Cost Disease, the Demographic Cliff, and Hampshire College

The president of my Alma Mater, Hampshire College, recently issued a letter stating that the college was facing significant long-term financial uncertainty, and that it would be looking to forge a strategic partnership in the near future. She also noted that they may not be accepting a class in Fall 2019 as they work through the transition.

As would be expected, the Hampshire community flipped out. Hampshire alumni facebook pages, which I don’t follow but my wife does, had long posts from people trying to figure out what the hell happened. And just the other morning, my wife and I had breakfast with some fellow alums and were going through some of our own theories.

I must emphasize that I know virtually nothing about Hampshire’s financial situation, how it got the way it is, or missteps that might have led us here. So as I thought about what happened, my mind immediately went to two high-level problems as the reason for the crisis: Baumol’s Cost Disease, and America’s college-aged demographic cliff.

The Tuition’s Too Damn High!

The sticker price of a year at Hampshire is $64,000, which is more than the median household income for the country ($59,039). Though, it should be noted that most attendees are given financial aid, reducing that cost by an average of 55%. Still, $30,000 is a lot of money, enough to buy a boat, make a house downpayment, or buy a really, really nice bike.

The economist Baumol observed that the cost of some things rise at a faster pace than the cost of others, and wondered why. Baumol used the example of a string quartet. An explainer from Vox:

In the 1960s, Baumol was trying to understand the economics of the arts, and he noticed something surprising: Musicians weren’t getting any more productive — playing a piece written for a string quartet took four musicians the same amount of time in 1965 as it did in 1865 — yet musicians in 1965 made a lot more money than musicians in 1865.

The explanation wasn’t too hard to figure out. Rising worker productivity in other sectors of the economy, like manufacturing, was pushing up wages. An arts institution that insisted on paying musicians 1860s wages in a 1960s economy would find their musicians were constantly quitting to take other jobs. So arts institutions — at least those that could afford it — had to raise their wages in order to attract and retain the best musicians.

This same phenomenon applies to education. The primary ways to raise productivity are by increasing class sizes or doing online learning. However, those strategies are antithetical to the personalized, hands-on approach Hampshire and schools like it have built their brand on.

Manufacturers can increase employee wages without raising the cost of, for example, toys by investing in new machines that improve productivity. But paying professors and staff more to educate roughly the same number of students must be done through higher tuition and fees. And so the cost of education goes up and up and up while the cost of an action figure goes down.

cost inflation
Source: Vox

To be sure, the story is a lot more complicated than the straightforward economic theory. I have also read about the following culprits for tuition inflation outside of the Cost Disease:

  1. Explosion of administrative positions at universities (e.g. Outdoor Programs, Development Staff, etc.);
  2. Declining state support for public institutions;
  3. Generous federal tuition loan programs that incentivize raising tuition.

Nonetheless, I like this concept of the Cost Disease because it also helps explain the exorbitant rise in health care costs as well as why Massachusetts towns are constantly having to do tax overrides to pay for their K – 12 education systems.

The Demographic Cliff

Layered on top of this overall problem with education costs is the demographic cliff all of higher ed is facing. Millennials, the children of Baby Boomers, are almost all out of the 18 – 22 age range, meaning that a much smaller age cohort is entering school. Colleges are competing for literally millions fewer prospective students.

2015 population pyramid
Source: US Census Bureau

So competition for students is only going to get fiercer, and filling all those dorm rooms is only going to get harder. For colleges like Hampshire, which are niche, expensive, and periodically controversial, the outlook is troubling. I’ve often talked with my friends from college about how in a post-Great Recession world, the liberal arts are looked at as a frivolous indulgence (sure, go ahead and study German history, but don’t come crying to me when you need to get a job).

I would anticipate in the next five years we are going to see more small liberal arts schools in similar financial straits. Maybe by getting out ahead of the flood, Hampshire  is positioning itself better for finding the kind of partnership with a larger educational institution that it – and the Hampshire community – can find acceptable.

Another economics principle is that of supply and demand – right now, there aren’t very many colleges hunting around for a strategic long-term partnership. That soon may not be the case, and nothing is worse than trying to sell something in a buyer’s market.

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One thought on “Cost Disease, the Demographic Cliff, and Hampshire College”

  1. Really terrific post. I have a hypothesis that a third thing is in play (it is at other colleges I believe). As the middle class stagnates, more students need reduced tuition, and the max tuition can’t go up to offset the change in median.

    Like

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