Friday, December 14, 2012

A Crisis in Higher Education?

Labor economists have routinely documented the high economic returns to holding a college degree.  The U.S has the world's best universities, so what is the issue?  Apparently in a diverse society, there are heterogeneous rates of return to attending university and even those who attend the same university achieve different outcomes as they choose different majors and many allocate their time to consumption (i.e beer drinking) rather than heading to the library.    Two recent news stories about Higher Ed caught my eye.

1.  The fight at NYU over vertical expansion.

2.  Universities borrowing lots of money to build new buildings.

Story #1 raises a series of issues related to the Coase Theorem and the Arrow Impossibility Theorem.   Given my position as a Visiting Scholar at NYU's Stern School, and having been a faculty member for 20 years at random places, I can provide some wisdom here.  Ask yourself the following questions,  who runs the University and what is the goal of the University?  Two seconds of thought will convince you that universities are funky,  they have a complex objective function with multiple stakeholders ranging from alumni, faculty, staff, prospective students, trustees and the administration.   If important decisions must be made, who decides?  Is majority rule the right way to make these decisions?  Economists question voting because voting doesn't reflect the intensity of your preferences.  Most University Administrations seek to pursue their own agenda while appearing to listen to "stakeholders".  This takes a lot of meetings and there is a lot of eye contact as sincere leaders signal that they are listening, but are they?  Did they take the job to listen to you?  I don't think so.

In the case of the "vertical expansion" if NYU, some interesting overlapping generations issues arise. Consider a 50 year old member of the Economics Department faculty. He will say to himself; "I love the current funky NYU scene.  This plan to create a "New NYU" will take 20 years to complete.  Yes, it will look great and urban universities face severe land constraints that going vertical will solve but by the time NYU is done, I will be done. I have no stake in this plan.  This plan confronts me with medium term pain and I won't be around in the long term".  So, the problem is that the key stakeholders have a medium term perspective while the trustees and the legacy seeking President have a long term perspective.  The Coase Theorem would suggest that if the professor have the property rights and can block this "progress", then the President must buy them out.  But, what can he offer them?

Economists have not devoted enough attention to bargaining games with a nasty "time to build" component. China can get big projects done in ways that NYU may not be able to. How costly are such democracy impediments to our long run productivity?    I don't believe that Manhattan has used its scarce land efficiently and NYU is an excellent test case of the interaction between land use controls and maximizing intellectual spillovers to achieve continued productivity gains.  We want 4% GNP growth.  How do we achieve that? In part by allowing NYU to go vertical.

Story #2; University borrowing.  The NY Times forgets that interest rates are really low right now. It isn't crazy to borrow.  I liked that Ohio State is issuing 100 year bonds.  These universities are over investing in buildings rather than faculty.  I would like to see a major university announce that it is borrowing $500 million dollars to fund 100 endowed faculty chairs.   That university would rise in the rankings.  Universities have forgotten what the words "comparative advantage" mean.   Schools, including my own, need to get the Eye of the Tiger back and return to the core mission of teaching undergraduates and creating new research.

UPDATE:  After watching this UCLA video, I'm now wondering if there is a crisis.  Our priorities seem a little skewed here. I didn't see a library or a nerd in this video.

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