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SAVING Alma Mater

The University of Chicago Press

Contents

Preface....................................................................................................viiAcknowledgments............................................................................................xxiIntroduction...............................................................................................11 Where the Money Comes From...............................................................................112 Market Forces in Higher Education........................................................................233 Why Public Universities Cannot Restrain Costs............................................................414 The University Prime Directive...........................................................................515 The Faculty Are the University...........................................................................636 The Cargo Cult College...................................................................................717 The Blessing and Curse of Shared Governance..............................................................818 What Price Shared Governance?............................................................................979 The Shape of Things to Come..............................................................................10710 Leadership Begins with the Trustees.....................................................................11511 The Role of Governing Boards in the New Era.............................................................12712 Recruiting Presidential Leadership......................................................................14313 Reforming the Academic Culture..........................................................................16114 A Proposal for Deregulation of Public Universities......................................................189Postscript.................................................................................................217Appendix A: The Miami University Tuition Plan..............................................................221Appendix B: The Impact of Competition on Public University Tuition, Costs, and Revenue.....................231Appendix C: Suggested Readings.............................................................................241Notes......................................................................................................247Index......................................................................................................263

Chapter One

Do Universities Have a Bottom Line?

Question: Why do economists predict their results to three significant figures?

Answer: Because they have a sense of humor.

This old joke about the dismal science underscores the fact that real markets do not replicate the simple, idealized models that economists use to illustrate basic principles. For even the most straightforward commodity transactions, complicating factors—taxes, regulations, social costs, buyer irrationality, and so forth—inevitably fog up the quantitative predictions of simple market analysis. In the process of explaining the real world of business and commerce, corrections grow on economic theories like so many Malthusian warts, leading to models that may account for a market's general behavior but have little predictive value. As is sometimes said, with enough variables one can fit a curve to the skyline of New York, but the curve can't then predict the location of the next skyscraper.

But at least in the business world there is an overall metric for gauging success, and of course that metric is profit. While General Motors may use many internal measures of performance—market share, sales growth, customer satisfaction—all of these are in service to the corporation's overall profitability. In the language of mathematics, internal performance criteria are independent variables and profitability is a dependent variable. In the end, only the dependent variable matters. That is the reason stock market investors care so much about corporate profits; the actual line of business being financed by their investments may even be of little interest to them except insofar as it provide insights into profit potential.

By contrast, in higher education there is no bottom line except in the sense that colleges must live within their budgets. However, colleges do have a large number of internal performance benchmarks. Many are quantitative but nonfinancial: student SAT scores, graduation rates, win/ loss record of the basketball team, percent occupancy of dormitories, number of National Academy of Sciences faculty members, number of pizzas consumed in dining halls. They have many intangible performance benchmarks as well: personal growth of graduates, beauty of the campus, quality of advising and job counseling, contribution to human understanding by English department poets. Furthermore, one can fill a ledger book with college financial benchmarks, including bond quality ratings, federal grant and contract dollars, endowment investment returns, and growth in alumni giving. But all of the benchmarks that ultimately differentiate good universities from mediocre ones are not rolled up into a single criterion of overall performance. In higher education there is nothing analogous to profit, and without this basic metric it is hard to know whether, say, hiring a Nobel laureate for the chemistry department faculty is a smart investment of institutional resources.

A second factor that muddies the economics of higher education is school-to-school variability. Higher education is an industry in which no two organizations produce equivalent products. This is the problem that plagues college ranking systems, the most widely read being the one published annually by U.S. News and World Report. For example, in 2008 the magazine ranked the College of William and Mary thirty-second and the University of Michigan twenty-sixth. But the two institutions are so fundamentally different from one another that this comparison provides little meaningful guidance to prospective students. The fact that most ranking services try to use a quantitative methodology and data-gathering protocol can never overcome the intrinsic apples-to-oranges problem of institutional diversity. And just as there is no bottom line to gauge a university's overall financial performance, there is no qualitative measure of its usefulness to society. Which is better: University A, which has Nobel laureates on its faculty, conducts research valued at hundreds of millions of dollars, recruits students from all fifty states whose SAT scores top the charts, and charges $40,000 tuition, or University B, which admits nearly all applicants, most of whom come from nearby working-class neighborhoods, has extensive remedial programs for underprepared students, offers evening and weekend classes for working adults, and charges $4,000 tuition? The answer is clearly in the eye of the beholder.

Despite their broad differences, however, all colleges and universities share one trait in common: they all need money to survive. And the fact that most of that money is influenced greatly by social, demographic and economic forces highlights the importance of making sense of higher...