Inflation Will Hit Universities Hard | Eastern North Carolina Now | Locked-in tuition rates and declining federal largesse will mean less spending flexibility.

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    Publisher's Note: This post appears here courtesy of The James G. Martin Center. The author of this post is Richard K. Vedder.

    It is indisputable that the U.S. faces the worst inflation in 40 years, an outcome that seemingly no one was predicting a few years ago. The impact on Americans of rapid, unanticipated price increases varies. Retired citizens living on interest income from bonds and fixed pensions are badly hurt, for example, while some others, including owners of inflation hedges like gold, land, or real estate could conceivably profit.

    In the short run, colleges and universities will be losers from inflation, partially for reasons peculiar to the workings of higher education. To borrow a term once used to describe slavery, colleges are now America's "peculiar institution."

    Whereas grocery stores, gas stations, and airlines change their prices weekly or even daily, universities set tuition fees that exist for a minimum of one academic year. If the Consumer Price Index is reasonably correct, each dollar of tuition schools collect this fall was worth around $1.08 (in today's dollars) a year ago, when university decision-makers decided on fees for the year ahead. The more rapid inflation becomes, the more colleges lose purchasing power.

    Aggravating the problem, a few years ago large numbers of colleges embraced a tuition price-guarantee program. Students were guaranteed that the tuition fees in place when they entered school would be maintained for four (or even five) years.

    Therefore, it is conceivable that some students will be paying tuition fees, in two to three years, that are 20 percent or more below current levels in inflation-adjusted terms. What seemed to be a good marketing ploy for colleges will now damage their finances.

    Inflation also hurts schools, especially richly endowed private ones, in other ways. When prices were rising predictably at two percent or so annually, markets adjusted to that reality, and stock prices rose over time, as did other investments. Endowments on average increased healthily, allowing private schools like Duke or Stanford to increase their spending on the basis of investment earnings.

    In the last year, as inflation has soared in unanticipated fashion (unanticipated to the Fed, but not to some contrarian economists like myself with a classical understanding of monetary and fiscal policy), interest rates have risen, driving bond and ultimately stock prices down. In time, the housing-price boom will likely reverse, as well.

    As a result, rich colleges may take multi-billion-dollar drubbings in the market. Those theologically disposed might say that God is punishing these schools for their contempt for American traditions like free speech, their downplaying of merit as the basis for reward, and even their declining academic standards.

    Furthermore, in the short run, rising inflation particularly hurts academic employees, who usually work on annual contracts, sometimes with a lifetime-employment guarantee. During unanticipated and substantial inflation in the World War II era, and then again in the 1970s and the beginning of the 1980s, college employees often got, say, three to five percent pay increases but faced eight to ten percent increases in prices, lowering their standard of living meaningfully.

    For example, between the 1972-73 academic year and the 1980-81 year-a period of substantial and largely unanticipated inflation (with prices rising about three percent a year at the beginning of the period and over 12 percent annually at the end)-federal data tell us that the real (inflation-adjusted) earnings of full professors at universities in the U.S. fell an extraordinary 20.8 percent.

    That was during a period of substantial enrollment expansion-robust and rising demand for higher-educational services.

    However, unlike decades ago, today's inflation is occurring in a period of reduced demand for higher-educational services. For higher education as a whole, national enrollments have fallen continuously for a decade, and the discounting of published tuition fees has grown to astronomical proportions at a time when costs are starting to rise sharply.

    Colleges buy electricity, natural gas, food, and other items even as they escalate in price. Tuition revenues are stagnant, but costs are rising robustly. Many schools are in precarious financial condition despite huge federal bailouts related to the Covid pandemic. Quite a few have already closed their doors.

    Most academics will probably dislike my saying it, but, to a considerable extent, the colleges brought this on themselves.

    I especially blame my fellow academic economists, a majority of whom seem to still, vaguely if not stridently, endorse the old Keynesian remedy for nearly all macroeconomic ailments: increase "aggregate demand" by "stimulus" packages of massive budget deficits and artificially low and unsustainable interest rates. The Federal Reserve System is run by individuals steeped in a Keynesian academic tradition and in such fashionable but unproven notions as "Modern Monetary Theory."

    In truth, the economic problems of recent years, emanating from the Covid pandemic, are supply side determined. Demand has been just fine-witness the shortage of many goods, from electric cars to baby formula.

    One of the very few advantages of old age is gaining some historical memory. The rise of faculty unionization in K-12 schools (and, to a lesser extent, in higher education) occurred in the late 1960s and the 1970s-a period of enhanced inflation. Falling real wages in the present will lead to increased tensions between faculty and administrations, aggravated, I suspect this time, by growing rage over the growth of a non-academic, sometimes even an anti-academic, cadre of high-priced campus administrators.

    Of course, the lobbyists at One DuPont Circle and other outposts of the higher-education elite will beg Congress for more aid to assist colleges in financial distress. Normally they would receive a sympathetic reception, as the universities are usually favored wards of the state.

    But their struggles may be overwhelmed now by bigger distractions, most notably prodigious federal deficits coupled with a slowing economy. These are perilous times, and college leaders have their work cut out for them to keep their institutions afloat.

    Richard K. Vedder is emeritus professor of economics at Ohio University and the author of Restoring the Promise: Higher Education in America.

poll#154
Inarguably, the policies of the Democrats in congress and Joe Biden as the Executive is plunging the United States into a recession, if we are not already there; a recession that was completely avoidable. Will abrupt changes in policies occur in time?
  Yes, the Democrats have a bold plan, yet to be revealed, to save us.
  No, there will have to be a complete undoing of the damage done by these Democrats.
  I can't do simple math, so how am I to understand the concept of basic economics.
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