Saturday, August 27, 2016

Background Information for Class on Tuesday 8/30

The Economics of Lock-In

Business practices develop in an environment where the practice is efficient, more or less.  Then the environment changes, but the practice does not.

A Couple of Historical Prices for Comparison with Today

Tuition 1980 (in state) ....  $682

My (9 month) salary as a starting faculty member in 1980  ..... $19,500.

Rough inflation adjustment - multiply by 3 and then round so the numbers are easy to manipulate.

Tuition 1980 in today's dollars..... $2,000.
My salary 1980 in today's dollars......$60,000.

What are the equivalents today?

Tuition 2016..... $12,000
New Assistant Prof in Econ.....$130,000+

So in state tuition has gone up roughly 6-fold in real terms during that time, while the salary or a new assistant professor in economics has roughly doubled in that time.  What explains this?

At least two different things happening.
1.  College costs are hyper inflationary - they grow faster than the rate of growth of inflation overall.
    a.  Baumol's Cost Disease - for sectors of the economy where there is no productivity increase over time.
   b.  With increasing income inequality in society overall, those goods and services that the rich value will rise in price faster than overall inflation.  College is in this category.   Look at private school tuition.  It is in the stratosphere now.
   c. There's been a destructive non-price competition across universities - to be the best - that has raised costs.

2.  The state contribution toward public universities declined as a share of overall revenues and then declined overall.

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