The Perfect Storm and the Privatization of Public Higher Education
Published on: Aug 17, 2006

Public institutions, especially the land grants, have an obligation to serve the population of the entire state, not just the students attending the institutions. Through agricultural, consumer, and industrial extension services, these institutions have been major transmitters of knowledge to American farmers, consumers, workers, and industry. Cutbacks in state appropriations for the extension and land-grant activities of the institutions have forced these operations to become more entrepreneurial. They can use the "profits" from groups that can pay (such as large corporations) to subsidize providing services to underserved populations, services that were previously financed by the state. However, forced to generate their own revenues, it is natural for extension services to spend a greater share of their time on commercial activities and less on serving the public at large.

More generally, public higher education benefits many more citizens of the state than those attending the institutions or those directly receiving services from the extension activities of the institutions. Research indicates there is a social return to higher education that includes increased income for non-college graduates, increased state tax revenues, increased intergenerational mobility, and lower welfare costs. If a high-tuition policy for public higher education reduces the fraction of the population going on to and completing college, we will all be worse off.

Looking to the Future

Privatization may help the most competitive flagship public universities obtain the resources they need to compete with their private-sector counterparts and regain their quality, but special efforts will be required to make sure that they continue to enroll students from lower- and middle-income families. Privatization is much less likely to be a viable strategy for our nation's public comprehensives and two-year colleges, and that is where our primary concern about reductions in state support should lie.

Economists and higher education finance specialists are not known for their accuracy in making long-run forecasts about higher education. During the 1970s many predicted that public colleges and universities would prosper relative to their private counterparts in the years ahead, and as I have shown, these predictions were not correct. However, these scholars do understand the role that incentives play.

Thomas Kane and King Alexander, among others, have been struck by how asymmetrical the incentives in federal public policy are with respect to state Medicaid and state higher education expenditures. Through matching formulae, a state that spends more on Medicaid is rewarded with more federal matching funds, whereas a state that reduces its Medicaid expenditures sees its federal funding diminish. In contrast, when a state spends less on its public higher education institutions and the institutions respond by increasing tuition, the level of Pell Grant funds received by the residents of the state goes up. So in tough times, a state gains revenues by protecting its Medicaid expenditures rather than appropriations to its public colleges and universities.

Most people, regardless of political persuasion and perspective on the desirability of privatization, would probably conclude that at least the incentives in federal public policy for states to spend more on higher education should be symmetrical to the incentives for them to spend more on Medicaid. Developing federal policies that reward states for spending more, rather than less, on their public higher education institutions and for spending more on need-based financial aid would go a long way to improving the quality and accessibility of our nation's public higher education system.


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