constituencies are often advocates for activities that drive costs up.

It is certainly true that federal regulation has been a source of additional administrative cost whether it is reporting and compliance requirements for research or Title IX, or the elimination of mandatory retirement for tenured faculty to name just a few examples. There have been some clumsy efforts to estimate the magnitude of these costs at Vanderbilt17. While the methodology left a lot to be desired, few would argue that compliance with federal regulation adds to our cost structure. The only question is by how much.

But in addition to federal regulation of higher education, it is also true that local government is constantly asking our colleges and universities to do more in service to the local community. Beyond payments in lieu of taxes, host communities also typically want more access to university facilities, more support for local schools, preference in admissions for local graduates, earmarked financial aid, etc. I could go on.

My point is that while colleges and universities are typically very good at doing more with more, increasingly they are being asked to do more with less. Everyone wants us to contain our costs but at the same time no one seems willing to moderate their expectations of what we provide for society collectively or for them individually.

So if students, faculty and trustees are not likely to be major sources of support for cost control, what explains the success of some institutions to rein in costs?

The Lincoln Project, created under the auspices of the American Academy of Arts and Sciences and co-chaired by former Berkeley Chancellor, Robert Birgeneau (Henry Brady also played a major and important role), studied the future of the public research university. It reported that education and related expenditures grew only one percent annually on a per student basis at public research universities from 2000 to 2012.18

Moreover, the Delta Cost Project of the American Institutes for Research found that in 2012, public research universities actually employed 30 fewer staff per 1000 FTE students than in 2002. By contrast, private research universities employed an additional 137 staff per 1000 FTE students.19

So it is possible to contain costs notwithstanding the alignment of the interests of students, faculty and trustees previously noted. What explains the success of public institutions in controlling costs (note, prices went up in this period due to the reduction in public support) and the failure of private institutions to achieve these same efficiencies?

I think the answer lies in an important observation made by the late Howard Bowen, a distinguished economist of higher education and the former president of Grinnell College, the University of Iowa and the Claremont Graduate University. Bowen formulated what has become known as Bowen’s Law or more precisely, Bowen’s Revenue Theory of Costs.20 Bowen argued that the unit cost of education is determined by the amount of revenue currently available for education relative to enrollment. In other words, higher education institutions spend on education essentially what they take in. Institutions that have very different revenue streams spend radically different amounts to educate the same students.

Another way of understanding Bowen’s Revenue Theory of Costs is that only severe and sustained revenue shortfalls create the kind of sustained political pressure necessary to bring about reductions in costs through efficiencies on college campuses.

I think this theory does an excellent job of explaining why public institutions fared far better than their private counterparts in reducing administrative costs during the period 2002-2012. While both sectors suffered a decline in investment revenue during the Great Recession, public institutions also saw a dramatic reduction in state support. As I am sure Bob Birgeneau will acknowledge, absent such a reduction, it is far from clear that Berkeley or any other institution could have mustered the internal political will to achieve the kind of administrative efficiencies produced during this period.

* * * * *

So I fear I have painted a rather bleak picture. While I do think cost control is hard – perhaps very hard, I don’t think it is impossible. Moreover, I do not wish to be heard arguing for further reductions in public support merely as a way of controlling costs. Far from it.

First, I think technology offers us some opportunities. I started this lecture by noting that the production function for higher education has changed little in hundreds of years. The result is that we have not experienced significant productivity growth and so, as Baumol and Bowen have predicted, our costs have risen faster than inflation.

As I mentioned earlier, while I don’t believe online learning will replace traditional bricks and mortar institutions, I do think we can learn from some of the current experiments with an eye towards reducing costs. For example, MOOCs have developed some very successful models for crowd sourcing both grading and advising.

I subscribe to the old maxim that faculty teach for free. We are paid to grade. Using technology to reduce the burden of grading would not only be popular with faculty, it would also boost productivity. The same can be said for advising. I know of few faculty that would fight if asked to give up the burden of advising undergraduates. Technology can help to improve productivity in this area and we should take advantage of it.21

Similarly, MIT has successfully implemented a virtual lab for a version of its introductory circuits and design course required of all first year electrical engineering majors.22 Virtual labs not only reduce the cost of constructing expensive teaching laboratories, they can also reduce the demand for TAs and technical instructors. We need to study these experiments and make realistic judgments about the magnitude of possible cost savings.

Technology also allows us to connect students with real time tutors that are physically removed from the campus. Imagine teaching languages where the tutorials are conducted by native language speakers who happen to reside in their own countries – for example, Urdu taught with the assistance of tutors in Pakistan. Admittedly, this is not a productivity enhancement but it might be a way to deliver higher quality instruction at a lower cost. And if we can do it for languages, we can do it for lots of other subjects where talent exists in industry. Indeed, we may have opportunities to use technology to forge bonds between our students and our alumni while also improving the pedagogy. Harvard Law School has pursued precisely this strategy in teaching an online class on copyright law that employs alumni who are practicing in the field as virtual section leaders.23

I don’t mean to oversell the prospect of technology. To be sure, there are costs associated with each of these strategies. That said, we need to be open to doing things differently and look for opportunities to both lower costs and build relationships (like with our alumni) or ease the administrative burden on our faculty. I think there are opportunities to do both.

We also have to be willing to have open conversations with the faculty about how the fruits of productivity gains made possible through technology are to be shared. Currently, I fear faculty believe that any enhancement to productivity will come at the expense of faculty employment. It need not. As I have previously noted, we can use these enhancements to relieve faculty of activities they find burdensome. We can also devote some productivity gains to educating more students, something I think would help to rebuild public support for higher education.

Second, if competition drives costs up in higher education as I think it does, perhaps the time has come for a bit less of it.

We need more cooperation among institutions in shared scientific facilities, in libraries, in purchasing, in graduate student housing, and in the provision of back of the house services that are not particularly strategic but that could be more efficiently provided if done at a larger scale. For example, Boston University, Harvard, MIT, Northeastern University, and the University of Massachusetts have collaborated to create the Massachusetts Green High Performance Computing Center, a state of the art facility for computationally intensive research that is open for use by any research organization. We need more such collaborations.

As the Lincoln Project persuasively argued in my opinion, we also need more cooperation among institutions on the curriculum. We need not replicate every major and every area of research at each neighboring institution. Such competition drives up costs for everyone. More regional compacts in which institutions agree to specialize in certain fields but provide access to students and faculty from neighboring institutions are needed. There are many examples of such cooperation – the Claremont Colleges are a good example in southern California. In Massachusetts, Amherst, Williams, Smith, Mount Holyoke, and the University of Massachusetts have participated in a successful exchange program for decades.

Let me now say something controversial but that I think needs to be said. I believe institutions should cooperate to rethink the terms of tenure and to perhaps limit it to a fixed term contract, perhaps 35 years from the date first granted to an individual at any institution.

Congress eliminated the exemption for mandatory retirement for tenured faculty in 1994. At that time, no faculty member who held tenure had any expectation that they would not have to retire upon reaching the age of 70. Thus, eliminating mandatory retirement resulted in a windfall gain for all faculty tenured at the time including me. But the elimination of mandatory retirement also has had other consequences for higher education. An aging faculty limits opportunities for intellectual renewal. Without faculty turnover, it becomes harder to commit resources to new fields of intellectual inquiry. Job prospects are also reduced for younger colleagues. Elimination of mandatory retirement has also made diversifying the faculty that much harder. If you look at faculty over the age of 75, they are a far less diverse group than those who are being hired to replace them.

Eliminating mandatory retirement has also increased costs for institutions in at least two ways. As the faculty has aged as a group, faculty salary costs have increased if for no other reason than it costs more to employ senior faculty than junior faculty. Also, many faculty will not retire absent financial incentives. It has become common for institutions to offer retirement programs simply to get faculty to give up tenure.

Beyond being expensive, these programs are often regressive from an institutional perspective. In effect, we are making payments to colleagues to give up a windfall they never expected in the first place, and these colleagues are often the wealthiest among us. They bought their housing when it was relatively cheap, sent their kids to college when it was far less expensive in real terms, and they have been the beneficiaries of a very strong equity market which has provided them with relatively generous retirement savings.

I know of no college or university president who thinks eliminating mandatory retirement for tenured faculty was a good idea. However, for both political and competitive reasons, no individual institution can act to change this policy on its own. Any president who took on this challenge would be immediately challenged by his or her own faculty. And any institution that tried to redefine the terms of tenure on its own would face resistance in the very competitive job market for faculty. Collective action is required.

Redefining tenure going forward as a 35 year contract from the time first granted at any institution would not require federal legislation because it would not run afoul of legislative restrictions on age discrimination. It also would not affect those currently holding tenure. After 35 years, faculty would still be eligible for a term appointment assuming they still met appropriate expectations for teaching and scholarly productivity. But such action requires a collective conversation. I believe we should start that conversation now.

Third, we need to raise money in ways that generate financial flexibility for our institutions. This requires doing a much better job of explaining to donors who really care about our institutions how they can help to strengthen them both academically and financially. We need to get them to underwrite the core mission of the university, not simply partially underwrite expensive new initiatives. The Hewlett gift that Bob Birgeneau secured for Berkeley to create 100 new faculty chairs is exactly the kind of philanthropy I am talking about.24

Finally, let me turn to the general lack of political support for cost control.

We are unlikely to change the underlying incentives faced by students, faculty or trustees. However, academic leaders can do a better job of framing choices so as to reveal their true consequences.

During my tenure at Tufts, with the concurrence of the faculty and the board, I made undergraduate financial aid our highest priority. Each time I was asked to expand a program or to otherwise incur new costs in support of some otherwise worthy objective I would restate the cost of the proposed new program in financial aid award equivalents. Thus, when students pressed me to make the entire campus Wi-Fi accessible (remember, this was before the days of ubiquitous smart phones and internet access) I responded by asking if they were willing to deny a Tufts education to three prospective students so they could sit under any tree on campus with their laptops and surf the web?

Similarly, during the financial crisis it was clear to me we were going to have to freeze all salaries. I could have just done it and there would have been grumbling but probably grudging acceptance. Instead, I framed the choice in real terms. We could either freeze salaries or lay off 200 of our colleagues in the worst job market since the Great Depression. People understood the reality of this choice and accepted the salary freeze willingly.

Brit Kirwan, the very able former President of the University of Maryland system succeeded in successfully negotiating additional support from the Maryland legislature to fund some important new initiatives by conditioning that support on the university achieving specific targeted reductions in expenditures. Framing additional state appropriations in this way gave everyone on campus an interest in undertaking change, even change that was viewed skeptically by many.

It is through framing choices that I believe we can do better to generate at least some support (or perhaps understanding) of the need for cost control. We need to do a better job of educating our donors and our trustees, and we need to give faculty a stake in harvesting efficiency. We need to demonstrate that only by making better use of technology, enhancing productivity, rationalizing parts of the curriculum, and by giving academic leaders more flexibility to make the university more efficient will we find the resources to support future investments in students, faculty and the scholarly enterprise. We cannot assume that these investments will come from ever rising tuition, larger investment returns, newly discovered revenue sources or a miraculous restoration of public funding. I believe the real choice for higher education writ large is whether to find a way to bend the cost curve or jeopardize all of public support for higher education. And no one has a bigger stake in this decision than the faculty.

They are the university.

Clark Kerr in The Uses of the University said, “The call for effectiveness in the use of resources will be perceived by many inside the university world as the best current definition of evil.”25 I hope you don’t think me evil. I am under no illusion that this process will be easy or popular but I think it is necessary to preserve this great institution that we all love and that I believe has done so much good for this country, the research university.


1 While my administrative experience is exclusively at private institutions, I believe there are many similarities with the management of elite publics. There are also some significant differences which I will try to highlight.

2David Autor, “Skills, Education, and the Rise of Earnings Inequality among the “other 99 percent.” Science, May 23, 2014. Raj Chetty, John N. Friedman, Emmanuel Saez, Nicholas Turner, Danny Yagan, “Mobility Report Cards: The Role of Colleges in Intergenerational Mobility.” National Bureau of Economic Research Working Paper No. 23618, July 2017.

3Calculated from the National Center for Education Statistics, Digest of Education Statistics.

4Stephen Burd, “Too Much Merit Aid for Those Not in Need,” New America Weekly, Edition 121, April 28, 2016.

5Niraj Chokshi, “Education Costs Rising Faster than Health Care,” The Atlantic, August 24, 2009.

6William Baumol and William Bowen, “On the Performing Arts: The Anatomy of Their Economic Problems,” The American Economic Review, Vol.55, No  . March, 1965, pp. 495-502.

7The Super Bowl provides perhaps the best illustration of this phenomenon. Why pay in excess of $1000 per ticket, plus airfare and hotel to watch a game live (with inferior access to instant replay, food, and rest rooms) when you could watch exactly the same game in the comfort of your own home with friends at substantially lower cost? The fact that people will pay large sums to watch the game in person suggests that there is something different about experiencing the event live and in person. Similarly, people will pay hundreds of dollars for symphony tickets, while tolerating people coughing around them when they could obtain a perfect digital download of the same orchestra playing the same music for a few dollars which they could enjoy as many times as they wish at their leisure.

8For a more thorough analysis of why online education is unlikely to replace traditional residential education see Michael McPherson and Lawrence Bacow, “Online Higher Education: Beyond the Hype Cycle,” Journal of Economic Perspectives, Volume 29, Number 4, Fall 2015, Pages 135–154.

9In thinking about escalating college costs we tend to focus on either gross or net tuition but time to degree also plays an important role. As students take longer to complete their education – five or six years in many cases – they not only incur additional tuition and living expenses, they are also out of the labor market. As a result, as the average time to complete a degree increases, the unit cost of a degree also increases.

10Personal communication.

11Personal communication. Erin Driver-Linn and Liam Schwartz, Harvard University Office of Institutional Research.

12National College and University Business Officers 2015 Tuition Discounting Study as cited in Inside Higher Education, May 16, 2016. “Discounting Hits New Highs.”

13The National Association of College and University Business Officers estimated that the average institutional discount rate for first time, full time freshmen in 2015-2016 was 48.6 percent. See The National Association of College and University Business Officers 2015 Tuition Discounting Study, op. cit.

14It is common for wealthier students to lighten their academic load by attending summer school once during their four years of attendance. For example, pre-medical students often will take some of their most demanding premedical courses like organic chemistry in the summer when they can focus on them free from the demands of other subjects. By contrast, poorer students do not have this luxury. They must work in the summer. In addition to bearing a heavier term time load, these students typically also have jobs during the academic year to meet the work-study requirements of their financial aid packages. Thus it is not surprising that they often do not perform at the same academic level as their wealthier classmates.

15“Professors at San Jose State Criticize Online Courses,” New York Times, May 2, 2013.

16Personal communication, Alan Garber, Provost, Harvard University.

17“The Cost of Federal Regulatory Compliance in Higher Education: A Multi-Institutional Study, “ Vanderbilt University, October 2015.

18American Academy of Arts and Sciences, The Lincoln Project, “Public Research Universities: Understanding the Financial Model,” 2016, p. 12.

19Delta Cost Project at the American Institutes for Research as cited in American Academy of Arts and Sciences, The Lincoln Project, “Public Research Universities: Understanding the Financial Model,” 2016, p. 13.

20Howard Bowen, The Costs of Higher Education: How Much Do Colleges and Universities Spend Per Student and How Much Should they Spend? The Carnegie Council Series, June 1980.

21See, for example, Underwood, Z. & Underwood, R. (2015, December). “Technology’s Evolving Role in Prescriptive and Developmental Advising.” Academic Advising Today, 38(4). Also see, Steele, G. (2014). “Intentional Use of Technology for Academic Advising.” NACADA Clearinghouse Resource Web Site.

22See Circuits and Electronics 1: Basic Circuit Analysis, 6.00

23See William W. Fisher III, “HLS1X: CopyrightX Course Report,” HarvardX Working Paper Series No. 5, January 22, 2014.

24See, “The Hewlett Challenge: A Catalyst for Faculty Excellence,” The Campaign for Berkeley.

25Clark Kerr, The Uses of the University, 4th ed. (The Godkin Lectures on the Essential of Free Government and the Duties of the Citizen), Cambridge, MA: Harvard University Press, 1995, p.181.