Arnold Kling  

Where Does the Money Go?

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Greg Mankiw writes,


Harvard tuition is about $30K (not counting room and board). Assuming 4 classes each of the two 12-week semesters and 3 class hours a week in each class, one finds that each hour class at Harvard costs about $100

So, if 250 students go to freshman economics lectures, Harvard gets $25,000 an hour to teach them. Even for a superstar like Greg, annual salary divided by teaching hours probably is not as high as $25,000.

If the students get split up into ten sections and taught by teaching assistants, each teaching assistant brings in $2500 an hour in revenue. Teaching assistants do not get paid $2500 an hour, no matter how you slice it.

The markup over labor cost in higher education is simply staggering, particularly considering how much of the labor is low-paid teaching assistants and adjuncts. I know that administrative positions have grown tremendously, but I still cannot figure out where the tuition goes.

My best guess is that those who teach subsidize those who do not. I conjecture that if you divided the total number of classes by the total number of full-time faculty, you would see an average work load of less than one class per semester.


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TRACKBACKS (6 to date)
TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/654
The author at The Free Thinker in a related article titled Education: Enhancement of Hedonic Capacities writes:
    Greg Mankiw:Here you can buy 10 economics lectures for $1.60 per lecture.By contrast, Harvard tuition is about $30K (not counting room and board). Assuming 4 courses each of the two 12-week semesters and 3 class hours a week in each [Tracked on February 19, 2007 7:39 PM]
The author at Newmark's Door in a related article titled Some fun provided by two economists, and others writes:
    Greg Mankiw does a back-of-the-envelope calculation that--at list price--Harvard grosses about $100 per class hour per undergraduate student. Arnold Kling tartly observes, So, if 250 students go to freshman economics lectures, Harvard gets $25,000 an h... [Tracked on February 20, 2007 5:40 AM]
COMMENTS (25 to date)
Horatio writes:

You can probably add, those who do not do science and engineering subsidize those who do. Labs use up a lot of resources and licenses for some math/science/engineering software packages are quite expensive.

Jody writes:

Horatio: At my university in the EE department, all labs and equipment are paid by sponsored research projects (and grants from government and businesses).

The university does not give us money. In fact, every research contract is "taxed" by the university and money sent to supplement the budgets of non engineering departments. It's not officially called a tax and some creative bookkeeping is done because it violates the terms of most government contracts.

To make my point crystal clear, that's a charge which is over and above the overhead and benefits charges.

So in my experience the interdepartment subisidization flows in the opposite direction from the one you are supposing.

Marcus writes:

Arnold, I've read some of your stuff before and its very insightful. But what possessed you to post this ridiculously simplistic post:

Have you forgot about overhead costs? Lights, sidewalks, heat, chairs. And what about the administration?

And what about the time to prepare for that class? The teaching assistant might spend a total of 8 hours of time before and after to cover that class (office hours, grading papers, preparing the lecture).

Not to mention, I presume, preparing for all the pensions a school like Harvard will pay.

And finally, somewhere in there, isn't there a margin for profits? I mean Harvard is non-profit, but don't they have building plans-- such as building/upgrading facilities?

Out of time.

Fabio Rojas writes:

Higher education, especially research universities, is a giant cross subsidy. It's not quite that "those who teach subsidize those who do not." It's more like professional schools, research grants, large lecture hall teachers and non-academic income (like patents) subsidize research specialists in fields that don't have direct applications.

The professional schools (medicine, law, business), the big science grants (like biology), sports (but only the big ones like football) and the people who teach 500 person lecture courses (like English) pay for everyone else. Then you supplement with donations/endowment dividends.

The reason this subsidy goes on is that research reputation drives the system but it doesn't directly generate much revenue. Also, schools invest in a lot of infrastructure (libraries, computer labs, new dorms, sports facilities) to attract students, which sucks up a lot of money, as do administrators.

Elton writes:

I thought that Harvard (and the other elite schools that have sticker-shock tuitions) justified it in the name of having an economically diverse student body; they claim that they soak the kids from rich families that would pay anything for an Ivy League education, and Harvard directs extra financial aid to deserving poor students. So if what they/I say is true, then it's just price discrimination. (If it were mostly true though, then I'd think that the elite colleges would make their Robin Hood generosity more public to counteract the public perception that only the rich can afford to attend; but maybe it would also turn off rich donors ...)

JD writes:

This one is extremely easy to answer, and I'll answer it with two words: financial aid. The large majority of Harvard undergrads get at least some amount of aid. That, along with what the other posts have said (extra costs, etc), should answer your question. Also, remember that even if Harvard got 25K an hour, it certainly would not give Greg 25K an hour. Remember, universities want two things: the student and the student's money.

Dave writes:

For public universities, you can see exactly where the money goes, and how much comes from tuition. Their books are pretty much public, down to the college or department level, and most have it available online.

garhane writes:

I was about to simply agree with the poster who noted the post as very simplistic until I read the other posts going on with various items to add in. Surely economic illiterates cannot solely populate this blog? What is this nonsense, class and caste in the vanishing republic? You analyze cost of the firm by taking the salary of the smallest group of "workers" and setting that against one of many income sources? All these guys need a guide dog to reach the bus stop.

Jessica Daniels writes:

Many public universities who, by comparision, have a somewhat staggering tuition also receive grants, donations, etc. I'm almost certain that Harvard alumni too, give back to their alma mater. So I shall also ask where does the money go? It is well understood that there is lights, supplies, equipment, maintenance and such. There is even the possiblility of expansion or updating faclities. BUT, along with tuiton, grants, and the possibility of 'wonderful' donorship, what is really left over? and who sees it? But Harvard as in the rest of higer ed. America have alomst completely wiped out a whole economic groups opportunity for education. Where did the trend begin and when is going to end? When only the uppoer middle class and beyond are able to support a college education? What behind the higher ed. cost increase and the gov't funding for students decrease?

BR writes:

You are not looking at things from a return on assets point of view. I saw on a site Harvard was touting a green program that covered 21 million gross square feet. At $200 per square foot they have an asset of $4.2 billion (assuming the green program data I found covered the whole campus, it could be higher). Now assuming a 10% return on their investment, they should be bringing in $420 mil per year. If you take their total enrollment (18,000) times $30k you get $540 million per year. Roughly the same ballpark for a napkin calculation.

Brandon Berg writes:

According to their financial report, Harvard took in $600 million from tuition (minus $100 million in aid) last year and paid out $1.5 billion in wages and benefits. So price discrimination isn't the answer--that's about $25k per student, net.

Barkley Rosser writes:

Well, there are plenty of private institutions of higher education that are just about as expensive as Harvard, if not more so, have much smaller endowments with, concomitantly much less financial aid, and are much lower in prestige, quality, or at least fame, of faculty, and lower quality of fellow students for future networking purposes.

So, why focus on Harvard? What about all these other schools, especially the ones that have third rate grad/research programs going on so that undergrad students still get plenty of incomprehensible TAs in their first few years?

Cyrus writes:

Has there ever been a test case of whether school-directed financial aid violates Robinson-Patman?

Regina writes:

Well since no one really knows what the money compensates for. I believe they should take some of that money and give out scholarships. By doing so they could possibly help students who receive the lower end of education, afford to receive the best education. Then again who is to say that the education one receives at "Harvard" is any better than the education one can receive at their local community college. When a student, or in most cases, a student's parent pays tuition for Harvard, their just paying for the name. For example a handbag bought at wal-mart may be just as good as the Coach handbag purchased at Dillards, but the Coach is preferred anyway.

Rocky writes:

I think that it does take a lot of money for maitence at a university but when you do think about it their is a lot of money that is not being used or their are other things that i am not thinking about.

jaim klein writes:

If Greg's work produces so much income for his employer, why is Greg allowing Harvard to go on exploiting him? Economists are supposed to pose those type of questions. Could Greg make more money by selling his product (lectures, etc.) on a free lance basis? Could a partnership of Harvard lecturers leave and rent nearby facilities and start up a competing educational enterprise? I am sure this partnership or collective could offer equal or better educational product for less money. Anyway, the startup is unfeasible, as the product sold by Harvard is not education, but the Harvard experience and network, and the Harvard diploma. Harvard could well manage with barely competent teachers and still sell its diploma. (Maybe they do). All in all, my conclusion is that Greg, as a salaried employee, is not being exploited but paid the minimum necessary to keep him content and working loyally for the firm.

jaim klein writes:

PS.: BTW, a fistful of enterprising teachers from Tal Aviv University did exactly that, they rented a vacated Army base and proclaimed themselves to be the Herzliya Interdisciplinary Center. Moneywise, they are waxing exceeding well.

Steve Sailer writes:

The point of getting into Harvard as an undergrad is to be able to say you got into Harvard. Getting into Harvard shows that when you were a high school senior, you were among the nation's Best and Brightest. What (if anything) you actually learn at Harvard is irrelevant in many non-technical fields.

I reviewed the economics of Harvard here:
http://www.vdare.com/sailer/070211_faust.htm

andres writes:

I cannot figure out where the tuition goes because we are tacking about a lot of money. In my opinions it is ridiculous how much money the students from Harvard have to pay. If the students pay that much money…what is Harvard doing with that? It is not necessary to pay that much money.

Matt writes:

New construction. Every President wants to build some grand new structure that serves as a sinkhole for alumni dollars and recurring costs for students to cover with tuition.

Jody writes:

What type of university do you attend?
My undergrad was a huge state school and the science and engineering programs were effectively subsidized by the humanities. Here at my grad school, one of the ivy caliber east coast schools, I have heard of the type of research taxes you wrote of.

Bill Conerly writes:

The answer is in Rich Vedder's book, Going Broke by Degree: Why College Costs Too Much (Amazon)

Boonton writes:
In world where typical state U charges 15K or more, while Harvard charges 30K it the state U which is a ripoff. The gap between Harvard and a handful other top private schools and the public U's is not only great but unmeasurable. I do not wish to say professors at those universities are worthless losers, that is not the case, but they simply dont measure up to a department where you cant get into an elevator without bumping into a Nobel prize winner.

I don't disagree but I think we should actually answer the question. If Exxon owns an oil well that costs $25 a barrell to pump and the price of oil goes from $50 to $100 the answer is very easy...The money goes into additional profits for Exxon. From their financial statements we can learn if Exxon puts this additional profit into higher wages for its workers and officers, dividends or stock buybacks for its owners, invests it in R&D and discovery or simply keeps it as cash sitting in its bank.

What do colleges do with their tuition? Is it going into their endowments? More secretaries, staff and administrators? Purchasing superstar Noble prize winning professors at rock-star prices? Massive new buildings? Research?

Boonton writes:

Travis,

I suspect that is kind of high. $50M off of 9,000 students? Each student is worth $5556 in profit per year. There probably are plenty of students who pay less than full tuition and perhaps you're not accounting for the cost of support staff.

Nonetheless, if that profit was real you'd think there would be lots of private universities operated on a for-profit basis. Yet it seems some like Phoenix are struggling to maintain quality and control costs. I'm curious as to what your school does with its 'profit'? Since it isn't owned by shareholders it can't just distribute it to the owners. It can hike salaries or it can stash the money in the bank (or endowment fund).

Assuming, though, those that run the school cannot easily reap the profit for themselves (either through dividends or paying themselves bloated salaries) and the school has enough saved to handle unexpected events what motive is there to rake in such big bucks that no one can use? Why not simply lower tuititons or create some type of ownership (say like a credit union that pays dividends to alumni) where the profits can be put to use?

pk writes:

I would like to know the same thing!!! I can speek on this matter first hand; I just transfered from a private school that cost $30k a year (it did include room and board) and witnessed the same thing! I sure know the excess of money did not go towards more (and/or better) professors where needed, the dorms that were build in 1889, or even the student body and athletic programs (althought our debate teams seems to continue to be able whoop Harvard each year! =) ) ....we did have amazingly green grass and an outward appearance (both the campus and people)....but of course its a different story once your inside!

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