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American Postsecondary Education: A Prada Handbag or an Irish Potato?

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COLLEGE COSTS
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Normally in economics, when the price of something goes up, the demand goes down. As commodity prices rise, fewer commodities are purchased. In tax policy, if you want less of something, you make it more expensive by slapping on a tax. If you want more of that something, you reduce the tax.

There are, however, at least two notable exceptions to this typical supply-and-demand relationship. The first exception is what economists call "Giffen goods," named for the Scottish economist, Sir Robert Giffen, who first observed these purchasing decisions and identified a notable exception. For a Giffen good, as the price rises, so does the demand. Typical Giffen goods are seen as inferior products where there is relatively little lack of substitution for another good and where the purchase of the good also requires a significant portion of an individual's income. An example often cited is the potato during the 19th-Century Irish Famine.

A Prada handbag, a Bentley automobile, or a house in the Hamptons are not Giffen goods. They are often called "Veblen goods," after the American economist Thorstein Veblen who is credited with coining the term "conspicuous consumption" in his 1899 classic, The Theory of the Leisure Class. The steadily rising cost and demand for these goods is explained by the fact that the cost increases confer the added values of status and caché. Few people seek bargains on Nantucket houses. Spending less is not the point; spending more is what confers the added status and value.

American postsecondary education is now beginning to resemble a cross between a Giffen good and a Veblen good with results that are not positive for most American students. Let's start with the basic cost figures. At the end of World War II, with the passage of the GI Bill, American postsecondary education became more available to millions of Americans at a relatively low, affordable price. Postsecondary education was considered an important staple and, ultimately, along with a house and a car, became part of the "American dream." Going to college often meant that middle-income households had to save, but the costs were not exorbitant relative to family income. The sacrifices made were considered justified given the expected returns associated with getting a degree.

In 1946, the one-year tuition cost at Harvard was $420, and average annual income for an individual was $2,600. College might have been a "luxury" to some people, but a low-cost, affordable college education was readily available and considered a ticket out of poverty -- a way to secure entry into the middle class. Back then, and until about 30 years ago, postsecondary education resembled a staple, like meat and potatoes.

In recent years, however, the promise of that American Dream has begun to fade, as college costs have now risen to such a level that for many they have become like unaffordable luxury goods. During the last 30 years, American postsecondary education costs have risen at a rate more than twice the cost increases in health care -- a figure which everyone knows is unsustainable. (Health care costs rose during this period at a rate more than twice the increase in the Consumer Price Index.) Harvard's one-year tuition in 2006 was $30,275. In 2014, it reached almost $39,000 (with room and board added, the total cost approached $60,000). Median household income in 2012 was around $54,000, and per capita income was $27,319.

The costs of American postsecondary education have risen four times the rate of growth in the Consumer Price Index between 1982 and 2012. Our policymakers continue to discuss postsecondary education as if it is a "must have" to thrive in today's globalized economy, but paying for it now consumes a larger portion of individual and family income than ever before (at least for middle- and lower-income Americans). One consequence of this trend is the recent massive increase in student indebtedness to the tune of more than $1 trillion in student loan debt.

At some of the "elite" institutions in the universe of American postsecondary education -- the Ivy League, the more selective public and private schools, and some major state universities -- tuition, room and board can now exceed $60,000 annually. These are not "inferior" institutions by any means, and they are at the opposite end of the spectrum from the community colleges and degree-granting proprietary schools that graduate cosmetologists, truck drivers, and dental hygienists. These "elite" institutions may be considered the Prada handbags of American higher education: the higher the costs, the higher the demand.

What is clearly evolving in American higher education is a three-tiered system: expensive, elite institutions at the top, a middle tier of less expensive four-year institutions, and a bottom tier of even cheaper community colleges and career schools. Viewed positively, this system offers American students a remarkable range of diversity. Viewed differently, this system will remain skewed with the Prada handbags at one end and the potatoes at the other. This situation is not a problem for the expensive elites: there will always be buyers for pricey luxury goods. The serious problems are for non-wealthy Americans for whom postsecondary education remains a requirement for getting a job and/or a drain on family and personal finances. It is only in recent years that American young people -- faced with the prospect of accumulating significant debt at the beginning of their working lives -- have begun to question whether the expense is worth the sacrifice. This development is a shame, and it comes at a time when we need more Americans with more, not less, postsecondary education.

Practicing economists will, no doubt, argue that I have mixed apples and oranges: handbags and potatoes are, after all, consumption goods, while postsecondary education should be considered as an investment. Point well made -- but it does not moot the argument about pricing and that even among investments one can find differentials that reflect my handbag/potato distinction.

It is critical that the return on investment in postsecondary education remains solid -- but unlike any other developed economy in the world, we are inflicting needless and massive trauma on too many of our young people who have begun to question the overall affordability of this investment.

The current situation is unsustainable. Some postsecondary institutions have begun to lower costs, and technology is now upending the postsecondary-education business model of the last 30 years. Schools will begin to move away from expensive-to-maintain bricks-and-mortar campuses towards more cost-effective delivery systems. The Prada handbags, like the Hamptons, will continue to do well, but with middle-class incomes stagnant for much of the last three decades, the rest of the higher education enterprise will soon have to find ways to do more with less. A reckoning is coming.

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Charles Kolb, a Lumina Foundation Fellow, is President of the French-American Foundation--United States in New York City. He served in the first Bush White House from 1990 - 1992 as Deputy Assistant to the President for Domestic Policy and at the U.S. Department of Education from 1986 - 1990. From 1997 until 2012, he was President of the Committee for Economic Development, a Washington, D.C.-based think tank. The views in this article are solely the author's.