Academic Armageddon Advances

Robert Kelchen of the University of Tennessee, writing in the Chronicle of Higher Education recently, described the most dire problem facing higher education today: “The list of institutions trimming academic programs, implementing furloughs, and laying off employees is long and growing…” 

A massive financial crunch has hit many schools because of sagging tuition revenue growth (reflecting falling enrollment or more aggressive discounting of tuition fees) and reduced public financial support in the form of federal and/or state aid and stagnant private philanthropy, all occurring in an environment of heightened inflationary pressures increasing the dollars needed to operate. 

While the problem has been the greatest among non-elite institutions with little national reputation, it has been felt nearly everywhere. Take Chicago, for example: its two most prestigious and wealthiest schools, the University of Chicago and Northwestern University, have both been forced to endure meaningful budget cuts requiring staff reductions. 

I would argue that the problems of American universities are largely related to just two words: incentives and ownership. I will elaborate on that shortly but first let’s look at some specific reasons for the current financial pressures that many universities face to some degree.

Colleges and universities in America typically have high fixed costs. Every time a school confers tenure on a faculty member, for example, it incurs a financial liability measured typically in the millions of dollars—the present value of a lifetime of salary and fringe benefit payments. Moreover, a typical large university has debt obligations often reaching several hundred million dollars. Unlike in, say, Europe, American schools typically feel obliged to feed and house their students instead of leaving that to entrepreneurs who specialize in those tasks. Moreover, they typically borrow heavily to finance increasingly luxurious dorms and student recreational facilities.

The cost pressures of colleges have been aggravated by massive administrative bloat; universities are supposed to focus on the production and distribution of ideas: knowledge. Yet many administrative personnel on campuses do other things that often detract from Job One. This is doubly true when universities finance anti-merit-based evaluation of academic success through such things as DEI initiatives. 

Additionally, at many schools, spending on athletics has soared in recent years—where outside America do universities run massive sports programs typically absorbing meaningful amounts of the institutional budget? Longer term, declining fertility lowers the stock of college-aged students, while the aging of the population also potentially lowers labor force participation and our capacity to finance universities. 

Aggravating things further, the completely irresponsible massive deficit financing of the federal government reduces our national capacity to finance everything else, including collegiate instruction and research. Still other academic pessimists like to cite successful technological advances like AI and the underemphasis on developing non-college-based skills like welding or plumbing as factors that have eroded the superior productivity of college graduates and thus their attractiveness to employers.

Let us return to ownership and incentives. The recent layoffs of collegiate workers demonstrate the difference between higher education and the for-profit private sector. 

As I write this, Fox News Business has just released a story headlined “Walmart Cutting or Relocating about 1,000 Corporate Jobs.” Walmart is prospering; its stock is trading near an all-time high, and earnings are robust—yet it is laying off a meaningful number of workers. That almost never happens in higher ed. Walmart is incentivized to maximize efficiency and increase earnings and its stock price, and apparently currently believes laying off a significant number of workers will help achieve that objective. Have you ever heard of a not-for-profit university not in bad financial shape doing the same thing?

Indeed, regarding government-owned schools (so-called “state universities”), closure almost never happens: politicians wanting to increase their popularity propose bailouts of schools in distress. So there is a difference between who “owns” businesses—well-defined stockholders in the profit-seeking private sector, and imprecisely ill-defined groups of interested people with respect to universities.

In the private economy, the threat of what Joseph Schumpeter called “creative destruction” compels firms to constantly innovate to lower costs. Incentives are cost-reducing, constantly looking to produce more for less. In the long run, that has propelled capitalism to unprecedented levels of prosperity. 

Conversely, higher education works hard to avoid destruction while also avoiding needed moves designed to promote efficiency coming from increased outputs or lower costs, because its “owners” lack incentives to do so. When I chaired my department at my university, I tried to lower productivity by acquiring more staff to ease the work burden, and my colleagues applauded me for it. In profit-seeking private business, I would likely have been fired. 

Who “owns” the universities? 

Walmart is owned by thousands of shareholders wanting higher earnings and stock price, and if performance sags, powerful stockholding interests like the Walton family will demand change. But who “owns” the universities? 

Various groups think they have control over an institution—the faculty (and sometimes their labor unions), the president and senior administration, powerful state political officials (for state universities), sometimes even wealthy or powerful alumni groups, or even the students. Presidents wine and dine the legal owners (the governing board) with fancy dinners, choice football seats, maybe even overseas trips ostensibly related to the university’s mission, so then the trustees often go along with almost anything the administration proposes. 

Moreover, college presidents often largely control the flow of information to trustees, keeping bad news from them when feasible. A corporate president doing that might get indicted for violating our security laws. Measuring success is easy for private businesses—look at stock prices and earnings statements. Not only is that not possible in higher education, but oversight bodies like accreditation agencies are usually largely controlled by the very universities they are supposed to prod into achieving efficient, better outcomes. 

The perverse incentive and opaque ownership structure of universities has contributed importantly to the current problems in academia. The problems have been so severe that universities are starting to react to the markets (falling student enrollment) and declining subsidies, shielding them from the consequences of perceived mediocre performance. 

In one state, Ohio, the legislature forced universities to ditch many low-enrollment majors. Under legislative duress, my school, Ohio University, agreed to end 11 degree programs with very low enrollment, including an Associate of Applied Science in Equine Studies (sell the university’s horse!) and a Bachelor’s of Fine Arts in Interdisciplinary Arts degree, whose rare graduates I suspect have had to choose between working at McDonald’s or Wendy’s after college.  

Some much-needed “creative destruction” is coming to higher education. The relatively isolated and heavily subsidized Ivory Towers of academia increasingly will need to respond to market forces as external subsidies from taxpayers and private philanthropists no longer automatically finance their costly whims. 

What changes do marginal colleges have to make to survive? Here are a half dozen possibilities—there are many more. 

One, adopt year-round schooling so students can get a bachelor’s degree in less than three years. Two, abolish tenure for new faculty and incentivize some faculty to retire early. Three, eliminate governmental support for colleges with more administrative staff than teaching faculty, forcing non-teaching staffing reductions. Four, increase teaching loads, usually to at least three classes. Fifth, end tax incentives to support ball-throwing contests (intercollegiate athletics), such as deductions for stadium luxury suites or indoor practice facilities. Six, require minimal academic performance if federal financial assistance is to be granted to students.