Matt Yglesias

On The Economics of Nonprofits

Tyler Cowen lists “the economics of the non-profit sector” as an under-explored area in economics. Having worked primarily in the non-profit sector (with a brief stopover in the intriguing for-profit-but-not-profitable sector inhabited by The Atlantic) I also think this is an interesting topic. I sort of wonder why economic researchers aren’t more interested in it, since they overwhelmingly work in this sector as well, so it’s hardly plausible that they forget it exists. According to “The Nonprofit Sector in Brief 2007: Facts and Figures from the Nonprofit Almanac 2007″, “the nonprofitsector accounts for 5.2 percent of gross domestic product (GDP) and 8.3percent of wages and salaries paid in the United States.”

You can also learn here the perhaps-surprising fact that sales revenue dwarfs donations as a source of nonprofit financing:

Figure 2shows that fees for services and sales of goods account for a huge percentage (71 percent) of the revenues for reporting public charities. These include patient revenues for hospitals (including Medicare and Medicaid reimbursements) and tuition at colleges and universities. They also include items such as the revenue from theater tickets, rental fees for providers of low-income housing, and—much less significant for most organizations—sales of goods such as merchandise sold at thrift or museum shops.

Which is just to say that the economics of the non-profit sector isn’t the same as saying the economics of giving money away. American nonprofits are primarily in the business of charging customers money in exchange for medical or educational services.

My sense is that in the near future a larger-and-larger portion of news media is going to be produced by non-profits, and we may need to start adding advertising revenue to the list of major sources of non-profit funding. After all, a great newspaper whose advertisers covered 85% of the costs of gathering news would be (a) totally non-viable as a business proposition, (b) a great bargain as a charitable endeavor, and (c) still primarily in the business of selling readers to advertisers rather than attracting donors.

Higher Education Needs a Numerator

Lamar Alexander has a pretty interesting piece in Newsweek pushing the idea that you should be able to get a bachelor’s degree in three years. I think, however, that any innovation around this theme is ultimately going to be hampered by the same problem that befalls nearly all efforts to provide cost-effective higher education: Nobody knows what the numerator is.

Expensive but prestigious (cc phot by Dan4th)

Which is to say that the claim you’d want to make as a proprietor of a three-year college is something like “our students get 95 percent of the learning in 75 percent of the time and at 80 percent of the cost.” But we don’t have any systems in place to measure, even very roughly or extremely imprecisely, how effective different colleges are at actually teaching people. Instead we have this kind of prestige-based economy of higher education in which basically nothing can change. There’s an aristocracy of fancy private institutions that raise tons of money and get tons of applications and can thus be very selective in their admissions and raise tons more money. And in any given state university system, a couple of campus are designated as the “good” ones so they get the best applicants and thus wind up with the best students and thus stay as the good ones. The other branch campuses tend to languish in semi-obscurity.

When schools invest money in self-improvement, the tendency is not to use the funds to improve the quality of the education but to use it to improve the quality of the students. Offer a more generous aid package to a student who capable of being accepted at a more selective institution, and you can wind up generating a higher quality of graduate through pure selection effect. And that improves your reputation, and thus your fundraising and your applicant pool.

The whole set-up makes it extremely difficult for outside-the-box efforts to improve value to get a toe-hold. You can’t really prove that you are offering value, for one thing, and cutting your price can even serve as a counter-indicator of quality and make your school look like some kind of second-rate, bargain bin institution.

America’s Mad Obsession With Giving Money to Already-Rich Universities

Via Felix Salmon, an eye-opening chart:

If you can’t think of a charitable institution that could use your money more than the already-richest university in the world—one that overwhelming educates the children of prosperous people—then you’re obviously not thinking very hard. If you want to support worthwhile education endeavors, find a charter school or an obscure local college that’s doing a good job with kids from underprivileged backgrounds. Or give money to improve public health in the third world, or to an effective politics/advocacy organization working to improve American public policy. Anything, really. Just not an outfit that’s already got way more money than every other nonprofit in the country.

Price Signals in Higher Education

Wellesley College (cc photo by thelehegarets)

Catherine Rampbell reports on a new study of what makes colleges appealing:

Traditional economics would suggest that raising the price of an item (such as a college education) would reduce demand for it. But instead this study found that raising tuition — as well as instructional expenditures — actually improves the demand to attend liberal arts schools and schools in the bottom half of the top 50. For example, for liberal arts colleges ranked 26th to 50th, a $1,000 increase in tuition and fees was associated with a 12.9-point increase in SAT scores and a 3.5 percent increase in the proportion of top freshmen admitted.

This is because such costs “serve as markers of institutional quality and prestige,” the authors write.

Ryan Avent offers the slightly different hypothesis that “education at a pricey institution could be a Veblen good, such that an increase in tuition makes the school more desirable as a status symbol.”

The underlying issue, either way, is that there’s very little in the way of reliable information about the quality of undergraduate education in the United States. Our major schools get to select which students they admit, which means that when you’re looking at data about the achievement of graduates it’s hard to know if you’re looking at quality education or just quality inputs. We know that it’s much harder to get into The University of Texas at Austin than the University of Texas at El Paso, so the mere fact that graduates of the flagship campus do better doesn’t tell us much of anything about the quality of instruction. Consequently, “signals” and prestige wind up being hugely important. This, in turn, is an important driver of ever-higher-tuition. There’s basically no numerator of school quality that would allow school administrators to demonstrate that they’re providing more efficient education than their rivals. Consequently, there’s little incentive to pursue efficiency as a goal.

Innovative Texas Admissions Program Being Scaled Back

Texas had been running an interesting experiment in an alternative to old fashioned affirmation action. The way it worked was that instead of using an explicitly race-conscious admissions formula, instead the University of Texas just guaranteed that the top ten percent of performers from any high school in Texas could gain admission to a UT campus of their choice. I think that struck a lot of people as a reasonable-sounding alternative to race-based formulae that a lot of folks are uncomfortable with. And above all, it accomplished the goal of ensuring that talented students who simply had the misfortune to grow up in a community with a low performing high school didn’t suffer additional penalties for their bad luck over and above the intrinsic disadvantages caused by attending a low performing school.

But now it seems Texas is going to curb this program, too leaving the state with little in the way of remedial admissions efforts.

This, in turn, highlights the extent to which college admissions in this country is often thought about in a backwards way. Our general understanding is that the most resources ought to flow to the “best” schools and the “best” schools ought to serve the “best” students who “deserve” to be able to go there. Under this framework, any departure from a strict scheme of “merit” looks suspicious. But another way to look at things would be to say that of course relatively able students from relatively privileged backgrounds deserve a higher education, but a larger amount of resources ought to flow to the students with more problems. After all, it’s the worse-prepared kids—typically from less privileged backgrounds—who have the most in the way of educational needs. The marginal dollar of either the taxpayer or the charitable donor will do a lot more for society when spent on people who aren’t already the best students.

Tax Subsidies for College Sports

One of the weirder aspects of American higher education is that a fair number of universities operate what are basically professionally sports teams as a sideline business. They differ from normal professional sports teams in that they’ve organized a cartel to sharply limit the amount of compensation that can be provided to a sub-set of the workforce, but in other respects—revenues, salaries for coaches and administrators, facilities, etc.—they resemble for-profit professional entertainment enterprises. This has long struck me as wrong in various ways, but it took the CBO Director’s Blog to get me to see that there’s a tax policy angle here:

A new CBO study released today assesses the degree of commercialization of athletic departments by comparing their share of revenue from commercial sources with that of the rest of their schools’ activities. In the case of NCAA Division IA schools, 60 percent to 80 percent of athletic departments’ revenue comes from activities that can be described as commercial—seven to eight times that for the rest of the schools’ activities and programs. For schools in the rest of Division I, revenue from commercial activities accounts for a much smaller share of athletic departments’ revenue, about 20 percent to 30 percent.

The high share of commercial revenue for some sports programs raises the questions of whether those programs have become side businesses for schools and, if they have, whether the same preferential tax preferences should apply to them as to schools in general. The Congress could change the tax treatment of sports programs in several ways, such as limiting the deduction for contributions, limiting the use of tax-exempt bonds, or limiting the exemption from income taxation. As long as athletic departments remain a part of larger nonprofit or public universities, however, schools would have considerable opportunity to shift revenue, costs, or both between their taxed and untaxed sectors, rendering efforts to limit the tax preferences for athletic departments alone largely ineffective. In contrast, changing the tax treatment of income from certain sources, such as corporate sponsorship income or royalties from sales of branded merchandise, would create less opportunity for shifting revenue or costs, and it would have larger effects on the most commercial sports programs.

This last option seems like something we should do. When you’re looking for revenue, it’s important to find it in these little nooks and crannies. In particular, when you have a situation where raising the tax leads to little tax-avoiding behavior, it means you’re looking at a revenue measure that’s going to have a minimal distorting effect on the broader economy.

Technology Alone Can’t Curb College Cost Inflation

Steven Pearlstein writes up a promising application called Aplia that helps teach introductory economics to college students. I can’t judge independently whether or not Pearlstein is right about the program’s merits, but I can say that he’s too optimistic about this: “For me, however, what’s really exciting about Aplia is that it finally holds out the possibility of bringing to higher education the same productivity revolution that has lowered costs and improved quality in almost every other industry over the past two decades.”

I used to think this way. I used to think that cost inflation in higher education was driven by a lack of productivity improvements. Therefore, I thought, when people invented productivity-enhancing technologies that made undergraduate education cheaper, we’d be on the road to curbing cost inflation. Then I read this eye-opening article by Kevin Carey in The Washington Monthly. Kevin points out that we actually have seen a bunch of things like Aplia that are making aspects of undergrad education more efficient. They’re just not making it any cheaper for students and their parents:

For the most part, colleges would just rather spend it elsewhere. The nonprofit Delta Project on Postsecondary Education Costs recently found that tuition and fee revenue per student at public research universities increased by 34 percent, in inflation-adjusted dollars, from 2000 to 2005. At the same time, spending per student on instruction and academic support declined. This is nothing new—overcharging for introductory courses is standard operating procedure in higher education, and has been for a long time. Colleges routinely use the excess revenues generated by huge, inexpensive lecture hall classes to support other, money-losing activities. Freshmen have always been cash cows—technology just made them more so.

You should read the whole article. But suffice it to say that the larger issue is that colleges and universities don’t face incentives to deliver cost effective undergraduate education. They face incentives to use undergraduate education as a profit center with which to finance other status-seeking endeavors like sports and research and higher salaries for administrators. If you want productivity enhancements to bring tuition down, you need to change those incentives.

Discrimination Against Asian Americans in College Admissions

Kevin Carey, an expert in higher education policy, mentions offhand that “It’s clear that, given the opportunity, elite American universities are prone to implement discriminatory admissions policies that artificially limit the number of American students of Chinese, Korean, and Japanese descent.” His point is that the same factors underlying this trend will presumably put a stop to the influx of Chinese students from China that come to American colleges and universities.

But the fact itself is genuinely remarkable. We’re a country that congratulates itself on having dismantled Jim Crow and the system of “quotas” that used to cap the number of Jewish students at top schools. But the quota system appears to have merely re-emerged with Asian-Americans as the victims. And nobody talks about it, though the discriminatory mechanisms are only slightly more subtle.