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Home Publications Blogs Beat the Press Why Do "Free Traders" Never Talk About Free Trade When the Losers Are Likely to Be People Like Them?

Why Do "Free Traders" Never Talk About Free Trade When the Losers Are Likely to Be People Like Them?

Saturday, 19 February 2011 09:40

David Leonhardt is one of the country's more thoughtful economic columnists who often has insightful pieces in his columns at the NYT. This makes his interview with two economists who recently wrote a book on college costs even more disturbing. He doesn't ask the tough questions.

His interviewees argue that one of the main reasons that college tuition has risen so much more rapidly than other prices is that college provides a service and that productivity growth in services is less rapid than productivity growth in goods production. They explicitly note that a college education is like haircuts in this respect.

The data don't support this case. Below we have graphs for the price increases in haircuts and college tuition since 1997 (as far back as BLS has data for haircuts). The price of haircuts increased by 40 percent over this period, while the price of college tuition increased more than 120 percent. Clearly the service story does not get us very far.


                                              Price of Haircuts -- 1997 = 100



Source: BLS

                                               College Tuition



If the fact that a college education is a service does not explain its high price then what does? Well, part of the answer is touched on in the discussion: "they don’t face competition from low-wage countries like China." 

This is true, but that is not an accident, this is by design. Trade agreements like NAFTA were explicitly designed to put U.S. manufacturing workers in direct competition with low-paid workers in the developing world. Business executives from companies like General Electric were brought in on the design of the treaty. They were asked what were the obstacles that prevented them from setting up operations in Mexico. The treaty was then constructed in a way to remove these obstacles.

The United States has not adopted the same route with universities (nor hospitals and law firms). Trade negotiators do not invite university presidents to meetings where they explain all the obstacles that prevent them from taking more advantage of the vast potential pool of high quality faculty from the developing world. (The word "potential" is important. The pool would be much larger if university students in places like India and China knew that it would be as easy for them as native born Americans to get jobs as university professors in the United States.) Given the huge gap in living standards, university professors in developing countries would be willing to work for much lower pay than university professors in the United States, just as auto workers in developing countries work for much lower pay than auto workers in the United States.

In short, one important reason that the cost of a college education rises so much more rapidly than other prices is that university professors are largely protected from foreign competition as a matter of conscious policy, unlike most other workers in the economy. Of course this is not the only reason.

It is now common for university administrators to get high 6-figure and even 7-figure salaries. This is partly as a result of the fact they are following the bloat in private sector pay for top executives. In this sense the process through which top executives now run companies in large part for their interests has affected the pay structure at colleges and universities.

There is also the issue that much of the responsibility of college presidents now is squeezing money from the small group of incredibly wealthy people who make large donations to colleges. This is likely best done by someone who is at least marginally in their ranks rather than someone who works for a living. In this sense, the explosion of inequality in the last three decades has fundamentally altered the role of a university president so that it now primarily involves the ability to cater to the ultra-rich. 


[Addendum: Several comments claim that there are no restrictions on the hiring of foreign born professors based on the fact that a substantial number of faculty actually are foreign born. This is known as the "Mexican avocado theory of international trade." Under this theory, because it is possible to go the supermarket and find avocados grown in Mexico, we have free trade in agricultural products.

Of course we are very far from having free trade in agricultural products. There are a whole array of tariff and non-tariff barriers that it make it difficult to import items grown in other countries. In the same vein, we do have many outstanding academics in the United States who were born in foreign countries. These academics were able to overcome the hurdles that make it difficult (not impossible) for foreign born academics to work in the United States.

It is not legal, for example, for a university to hire dozens or even hundreds of non-citizens/non-green card holders explicitly because they are willing to work for a lower wage than their U.S. born counterparts. This restriction limits the extent to which foreign born faculty will put downward pressure on the wages of U.S. faculty. This doesn't mean that there is zero competition, just that the competition is deliberately limited by protectionist barriers imposed by the government.]


[Second Addendum: I see that my blogpost brought a response from David Feldman, one of the co-authors of the book that was the basis of Leonhardt's interview. He may have missed the addendum added above clarifying the nature of international competition that does occur in academia. The point here should be simple.

This is not a zero/one proposition. There is clearly competition. However, it is also a clear violation of the law for a university or college to dump its faculty and replace them with highly English speakers from India or elsewhere who would be willing to work for 40 percent less. If universities had this option, and offered tuition that was $15k-$20k a year less than their competitors would it affect the market? David Feldman says no, I think it likely would, but to argue that precluding this option is not protectionism is just silly.] 

Comments (24)Add Comment
written by Paul, February 19, 2011 9:38
Given that an Indian would have to move to the US to teach at an American college, I can't help but wonder how low a salary he/she would be willing to accept. After all, a Mexican autoworker lives and works in Mexico and can afford to make less than his/her American counterpart since the cost of living is presumably much lower there. Are there substantial savings to be had here?
written by jcl, February 19, 2011 11:29
Paul makes a good point; also, colleges are increasingly taking advantage of low-paid adjunct faculty (not adjunct administrators, of course), which has to be a lot cheaper than hiring actual tenure-track professors from overseas.

The rise in college costs doesn't make sense to me, and the debate has been dominated by people with various agendas. The "high faculty salaries" explanation doesn't make sense because of the huge rise in contingent labor. Some people will point to expensive student centers and dorms, but are they really a big cost driver, or is it just an attractive explanation because it gives baby boomer commentators an opportunity to complain about today's pampered youth? How can it be caused by research costs, given that liberal arts colleges charge just as much as big research universities? Dean, you're one of the only people I trust to look at this objectively, and I'd love to see you explore the issue more sometime.
written by K. Williams, February 19, 2011 12:33
This is an absolutely terrible post. There are myriad fields in which there is complete free trade in the labor market that nonetheless see enormously high salaries -- professional sports, most notably. European teams are able to recruit and hire players from all over the world in soccer. NBA teams can and do recruit players from all over the world to play professional basketball. Yet the salaries of professional athletes have risen even faster than those of university professors. Similarly, large corporations can and do hire CEOs from anywhere in the world. Yet that has not driven down CEO salaries at all. On top of this, the lack of free trade obviously can't explain the ever-rising cost of college, since it's not like colleges have recently imposed barriers to the hiring of foreigners (in fact, if anything, the move has gone in the other direction -- look at any top institution's economic or engineering department and you're likely to see plenty of foreign academics). Your argument here is completely preposterous.
There are plenty of foreign professors at US universities.
written by Tom, February 19, 2011 1:23
There are plenty of foreign born professors at US universities. I can speculate on some other factors:

1. State financial support has dropped substantially
2. High sticker prices are used to support financial aid for lower income students, perhaps more necessary due to greater income inequality
3. (Conspiracy mode) Student protests during the Vietnam era pissed off the powers that be so much that they vowed to keep students indebted and scared.
written by dunkelblau, February 19, 2011 4:18
I don't think labor costs are a major factor in the rapid price rise at university. There's plenty of foreign competition for professorships; at my alma mater probably the majority of the engineering faculty is foreign-born. Plus professors are far outnumbered by graduate teaching assistants who, you guessed it, are predominantly foreign-born. I think they have earned roughly the same relative to private industry over the past few decades.

Instead I think the fuel is the same stuff that ran up the housing bubble-- namely easily available credit peddled to people who either viewed the situation as "no choice" or didn't know better.
written by dunkelblau, February 19, 2011 4:29
Two more points: (1) Sallie and Fannie are sisters (2) language barrier.
You may not care that your ipad was assembled by a team that doesn't speak a word of English, but I don't think you'd learn quite as effectively from a professor who is similarly disposed. This may help explain why the foreign invasion hasn't cratered professors wages.
written by Doc at the Radar Station, February 19, 2011 4:45
More and more people are slowly starting to understand what is wrong with this country. Here's the comment I left on NYT's blog:
"...the relative decline of the parts of the economy more exposed to trade makes education and health, and government, comparatively more expensive to the rest of us."

Bingo! While there are a lot of valid contributions to the problem being pointed out by many other posters, I think this is the most fundamental one. If the US tradeable goods sector had not been decimated through trade deficits and offshoring, tax revenues and wages would not have gotten depressed to the point where states and individuals couldn't afford higher education. Also, the demand for higher education would have been lessened, since a lot of the technical expertise needed in tradeable goods doesn't require so much education in the first place. This would have resulted in a lower inflation rate for higher ed. People would have spent more of their time actually WORKING instead of spending so much of their time going to school.
University Salaries
written by Rufus, February 19, 2011 5:30
As much as I overall agree with Mr. Baker, he does not have his facts straight on academics, free trade, and faculty salaries. In fact, if one looks at American Universities, they have a relatively high level of non US citizens teaching compared to Canada or Britain, for example. In my own department, 4 of 16 tenure track faculty are foreign born. What undercuts his argument the most is that the highest paid departments tend to have the most foreign born individuals--business, computer sciences, engineering, and--dare I say it--economics.
An Incredible Stupid Application of Neoclassical economic theory
written by MikeSFB, February 19, 2011 6:29
I think your heart is in the right place...most of the time...but sometimes it seems as though you are applying neoclassical theory like a zombie without consideration of the reality of the world as it actually is.

Teachers in universities are usually not well paid at all and as other commenters note there is plenty of foreign competition for the best paying academic jobs in the STEM fields. Most teaching in universities is done by graduate students or adjunct faculty who are not paid very well. Yes there are a few well-paid full professors in some fields but their salaries are a pittance in comparison to the vast costs associated with running a modern university that is in a life and death competition with other universities for prestige, grants, and top faculty.

You're going to have to back to the drawing board and look at the fundamental assumptions that you use to explain the world. Sometimes what you write is an embarrassment to economists that call themselves progressive.
Supply of profs
written by McDruid, February 20, 2011 4:01
Dr. Baker's hypothosis is not persuasive. The supply of teachers is actually quite high. In addition to adjunct/part-time teachers increasing from 43% to 70% over the past 30 years, there is also an oversupply of Ph.D. level graduates. In History, for example, there was a 36% increase in Ph.D. graduates just in the '90s. The rise in price is more likely a demand phenomena.
written by skeptonomist, February 20, 2011 8:58
I couldn't find a time series of average faculty salary (something which Dean should have provided), but the AAUP has complete data on current salaries:


Scan this list and see whether salaries are really outrageous. If these salaries have increased at the rate of tuition, many professors must have been in deep poverty 10-20 years ago.

Dean's point that workers such as those in manufacturing are subject to international competition while capitalists, managers and some professionals are not is well taken. But education professionals - including K12 teachers - are not generally among the upper few percent in the US economy who have gained over the last 50 years.

As for education administrators (again Dean provides no data), do they really earn as much as they could in for-profit business?
written by skeptonomist, February 20, 2011 9:15
Supply and demand in education has been affected by the baby boom. When boomers were students, the system had to be expanded and there was a real shortage of professors and teachers. Now the boomers are professors. Could the rise in tuition be due to supporting a mass of institutions and professors which is much larger in relation to students than before? One way to get at this would be to look at student/faculty ratios over time. While a higher ratio is considered a good thing, it does cost more.
written by Bloix, February 20, 2011 10:01
Universities charge the prices they do because they can. It has nothing to do with the cost of running a university. Faculty wages in most fields are down not up, particularly as tenured and tenure-track faculty have been largely replaced with adjuncts who are paid by the course and have no health care or pension benefits. Increased tuitions go toward ever-more-bloated administrations.

Why can universities raise prices ahead of inflation, year after year?
(1) There is litle price competition. The reverse is true. Buyers have no ability to determine what a good education looks like, and rely almost entirely on reputation and other proxies. And one universally accepted proxy for quality is high price. Thus there is a perverse incentive for universities to raise prices in order to signal to the consuming public that they are "first-tier" institutions.
(2) The federally guaranteed student loan program ensures a sufficient pool of buyers who can pay. The university need not finance the students' educations and does not need to worry about whether its graduates can actually earn an income stream sufficient to pay back the loans. (The fact that loans are a crushing burden for many graduates and cannot be discharged in bankruptcy is not the universities' problem.)
Elite college degrees, medicine, are law are not marketed on the Chicago Wheat Exchange.
written by Rachel, February 20, 2011 10:06
We're not talking about efficient markets here. Connections matter. Insulation from consequences has an effect. Decision-makers often seem to have few incentives to seek out reasonable prices. A case in point seems to be Richard Blum, UC Regent and Senatorial Spouse, who wants to substantially increase pay of his friends (putative elites), in the midst of a crisis, while slashing spending elsewhere.

In the meantime, all the UC hospitals are bargaining collectively to extract higher fees, ultimately from patients, and our legislators fail to object. The hospitals form cartels and the prices of health benefits skyrocket in northern California, and the progressive media generally (with a few admirable exceptions) does not care to make the citizens aware of this (while the right wingers blame the unions).

And private equity firms are running to jump on the medical gravy train, much more lucrative now thanks to health care "reform."

So the "elite schools" tantalize students with the hope of a ticket to ride this train too (albeit in not in the same cars as the private equity funds). No wonder fees go up.

In other words, there's a huge amount of market power and government folly at work here. I doubt that importing more professors would have more than minimal effect on this. (Except for creating more local unemployment. As people have noticed above, there's a PhD surplus.)
written by skeptonomist, February 20, 2011 10:07
I meant, of course that lower student/faculty ratios are considered a good thing. In fact, this is a major point of competition among the better institutions - it is almost always mentioned in the most rudimentary advertising. If ratios have in fact decreased then it can be argued that higher tuition is buying greater value. Maybe what should be measured is faculty time per tuition dollar.
written by Scott, February 20, 2011 10:07
The idea that faculty positions are responsible for the accelerated rise of university tuition is similar to blaming the rise of health care costs on doctor's salaries and ignores several important concepts:

1.) That international competition does in fact exist for faculty positions. Visa and language issues notwithstanding, academic jobs are global - five minutes perusing the jobs section of the Chronicle of Higher Education demonstrates that.

2.) That capable analysis of the economics of academia exists. If universities are to be regarded as factories, which is the core thesis of this and many other articles, then the factory suffers from:

Huge and growing infrastructure costs - find a campus that doesn't have building projects in the works. It is a usual occurrence to find administrations cutting budgets while they create even large "Factories" with the idea that it will bring in more grant money or a larger number of increasingly unsubsidized students.

Diversionary bookeeping. Athletic programs and other spectacles, long the golden child/whipping boy of university debates are kept on as money losers with the tacit understanding that they keep alumni donors involved and keeps them writing checks. Very little actual proof of this exists while the costs continue to mount.

Excessive administrative overburden. While this has begun to change, observation of any college or university's corporate structures shows an astonishing number of functionaries - associate deans, vice chancellors and others, much of it for self-created work.

Declining subsidies. Large universities grew in true Parkinsonian fashion to consume every penny that state legislators and grant mills could produce in a booming cold war domestic economy. Academia, for all of its capacity to theorize, hasn't realized that the party is over and that its economic models are older and less capable than Detroit's "big three" were.

Extraordinarily, while the article argues for foreign competition on the production end, universities are finding something salvation on the consumption end, bringing in increasing numbers of (very profitable) foreign students and creating more "factories" overseas. It is only a matter of time before those overseas facilities begin to re-import instruction wholesale, much as our U.S. based companies re-import products produced in overseas factories for sale here.

The problem with that model is that nobody in this country can imagine victimizing their own children's future with the same kind of neglect and ineptitude that are epitomized by offshore "help" lines that many of us have suffered through.
written by skeptonomist, February 20, 2011 10:15
Another variable is the state of endowments and investment performance. Most of the institutions under discussion are non-profits, and their mission is not to put money in the pockets of stockholders, but they depend on investment performance. Both stocks and bonds did extremely well 1980-2000 but stocks have been stagnant since, which means that more of operating expenses have to come from tuition instead of endowments. Do institutions use tuition income to build up endowments?
written by onionpeeler, February 21, 2011 10:15
Is the question, why are college costs so high, or, why are college costs to students so high (tuition)? The two are different. To answer the second, should we ask why tuition is free or very low in Europe? Quality differences in some places, but so grand as to explain $45 000 tuition compared to zero? Aren't the differences more political than economic (the role of the state if supporting student education)?
Bloix gets it
written by LSTB, February 21, 2011 10:21
The problem is that the federal government is willing to lend students ever-increasing sums of money to attend colleges whose degrees carry varying, decreasing market values. The government doesn't conduct any risk analysis on the system, and colleges dog-pile over their magazine rankings.

On top of that, the loans aren't dischargeable in bankruptcy. The end result is that two universities can charge similar costs for the same degrees yet provide different outcomes.

Richard Vedder authored a study that's not about tuition increases but does tell us why higher education has a low ROI. http://www.centerforcollegeaff...l-Mart.pdf
Price Discrimination
written by Floccina, February 21, 2011 1:59
1. There is tremendous price discrimination in schooling so the higher costs are mostly paid by the rich.

2. There is a surplus of PHDs so I think PHD immigration is only a small part of the problem.

written by physphan, February 22, 2011 4:48
1. I know at my alma mater (Public R1 university) the state contribution per fte student has dropped off considerably in the last years. Here's a graphic from U-Washington showing state support dropping by from $13k to $9k over the last decade http://gordonwatts.files.wordp...=442&h=256 . In addition to leading to increased tuition, it has also lead to a higher reliance on grant income and has increased the "competition" for professors who can bring in a lot of grant money (particularly overhead).
2. Is the implication that if we hired cheap labor from abroad to be professors that they would not come here to work but work remotely? Otherwise won't their cost of living go up and cause them to cost more? (thought perhaps not as much more as indicated due to the other pressures above).
3. As someone teaching at a small, non-elite private university I must laugh at the idea that my salary (which hasn't even seen cost of living agjustments in the last few years) would be attractive to anyone. Is there evidence in the history of the wages of university profs to support the idea they've been "protected".
written by Mike B, February 23, 2011 9:57
If you thing teaching staff salaries are driving the cost of higher education you clearly haven't been exposed to institutions of higher education lately. Most Universities have in fact been driving down their staff costs through increased use of adjunct faculty, non-faculty instructors and graduate student teachers (many of which are foreign and, little heads up, you get what you pay for). Full professors are often treated as profit centers, required to bring in grant money or ancillary revenue (publishing, speaking, etc) or even just good publicity.

What sucks down the dollars at Universities are their large physical infrastructure and their wide range of student services. The University can't look shabby, they need cutting edge technology and research lab equipment to attract the best students and most profitable professors and they need to cater to the demands of students that have money and are willing to take it to the University that will shower them with the most gifts.

The root of the problem is that the students who choose where to go are by in large not playing with their own money. Either their parents are paying, the state is paying, scholarships are paying, their future selves are paying (via debt) or the University is cross subsidizing them.

Except for the decision of going public or private or comparing financial aid packages from equivalent institutions, money is not an important factor for the majority of students. If you want prices to fall simply convince millions of students (and their parents) cheap out on their futures'.
Int'l competition in higher ed is not perfect, but it's certainly present
written by GTB in DC, February 28, 2011 5:17
Even with the supplemental comments Dean Baker has added to his original post, I have to question his basic position on free trade and the American university industry. My impression is that (1) there's a heck of lot of international trade in college and university education; (2) U.S. colleges are major (and successful) competitors in the field; (3) the composition of both the student bodies and faculties of U.S. institutions reflects the large and growing role of international competition; and (4) aspiring academics in the developing world do indeed want to compete in the U.S. academic market place ... and they do compete -- in this competition they are displacing U.S.-born academics; however, the successful competition occurs by Indian, Chinese, and Latin American nationals moving to the U.S. and taking positions in American universities; it does *not* take place by persuading U.S. students to obtain their college schooling in low-cost and very low quality institutions in poor countries.

I'm a bit surprised anyone familiar with U.S higher education could miss these facts, which seem to quite obvious on the nation's campuses. In fact, they are equally visible in the nation's best-known unversities and in academic backwaters.

The NSF tries to keep track of the science and engineering (S&E) personnel (and bear in mind that disciplines like psychology and economics are considered sciences in these tabulations). In particular it tracks the ethnic, gender, and foreign-born composition of S&E personnel by final degree (associates, bachelors, masters, & Ph.D.) and employment inside and outside of academia. Here are some things to bear in mind when considering whether or not the U.S. university sector is exposed to foreign competition:

31% of working Ph.D. degree holders in S&E are foreign born.

In many S&E fields, such as computer and mathematical sciences, physical sciences, and engineering, about a quarter of job holders (regardless of their highest degree) are immigrants.

23% of the S&E doctorate-holders who are employed by U.S. colleges and universities are foreign-born ... the great majority were born in low- or middle-income countries (mostly low-income countries, by the way).

No one -- except possibly S&E degree holders themselves -- would characterize the last 30 years as ones in which their wages and incomes have lagged those of other well educated groups in this country. True, foreign competition (through immigration into the U.S.) has probably limited the employment opportunities and earnings gains of U.S.-born degree holders, the fact is that U.S. demand for S&E personnel has kept S&E wages pretty high in comparison with the wages of other well-educated groups.

All the percentages mentioned above are considerably higher than the comparable percentages of immigrants in the population, in the working-age population, or in the employed U.S. population as a whole. I think academics, like the two economists interviewed by the NY Times' Leonhardt, are well aware of the competition they face from foreign entrants into the U.S. market. If they attended graduate school anytime in the past 30 years, it would be hard to miss this plain fact. When I was a graduate student in the mid-1970s, I think exactly half my class came from abroad. Most of the foreign degree recipients stayed in the U.S. I do not consider these able economists as "foreign competitors," but that's because I tend to think of them as as colleagues in my profession rather than "competitors." Surely, however, they could move back to their countries of origin, improve the faculties of those countries' strongest universities, and attract ambitious U.S.-born students to those universities if they thought the institutions in their home countries were strong competitors to universities in this country. However, they have decided to remain in the U.S. because they feel, probably correctly, that U.S. institutions offer the best education available (which means these immigrant professors will teach some of the world's best graduate students) and provide the best wages and working conditions.
Int'l competition in higher ed is not perfect, but it's certainly present (II)
written by GTB in DC, February 28, 2011 5:18
What about the "output" of colleges and univesities? Is international trade possible in the product market in which universities compete? (We have seen that international competition is possible in supplying the personnel who deliver higher-ed services here in the U.S.) It is certainly feasible for Americans to receive some or all of their post-secondary schooling in overseas institutions. In many (e.g., in Britain, Sweden, The Netherlands, Belgium, Canada, Australia, South Africa, and India), English is frequently the language of instruction. The cheap prices in most of the rest of the world should make this attractive if the reasoning in the "Beat the Press" column were correct. It is also feasible for foreign students to obtain their schooling in the U.S. (Little-known fact: the annual caps on U.S. immigration do not apply to student visas.) My impression is that this kind of international exchange is increasingly important in higher education. About 3.5% of students in U.S. higher ed are from abroad, and this fraction is up considerably over the past 30 years (though not over the last 10). The number of U.S. students studying abroad is about half this number, and -- surprise, surprise -- only a very small percentage try to obtain their degrees in countries that should enjoy the biggest cost advantages over the U.S. (namely, the poorest countries). You don't need to be strong believer in comparative advantage to conclude that, for most U.S. residents, the private advantage / cost ratio of attending a U.S. university looks considerably more attractive than the same ratio in an Australian, Indian, or South African university. The plain fact is that, unlike other U.S.-based industries, the higher ed industry enjoys a favorable balance of trade: We export much more than we import. In addition, it would very hard to claim with a straight face that Americans cannot obtain a college education in other countries. It gets easier (and relatively cheaper) to do so with every passing year. In what sense are U.S. universities sheltered from international competition?

I think good economists must come up with a more persuasive explanation for rising college prices than this one: "... one important reason that the cost of a college education rises so much more rapidly than other prices is that university professors are largely protected from foreign competition as a matter of conscious policy, unlike most other workers in the economy." This statement is flatly contradicted by the evidence: (1) Immgrants from other countries, especially poor countries, comprise a large and growing percentage of the U.S. professoriate, so U.S.-born university professors are exposed to direct competition from foreign competitors in their home market; (2) Students in the U.S. and the rest of the world are free to receive their higher ed in other countries, but the balance of trade suggests there are more foreign students who want to receive their higher ed here (paying our high prices) than there are American students who want to get a much cheaper education abroad.

I am not claiming there is "perfect competition" across national boundaries in higher education. However, there is not perfect competition in auto, steel, aircraft, or textile production, either. And there is a heck of a lot more international competition on the product side of higher education than there is, for example, in construction.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.