Is the College Textbook Industry (Also) Uniquely Inefficient?

Last year, Harvard healthcare economics professor Amy Finkelstein published an interesting paper titled Is American Pet Health Care (Also) Uniquely Inefficient?, with the title itself referring to Dartmouth professor Jon Skinner’s article, “Is American Health Care Uniquely Inefficient?” Skinner argues that the glut of paper-pushing administrators cannot explain much of the widening gap in health expenditures between the United States and the rest of the world; single payer systems save money by rationing medicine, not by firing bureaucrats.

While Skinner’s article answers “yes” to its title — citing the lack of skin in the game for doctors and insurers to keep inessential medical costs down — Finkelstein’s article suggests much more ambiguity. Unlike humans, less than 1% of pets are insured, so their owners really do feel the economic pain of expensive treatment. Like humans, pet healthcare spending has grown much faster than inflation, especially for end of life care.

The insight that Finkelstein’s paper gives us on cost disease for healthcare spending is that most explanations for exploding pet health care costs are also very good explanations for exploding human health care costs: more value is being placed on easing previously untreated suffering combined with the wealth to pay for it.

Mainstream explanations for why college tuition has more than tripled in real terms since 1980 include cutbacks in state contributions, credit expansion from student loans (pdf), useless administrators and diversocrats in particular, and for profit scam colleges.

While the first two explanations — which are popular on the left — tell you nothing about the source of exploding spending per student, the latter two are merely symptoms of the appetite for college credentials even at rapidly increasing prices. To see how useless bureaucrats cannot completely explain this dramatic rise, it’s worth looking at college textbook costs:

Source: AEI Carpe Diem blog.

The superficial reason for expensive textbooks is that, just like doctors ordering too many tests, the people making decisions about which textbooks to use do not bear the costs. Sales reps from giant textbook companies have their way with naive or crooked faculty. There are some compassionate professors who demand sanity, but for the most part they don’t care. When I was a graduate student at the University of California, we forced students to buy a $200 special edition calculus textbook which was supposedly tailored to our curriculum. It mostly swapped chapters and homework problems around in a different order to distinguish itself.

Just as an explanation that covers both pet and human health care costs is more powerful than a pair of explanations each covering only one, any account of higher education cost disease that does not also elucidate why books cost almost three times as much as they did in 1980 is missing a part of the puzzle. Whether it’s prompted by needlessly expensive textbooks or UC-Berkeley’s $20 million army of diversity bureaucrats, the bigger question is why universities can as a whole can get away with lavish spending that doesn’t even make the experience more fun or useful for their students. It would be remarkable if each rent-seeking tumor eating away at college affordability had an idiosyncratic source, but it’s much more reasonable to look for a common cause.

In my view, the best approach comes from understanding these runaway costs as a natural consequence of the higher education wage premium. Its value viewed properly as the signal value of cognitive skills plus some social proofing, a college degree affords its recipients a 40% pay bump even with demographic controls. University costs were a bargain in the 1980s and tuition — whose growth was actually highest in that decade — has steadily risen at a rate that cannot even keep up with the wage premium.

Source: NY Fed

Though parents willing to overpay for a prestigious degree may push prices even higher, tuition cannot plausibly exceed the median return to wages for long. This explanation also has the advantage of showing why European countries with threadbare universities and stricter price controls don’t generally spend as much on tertiary education.

I hope to elaborate on the evidence from the economics of higher education literature in a future post.

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