roanoke.com Real Politics / Preston Bryant

NOV. 25, 2002

Towards a free market in higher education

Preston Bryant is a Republican who has represented Lynchburg and part of Amherst County in the Virginia House of Delgates since 1996.

What is it about higher education tuition policy that makes an otherwise free-market, conservative-minded legislature approach it in a way more suitable to a third-world planned economy?

Over the past few weeks, there has been a rash of news accounts of Virginia's public colleges and universities imposing tuition "surcharges" in mid-year to offset looming state budget cuts.

Virginia Tech and the College of William and Mary just announced $400 increases. At the University of Virginia, it'll be $385. Virginia Commonwealth University will bump up tuition by $300, and Radford University will increase it by $250. James Madison University will go up $170. These are just a handful of Virginia's 15 four-year institutions that are raising tuition. The state's 24 two-year schools will increase tuition, too. All increases will take effect in the spring.

Nobody likes these tuition hikes. But these schools' presidents and boards of visitors are doing what they must in the face of millions of dollars in state cuts in order to maintain - to the extent they can - the array of classes they offer and the professors who teach them. Still, some are considering scaling back, consolidating, or even closing some programs.

It's all come to this, arguably, because tuition is not more a result of free-market forces; it's "artificially" set at each school within certain constraints imposed by the elected General Assembly and the bureaucratic State Council of Higher Education in Virginia (SCHEV). Tuition is regulated, quite honestly, because good-hearted law- and policymakers want to keep a college education as affordable as possible to as many Virginians who want one.

The General Assembly established years ago the noble goal of having students pay no more than 25 percent of what it actually costs to educate a student at his or her university; the state, ergo, is to pay at least 75 percent of the costs. According to SCHEV, in 2002-03, eight of the 15 four-year schools are indeed keeping tuition charged to students at or below that 25 percent figure, which is considerably better than the 1993-94 year, when students paid on average about 38% of the actual costs.

Further, SCHEV profiles each Virginia four-year school against a dozen or more of its national peer institutions in order to get an idea of what its tuition and mandatory fees (among other financial and operational elements) should be, and the school is then measured largely within that sphere.

But is this the best way to go about setting tuition? Why shouldn't tuition be more a product of free-market forces than of government-enacted price controls? And wouldn't greater tuition flexibility be better in the long run for the institutions' planning processes?

Economics 101 tells us that price controls are wholly inconsistent with the free-market principles that conservatives usually hold dear. And basic economics also tells us that price controls are certain to result in the very unintended consequences that we're seeing today in our state colleges and universities - costs out of their market equilibrium and quick-fixes to try and put them there.

First, let's make one thing perfectly clear: a college education is a commodity. It's a product that is offered in limited supply - there are only so many student spots at any given school - and is one which consumers vie to purchase. Thus, it takes on a certain dollar value within a certain market.

But what happens when the state - through its regulated tuition policies - holds that commodity's price at an artificial level? Well, the same two things happen here that happen whenever government price controls are enacted on any product.

The first consequence of price controls is that demand is increased for the product. Because the product's price it held down and is cheaper than it normally would be, everybody wants to buy it. Most everyone agrees that Virginia's public colleges and universities offer high-quality educations at bargain prices. (Even students from other states who attend Virginia schools - and pay tuitions dramatically higher than do in-state students - marvel at the relatively low tuitions.) Consequently, our schools are in great demand, and their facilities - dorms, classrooms, labs and the like - are increasingly unable to meet that demand.

The second consequence of price controls on a product is that its supply falls. If everybody wants to buy the product because it's cheap (and even more so if it's high-quality to boot), then the supply is almost certain to run out. SCHEV studies now show that enrollment demands on Virginia's public and private colleges and universities will jump by more than 38,000 students by 2010 as our state's population continues to soar. A substantial number of these students will be applying to our cheap-but-good state-supported schools - some say two-thirds or more - and it's going to be tough to accommodate them.

So how is it that a less regulated, more free-market approach to tuition and fees could be the way to go?

It should go without saying that our schools could more nimbly respond to changing supply-and-demand market conditions if they weren't bound by pricing and revenue schemes more apt to an eastern European planned economy. While they do have some flexibility, as is evidenced by the tuition "surcharges" they're about to impose, they are essentially constrained by General Assembly and SCHEV policies.

College and university administrators also long have decried how these constraints have disallowed them from engaging in truly long-range planning. These folks are running enterprises with budgets in the hundreds of millions of dollars, and it's difficult for them to plan for the future when regulators are artificially controlling their revenues. How effectively can schools' five-year plans be devised to accommodate the tens of thousands of expected new students when tuition and fees are scoped out only a year or two at a time?

The irony of it all is this. Well-meaning lawmakers who want to keep a college education affordable enact price control policies so that the product can be kept in abundant supply and at a reasonable cost. Sounds good, but it doesn't work very well. These very policies bring on the opposite result. Demand goes up and supply goes down - and then lawmakers and bureaucrats are pushed to impose a mix of additional artificial fixes, such as rationing, cost controls, and subsidies, adding insult to injury.

Which is where we are today. Rationing, cost controls, and subsidies also are all too much a part of higher education funding policies for any right-thinking free-marketeer.

Legislators are often caught between wanting to grant more independence to the institutions and fearing doing so. Their fear, it seems, is that without some controls on who are perceived to be free-spending, fiefdom-building presidents, then they'd raise tuition through the roof and put a college education out of reach for many Virginians - and then it'd become a "political" issue, for delegates and senators would certainly hear about the high costs from those they represent.

But that's an unfounded fear. It'd be pretty stupid for presidents and boards of visitors to price their schools out of a very competitive marketplace, one where students have lots of options available to them. The market is a great regulator.

The University of Virginia rivals Berkeley as the nation's top state-supported school. The venerable William and Mary is forever ranked among the best small universities in America. Virginia Tech is still climbing as a prominent national research university - it is destined to hit the top 30 sooner than later. George Mason University is exploding in Northern Virginia; it now has three campuses across the region. James Madison University is among the most popular choices in Virginia among graduating high school seniors - last year, it received more than 18,000 applications for barely more than 3,000 freshman slots. And our community colleges are increasingly in demand by industries for their workforce training programs. These schools are hot commodities and have a valuable product to sell - and consumers recognize it.

Legislators are famous for telling presidents to run their schools more like businesses. Well, that requires the right conditions and policies, ones much different from those currently imposed on them.

As the governor and the General Assembly prepare to enact wholesale changes in the way government operates - out of necessity, given the $2 billion revenue shortfall that must be managed - now is the perfect time to take a new approach to higher education.

In the marketplace of ideas, we should turn loose the free-market principles that history tells us can work so well.

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