Early Indications September 2009: Universities and an Information Economy

Apart from asserting, with Emil Faber, that "Knowledge is good," there
is little one can say with certainty about the role of the university
in an information, rather than industrial, economy. The connections
are many and complex, with as many exceptions as rules. My examples
will all be from the U.S., which is based on my merely anecdotal
understanding of promising developments in Australia, the Nordics, the
Arab world, and elsewhere.

In the light of 50 or so years that mark the rise of information and
services and the decline in the role of manufacturing in the U.S.
economy, what can we say about U.S. colleges and universities?

1. American colleges and universities have grown faster than
population growth. According to the U.S. Department of Education,
758,000 people enrolled in college in 1960. The post-war "baby boom"
kicked in shortly thereafter, as the number of high school graduates
rose by 64% in the following decade. As high schools turned out more
graduates every year, a greater percentage of them attended college.
In 1960, 45% of high school graduates attended college. Every year
after 1980, at least half did so, and since 2005, 2/3 of high school
graduates attend college. Accordingly, college enrollment has soared,
from 3.6 million in 1959 to 17.8 million in 2006, an increase of
almost 400%. In addition, the number of institutions, mostly branch
campuses of existing institutions I suspect, more than doubled in
those same years. By comparison, U.S. population in that period rose only 67%.

2. In the past half-century, American higher education has grown more
female. In the academic year 1959-60, men outnumbered women among the entering fall enrollment 2.3 million to 1.3 million. Only 20 years later, women had taken the lead 5.9 million to 5.7 million -- and note how much larger the entering class became in only a generation! In 2006, women outnumbered men 10.2 million to 7.5 million. Women have held or currently hold the presidency at every type of institution, including MIT, Duke, Harvard, Penn, Chicago, Michigan, and Princeton. Faculties, however, are still more male than female.

3. Tuition has grown much faster than inflation. According to the
College Board, since 1958 tuition has risen by less than the Consumer
Price Index in only 6 years, all in the 1970s, including one year when
the CPI jumped 11.5% In a typical year, tuition rises by twice
general inflation, and in some years it has gone up 4, 5, or 6 times
the CPI. Numerous explanations have been proposed, but the situation
is so big and so complex, it's likely nobody knows for sure.

Some considerations in that spending growth:

-Universities are heavy in human resources, and so have to pass along
increases in health care and related benefits costs. At the same
time, in part driven by a glut of Ph.Ds in the 1980s and '90s, many
universities have shifted teaching loads away from tenure-track
faculty to fixed-term, adjunct, and other types of instructors, which
should deliver some measure of cost savings.

-Headcount growth over the past 50 years has included many
administrative positions to oversee student life, minority affairs,
grant compliance, record-keeping (including IT posts), and alumni
affairs/fundraising. In contrast, teaching faculty has grown more
slowly than student populations: the ratio of American students to
faculty in 1959 was 9.6 to 1, while today it is over 13.5 to 1, nearly
50% higher.

-Medical schools and teaching hospitals are vastly complex and almost
universally lose money. Salaries can be astronomical - a Columbia
University dermatology professor makes over $4 million a year, and
heads of health systems can also earn seven figures. The university's
role in the emerging health care funding model has yet to be
determined, but it will be significant.

-To compete for students, universities have invested heavily in
facilities such as student unions, dorms, and fitness centers. To
compete for grants, universities have invested in researchers,
post-docs, and facilities; big science, in particular, is expensive.
Capital spending is an area of major growth, as a trip to your local
campus will reveal.

-Finding real estate to hold new buildings can be an issue,
particularly at urban institutions: Columbia and NYU are tightly
constrained, while Harvard's expansion into Boston across the Charles
from Cambridge is both expensive and controversial. Given the
performance of the university's investments, it is also on hold.

Harvard's Ivy League rivals in New Haven have had better fortune. In
2007 Yale purchased 137 acres of land home to 17 buildings totaling
1.5 million square feet from Bayer; three of the largest research
buildings were less than ten years old and would have cost about $700
per square foot to build. Large warehouse spaces, meanwhile, are
climate-controlled, making them potentially attractive for
conservation of art, scientific specimen, and manuscript collections.
Like many university expansion projects, such as Carolina North, which
is two miles from UNC's main campus, Yale will have to work through
the integration issues of separate facilities.

4. By definition, universities' responses to job supply and demand
lags the market. PhDs continue to graduate in fields with few or no
job openings. Nursing schools cannot fill demand, in part because of
a shortage in nursing professors. Some majors will surge in
popularity -- crime scene investigation and forensic science rode the
wave of TV detective shows, for example -- while others such as
accounting are perennially strong. Efforts to connect higher
education to job growth have had only mixed success: the number of
moving parts, and the lead times involved, and the degree of foresight
required on all sides of the table, make such a project a daunting
challenge.

5. Private universities are increasing their research role. For
years, Texas, California, and Michigan led the nation in Ph.D.
production. According to Washington Monthly's tables, the leaders are
now Berkeley, MIT, Stanford, Michigan, and Illinois. In terms of
research dollars won, Johns Hopkins is on top, followed by University
of Washington, Penn, Michigan, and Stanford. Powerful medical schools
tend to be the constant on this list.

6. Universities drive high quality of life. In such listings as
Cities Ranked and Rated, Money Magazine's Best Places to Live, and
others, college towns consistently score well. Pollution tends to be
low, cultural activities abound, teaching hospitals provide excellent
health care, and commutes tend to be short. Many such towns are so
desirable, however, that real estate prices drive a high cost of
living. Boulder, Charlottesville, and Hanover, NH have seen this
phenomenon, and Palo Alto is off-the-charts expensive. The impact on
adjunct faculty and university support staff usually means that food
service workers, administrative assistants, and HVAC technicians must
live far from campus in many college towns.

7. Documenting university economic contributions is difficult.
Stanford's record of launching companies is probably unmatched in
recent history: roughly 4,700 companies have been founded by graduates
and faculty, including tech heavyweights Cisco, Google, HP, Nvidia,
Sun Microsystems, and Yahoo!. Reaching farther back, MIT's company
list includes Gillette, Texas Instruments, McDonnell Douglas,
Raytheon, Bose, and Genentech. In terms of royalties deals,
Northwestern sold its rights to the pain drug Lyrica for $700 million
in 2008. Gatorade has earned between $80 and $100 million for the
University of Florida since its invention in the 1960s.

Economic mobility is harder to track than IP licensing or
entrepreneurial impact. Washington Monthly ranks colleges and
universities by the percentage of students receiving low-income Pell
Grants, and by the predicted graduation rate of those recipients. On
this measure, the leaders are not Penn or Chicago, but South Carolina
State, Penn State, and UC-Davis. Harvard, Stanford, Johns Hopkins,
Duke, and MIT have negative scores on this index, suggesting they
function more to reinforce class rigidity than drive social mobility.

8. Universities are not particularly transparent. Unlike public
corporations, government bureaus and universities (both public and
private) do not report their activities in any standardized form. The
University of California, for example, presented 180 pages of detailed
budget documentation to the Board of Regents that is public. The
University of Michigan's public budget documentation, meanwhile,
consists of a one-page summary of all major units that add up to $1.4
billion. For all of that state's economic turmoil, the university
budget is up over 3% for FY2010, including an increase of 12% in
spending on "ceremonial and presidential events."

9. University athletic programs are big businesses on their own, most
of them operating in the red. A few athletic departments turn a
profit: Michigan's brought in about $90 million last year and passed
$1.6 to the University's general fund. The Southeastern Conference
(state universities from South Carolina to Arkansas to Kentucky, plus
Vanderbilt) recently signed a contract with ESPN for $2.25 billion
over 15 years. Including another deal with CBS, the league will
receive over $200 million a year in media rights, not counting bowl
games. Payrolls at the top end are in line with entertainment scale:
the University of Alabama football coach makes an estimated $5 million
a year, including cars, country club memberships, use of the
university airplane, etc. A rough rule of thumb at football-centric
schools is that the head football coach earns four times what the
university president does, but at Iowa and Oklahoma, the multiplier is
about nine.

10. Going forward, colleges and universities face multiple challenges
that will shape the society and economy in both short and long terms.
Given the nation's front-burner issues with wars and terror, budget
deficits, economic regulation and stimulus, and health care policy,
education is not the stuff of blogs, talk radio, or Senate hearings.
A long list of macro-level questions will demand action at some
juncture, however:

-Tuition cost increases have priced private education beyond the
middle class, not just at elite institutions: cost is not proportional
to quality. Total annual fees at St. Olaf college in Minnesota, to
take a good school at random, are estimated at $45,600 compared to
$50,600 at Princeton -- and Princeton's massive endowment ensures that
its aid packages are better. The Bucknells, Loyolas, and Oberlins are
faced with a severe challenge in that most costs are fixed: dorms have
to be heated and professors paid whether the entering class is 100% or
80% full. State universities face a different set of issues given
their vast scale and the changing revenue patterns for state tax
receipts.

-High tuitions paid by wealthy families are to some extent a subsidy
to those on financial aid. Elite universities do a good job of
running that process as a "black box," but assuming continued tuition
growth, there will be increasing dissatisfaction with the arrangement
among some of those who are (on paper, if not in wallet) rich enough
to pay full freight. Once again, issues of social class are deeply
ingrained with educational institutions.

-Curricula may change more slowly than markets, but they must change
nonetheless, and the process is (for some good reasons and some
worrisome reasons) slow and politically sensitive.

-The customer satisfaction mentality, in which students are
"consuming" their education, has both upsides and downsides. As
tuition soars, it's impossible not to take seriously student concerns
about return on their and their parents' investment. At the same
time, education is not a vacation with professors serving as
recreation directors, and the customer is not always right.

-How will universities cope with globalization? Population growth and
market need are most vigorous in the developing world, and a wide
variety of partnerships is in place for U.S. institutions to tap into
such countries as India, Spain, and China. Will top universities
franchise their name, open branches overseas, dramatically expand
online offerings and experiences, or develop entirely new business
models?

-Demography is destiny, and a decline in the college-age cadre appears
to be coming coming in a few years: the U.S. population pyramid shows
fewer 10-year-olds than 15-year-olds.

-Do 2/3 of graduating seniors really need to attend college? If
tuition is priced out of reach for the middle class, and if the
education premium is shown to be lower than believed, colleges and
universities will be further pinched between high costs and decreasing
demand. The wild card here is of course international students, who
are already an increasing presence at many institutions.

For all their challenges, American colleges and universities are
over-represented among the best in the world. According to the Center
for World-Class Universities at Shanghai Jiao Tong University, U.S.
institutions occupy 17 of the top 20 positions, and 36 of the top 50.
Such excellence occurs despite low math and science test scores among
high school students, despite troubling patterns in research funding,
and despite foundational shifts in U.S. social, regional, and economic
patterns. Going forward, the biggest challenge may be balancing pride
in the magnitude of our achievements with forward thinking to meet the
needs of the next generation of research questions, employment trends,
and entering classes.