Tuesday, July 02, 2019

The Business Model Problem

About twice a week I’ll see someone on the interwebs say something along the lines of “why don’t public colleges stop messing around and just fix their business model?  It’s obviously unsustainable!” Bryan Alexander had a more thoughtful version of that this week, in which he responded to some pretty alarming demographic projections by wondering how colleges could survive when overall enrollments look to be set for long-term decline.  

There’s an obvious element of truth to the question.  The economic model of community colleges was built on the assumption of subsidies.  It was never intended to be self-sustaining. The form those subsidies takes can vary from state to state -- some have local funding and some don’t, some have millages and others have appropriations, and so on -- but the general idea is the same: students were never supposed to pick up the full cost themselves.  

And that’s not unique to the public sector.  Private, non-profit colleges typically don’t run instruction on a self-sustaining basis, either.  They use philanthropy and/or endowment income to supplement revenue from tuition. The closer they get to being purely tuition-driven, the more precarious their existence becomes.  The recent mortality rate of private colleges in Vermont and Massachusetts is a direct result of what happens when tuition-dependent colleges confront enrollment declines. In a high-fixed-cost model, relying entirely on variable revenues leaves you exposed the first time enrollment drops.  It’s the nature of the beast.

It’s hard to run education on a for-profit basis, in part because the gains to education aren’t captured by the provider, and in part because they tend to lag the provision of education by years, if not decades.  It can be done in certain niches, but the track record of for-profit colleges in the US suggests that some skepticism is in order.

Some have suggested a return to the “indentured servant” model, through “income-share agreements.”  But even if that model were to take off -- and heaven knows, I’d rather it didn’t -- it still wouldn’t address price or cost.  It’s just a different way of paying for it.

“Public-Private Partnerships” offer the tantalizing prospect of access to private capital, but we need to remember that private capital brings with it private agendas.  The entire idea behind “endowments” was to separate the provision of capital (in that case, initially through donations) from control of that capital. The structure of the endowment provides a buffer.  It’s a mechanism for ensuring that academic decision-making remains within the purview of academics, who typically don’t have the money to pay for it themselves. Eliminate the buffer -- or what some like to call the “middleman” -- and you eliminate that autonomy.  “P3’s” can be useful, when carefully considered, but they aren’t full replacements for either private philanthropy or public subsidy.

Market-driven thinking has become so pervasive that many people see public colleges’ habit of running instruction at a loss as some sort of failure.  They don’t understand that it’s a feature, not a bug. We subsidize instruction precisely because if we made every student pay in full at the time of enrollment, far too few would (could) actually do it.  The citizenry and workforce would become much less educated and productive. The highest payoff to education comes when students are educated early in life, when people’s earnings tend to be the lowest. Absent some sort of subsidy, we should expect suboptimal enrollment.  In saving pennies in subsidy, we’d lose dollars in productivity. It’s a false savings.

To the extent that there is a business model problem, it’s not because we subsidize instruction.  It’s because we denominate instruction in units of time. Regular readers are probably tired of my references to Baumol’s Cost Disease, so I won’t rehearse it here, but it boils down to the mathematical impossibility of improving “learning/time” when learning is denoted in units of time.  That’s a business model problem, and a serious one. But it’s not the one that most people assume. The “business model” conversation I’d rather have is around other ways of teaching, learning, and proving competency.  

The problem most people refer to is the need for subsidy.  That’s not a problem of the model, though; it’s a problem of our politics. For example, if you replace the idea of “income-share agreements” with simpler, progressive taxation, then you wind up accomplishing the same general idea -- the folks who benefit the most pay the most -- but you do it without a generational lag, and you don’t punish the folks for whom things didn’t work out.  Even better, you don’t have to try to go back and apportion credit or blame. But that would involve admitting that the public sector can be more efficient than the private sector. It absolutely can, but that flies in the face of current dogma. In our current political culture, it’s almost a forbidden truth. FIxing that is a much larger task. Get that right, and we’ll have room for all sorts of promising experiments in teaching and learning.  Get it wrong, and we’ll keep having these same conversations over and over again.

Program Note: I’ll take a blogging break for the holiday weekend, returning on Monday, July 8.