Paying the Piper: Productivity, Incentives, and Financing in U.S. Higher Education.

Who pays the piper in higher education? This provocative theme runs through this delightfully readable collection of essays on productivity, faculty tenure, financial aid, and accounting practice in colleges and universities in the United States. The discourse reflects institutional detail, yet challenges conventional wisdom.

The core of the discussion is a series of essays by McPherson on federal financial aid programs. There are two core issues. First, does federal aid increase enrollment? Aggregate time series evidence examined by Hansen and others raised doubt about whether aid influenced enrollment behavior while cross-section evidence by Manski and Wise and others suggested that enrollment is responsive to aid. McPherson resolves the conflict by using aggregate, time series evidence, carefully treating aid as a credit toward tuition and allowing enrollment effects to differ by income group. His time-series evidence indicates that the level of federal student aid has a positive effect on enrollment, giving a result similar to that found in the cross-section studies. Federal aid then tended to increase college enrollments as it expanded through the 1970s and caused some decline in enrollments through the 1980s as the level of federal aid declined in real terms. McPherson leaves little doubt, then, that higher federal aid to students increases enrollment.

Second, does an increase in federal aid cause colleges and universities to increase their prices? One might expect increases in sticker prices in response to increasing federal aid if the formulas for aid were tied to tuition rates much as Medicaid entitlements seem to increase the price of medical services. McPherson notes, however, that federal aid to individual students in higher education has been capped at levels well below the tuition level even at most public institutions, and so increases in tuition do not increase federal aid. In addition, the essay reports regressions with institutional data that finds that changes in federal aid, for private institutions, not only is not associated with tuition increases, but higher federal aid is associated with lower tuition as institutions spend less on their own financial aid programs. If federal student aid is reduced still further in the 1990s, McPherson expects private tuitions to increase faster to support institutional scholarships.

An essay by McPherson and Winston on faculty tenure views the tenure process as a rational policy for employing labor with high occupation specific skills in narrow specialties but with little employer specific skills. Moreover, the lengthy probationary period with a mandatory review seems an appropriate way to focus the considerable effort needed to evaluate such employees. The essay, then, is a thoughtful defense of tenure as we know it.

An essay by Schapiro on productivity in higher education provides a review of a variety of ways one might think of measuring results and relating results to the quantity and quality of inputs. A lengthy bibliography documents a variety of efforts to measure productivity in higher education. Some institutions are putting more effort into monitoring results. Could grades carry more information? The Educational Testing Service is introducing computer-based tests that have the potential of being substantially superior to conventional tests. Might tests play a larger role? The chain from how a student spends his or her time in college to the results in the labor market is lengthy and filled with intervening elements that make it difficult keep track of the effects of teachers, curriculum, and class size. Yet, with more effort, higher education may be able to learn more about what works.

Gordon Winston provides two essays on accounting that ought be required reading for college presidents and board members. The core idea is a simple one: Every institution of higher education can learn from looking at an income statement and a balance sheet for the totality of its operation. Indeed, the surprising fact is that because institutions use fund accounting, their boards and even their executives often seem unaware of their global financial position. Because institutions report results for individual funds rather than globally, they sometimes draw newspaper headlines for a deficit in the operating fund when the aggregate is in substantial surplus. Winston presents annual global accounts for Williams College for the past thirty-year period. During this time enrollment doubled, the value of gifts and endowments varied remarkably, and auxiliary income changed dramatically. The notion of "tuition dependence" has quite a different interpretation in this light.

Of critical importance in a description of an institution's global financial position is its capital, both physical and financial. Colleges and universities typically do not include the value of their buildings in their balance sheets, do not account for deferred maintenance, nor monitor replacement values. Winston estimates that the service of the buildings used in a college education has about the same economic value as the payroll. A description of the cost of a college education that includes an annualized cost of the services of the buildings would likely be more than 50 percent higher than a figure based only on the operating budget. Even reports of financial wealth are often misleading. A statement of the endowment would be more informative if it were net of outstanding debt. Shouldn't university presidents and their boards insist on tracking their institution's net worth?

These essays address important issues in higher education thoughtfully, include appropriate, original empiricism, and reach compelling conclusions. Several of the essays are several years old and have appeared in somewhat different forms in other places. There is no mention of President Clinton's national service program nor of the national debate on direct student loans in 1993. Yet, given the continuing reassessment of federal spending programs and the importance of higher education to our economy, the matter of paying the piper will be of continuing interest.

Malcolm Getz Vanderbilt University