California State University Should Learn a Lesson from Economics

Dr. Justin L. Adams
President and Chief Economist of Encina Advisors, LLC, a Davis-based research and analysis firm.

Stunning news emerged from Long Beach last week when the California State University (CSU) Chancellor’s Office announced it would freeze enrollment at most campuses next spring and wait-list all applicants for the 2013-14 academic year.  State budget cuts have driven CSU to slash its enrollment by 20,000 to 25,000 students, and the enrollment freeze is CSU’s solution.

CSU’s budget problems are certainly real.  The Legislative Analyst’s Office notes that under the Governor’s proposed 2012-13 budget, CSU would receive 26 percent less General Fund revenue next year than it received in 2007-08.  And despite large tuition increases over the same time period – increases of 55 percent net of financial aid – CSU’s total funding would still be 5 percent lower in nominal terms.  When cost increases and inflation are factored in, the magnitude of this funding reduction grows much larger.

But must thousands of high-school seniors and community college transfers have their higher education plans put in jeopardy because of CSU’s funding crisis?

CSU’s logic goes something like this:  Budget cuts have led to reductions in faculty and staff, and thus fewer class offerings.  Having fewer classes makes it harder for CSU students to meet their graduation requirements, and so students take longer to graduate.  Since this backlog makes it more difficult for subsequent cohorts of students, then enrollment must be curtailed.

This is in essence a supply-oriented story.  Namely, CSU cannot provide enough classes under its current resources to effectively meet students’ needs.

CSU is neglecting the demand side of the equation, however.

Despite the large fee hikes over the past few years, CSU still remains very affordable to California students.  As the Chancellor’s Office notes in a press release just this month, “the cost of attending the California State University remains well below that of public and private universities across the nation….”

Based on data compiled from the website College Portrait for Undergraduate Education, CSU describes that its full-time undergraduates paid an average “net price” (the amount actually paid on average) of $2,124 for tuition fees.  This compared to the average national “sticker price” (tuition and fees charged to full-time undergrads) of $7,119 for public universities and $25,538 for private four-year institutions.

And therein lies the problem.

Economics 101 tells us that the lower the price of a good or service, the more of it will be consumed.  This is true whether buying potato chips, gallons of gasoline, haircuts, or college courses.  And if prices are too low, demand can outstrip supply resulting in shortages.

This is undoubtedly part of the story with CSU.  While budget cuts and eliminated classes have contributed to class shortages, the low prices for a CSU education have also contributed by needlessly increasing the demand for classes.

Specifically, low prices encourage students to “shop around” by signing up for extra classes that are only tangential to their majors.  And they encourage these students to take longer to graduate.  After all, who wouldn’t want to spend more time “finding themselves” in college if it were cheap to do so?

And there is actual data suggesting that low prices do help cause shortages.  The National Center for Education Statistics (NCES) has compiled graduation rates for students who entered four-year public and private colleges across the country in 2003. NCES data for California show that nearly 60 percent of students in private, not-for-profit schools got their bachelors’ degrees in four years, compared to just over 33 percent of students in public schools (including CSU).

Graduation Rates for California Public and Private 4-Year Institutions
(2003 Cohort)

School Type

Graduation Rate

4-Year

5-Year

6-Year

Public (including CSU)

33.35%

56.97%

64.55%

Private (not-for-profit)

59.86%

70.38%

72.56%

Source: National Center for Education Statistics (NCES) Integrated Postsecondary Education Data System

Note that these graduation rates are for 2007, which predated the severe budget cuts to higher education in California.  And also note that by year six, graduation rates between public and private institutions are more comparable.  In other words, it is difficult to argue that public students are any less capable than private students of finishing college.

So prices matter in terms of class shortages, and increasing prices across the board (again) seems like a good starting point for CSU.

That said, given CSU’s commitment to maintaining Californians’ access to education, perhaps there other ways that CSU could introduce price signals to help reduce shortages.  One innovative example comes from Santa Monica College (SMC), part of California’s community college system.

As described in the Atlantic and elsewhere, this summer SMC will provide additional offerings of its most popular courses and charge students their full cost.  (The classes are beyond what state funding normally covers, so SMC needs to recoup the entire expense.)  The price works out to about $180 a credit (although financial aid will still be offered to students).

The advantages of this approach are clear:  The higher cost discourages people who don’t need these summer classes from taking them.  Students who choose to take the summer classes get closer to meeting their degree requirements sooner.  And the reduced backlog makes it easier for other students to enroll in the state-subsidized classes during the regular academic year.

What’s interesting is that by applying basic economic concepts to its course offerings, SMC will be able to offer more courses, like economics.  CSU could learn a thing or two.

Dr. Justin L. Adams is the President and Chief Economist of Encina Advisors, LLC, a Davis-based research and analysis firm.

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