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A Crack in the College Cartel?

Say one thing for recessions: they force companies, governments, and institutions (not to mention individuals) to look for ways to be more efficient and to decrease costs. That’s why productivity always soars in a recession.

Today’s New York Times reports that people are increasingly fed up with the high costs and high-handed ways of American colleges. It’s about time. As the Times reports: “‘One of the really disturbing things about this, for those of us who work in higher education,’ said Patrick Callan, president of the National Center for Public Policy and Higher Education, ‘is the vote of no confidence we’re getting from the public. They think college is important, but they’re really losing trust in the management and leadership.’”

College tuition has risen far faster than inflation. In the 1960s, I paid $2,200 a year to attend a first-rate university. From the month I graduated to December 2009, there was an inflation of slightly over 550 percent. So tuition today, net of inflation, should be on the order of $12,500. It’s $37,005, almost three times higher. Why?

Well, high-prestige colleges have market power and can charge more. But even second- and third-tier institutions in terms of prestige have been able to jack up their tuition far beyond inflation because there is a cartel in operation. Entrance into the marketplace by new competitors is very restricted, and colleges and universities are not subject to antitrust laws, so they are free to conspire to set prices. In effect, they do. But all cartels require an enforcement mechanism, and in this case, it is the accrediting agencies that often prevent colleges from competing by means of price. They often require ever more elaborate plants and facilities, like a large library even if the institution is located in a city with a large, easily accessible municipal library. Unnecessary courses are often required, even if the student can demonstrate competence in the subject. Colleges often cannot fully use the new communications technologies that would greatly lower costs, and they often cannot employ great ideas like the wonderful college-level courses offered by, for example, The Teaching Company.

If colleges were able to compete freely in terms of prices — still better, if they were required to compete, like profit-seeking corporations — those prices would come down wondrously. In fact, today’s New York Times has a perfect example of that near the article on the public’s growing resistance to college costs. It’s a full-page advertisement by Fidelity, the huge brokerage and mutual fund company, offering stock trades for $7.95 each and bragging that that’s cheaper than the prices charged by its largest competitors.

From the first beginnings of what would become the New York Stock Exchange, in 1792, members were required to charge the same fees, no competing by means of price. In the 1970s, trading 100 shares could easily cost you $70.00. Trading 1,000 shares cost 10 times as much, even though the cost to the firm of executing the trade was the same. But May 1, 1975, (May Day in Wall Street history) was the day the SEC required the NYSE to stop fixing prices. They immediately declined drastically and, despite inflation, have been declining ever since. That is by far the most important reason behind the huge increase in stock exchange volume in the last 35 years and the ever-higher percentage of American families owning securities in their own right. The brokers had to undergo an agonizing restructuring, and many did not survive. But I notice few tears being shed for Wall Street these days.

It will take a lot of pressure to kill the higher-education cartel, but it will do a lot of good if the effort succeeds.



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