Tuition Reform, Obama’s Best New Idea

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I am coming after you, university bureaucrats.Photo: JEwel Samad/AFP/Getty Images

The most distinctive idea in the State of the Union address — subsidizing manufacturers — was a political quick-find-something-to-say-about-the-economy-that-polls-well-in-Ohio pander, and hopefully it will die a quiet death after its use as an election issue has passed. With much less fanfare, though, President Obama did announce another idea of real importance: finding a way to control college tuition.

That was the theme of Obama’s Ann Arbor speech today. His administration has increased subsidies for students who can’t afford college tuition. But the main problem is that college tuition has skyrocketed over several decades, far out of proportion to any plausible increase in quality. It’s happened because of a complex set of incentives that give universities every incentive to continually jack up their costs, and students little incentive to shop for quality. (Kevin Carey has a decent primer on the problem here.) With that backdrop, increasing Pell Grants, while necessary, is just a way of running faster on a treadmill that keeps increasing its speed. The approach Obama unveiled Tuesday night, and explained in more depth today, would try to change the incentive structure and control tuition inflation.

The plan involves a series of changes. Federal aid to universities would be tied to improvements in affordability. The administration would also create a competition for states to reform their higher education policies, with $1 billion in funding as the lure for the most effective reforms. And it would create mandatory disclosure for potential students, who could use the information to shop between competing schools more effectively. (Marty Nemko advocated this in the Atlantic a couple weeks ago.)

The upshot of all this is to flip the broken incentives in the system and create an actual functioning marketplace, where the sellers (the universities) have an incentive to provide real value, and the buyers (students) have the information to make an informed choice.

Of course, the providers aren’t going to like that very much. This ominous quote in today’s New York Times foretells a fierce battle if and when Obama’s idea ever makes its way to Congress:

“When we hear things like a shift in federal aid, it causes our antennas to go straight up,” said Molly Corbett Broad, president of the American Council on Education. “Anything that smacks of price controls is of great concern on many levels, especially at a time when states are cutting their budgets — and if the effect of this is to limit tuition, what else would you call it but price controls?”

Price controls, huh? Where have we heard that before? Oh, yes – during the health care fight. Providers have fought to the death against anything that would tie their federal funding stream to any mechanism of accountability. If the government is giving you money, what you want is to keep collecting larger and larger checks with no strings attached. That arrangement should not be confused with the free market. Nor should it be confused with a generous welfare state, if the higher costs are merely providing a static level of service.

Obama’s college tuition reform campaign is in keeping with the central thrust of his whole domestic policy, which is to create mechanisms of accountability for things the federal government funds. Race to the Top encourages states to create performance metrics for primary education. He's likewise imposed accountability standards for Head Start. The Affordable Care Act reorients the health care industry to offer better value and not simply higher cost. His higher education plan extends the same approach to college tuition.

The connecting tissue between these reforms is that it tackles vital goods that lie in the gray area between the marketplace and the government. The exploding growth of health care has played a huge role in middle-class income stagnation — we’ve grown more productive, but exploding health care costs have simply eaten up what should have been higher wages. Schools have not done a better job of preparing kids for college, and those who are prepared have found the cost of college increasingly beyond reach. Obama’s domestic reform agenda is, therefore, focused on re-jiggering the incentive structure that has produced these exploding costs.

One inevitable result is that this sets up a lot of tough fights with providers who want to preserve the status quo. And they have an attractive-sounding argument they can sell to the left and the right alike. To the left, they can couch their pleading in the lingo of liberalism – that stingy Obama wants to cut off the gravy train, and it will mean stingier services. To the right, they can frame it as a defense of freedom against overbearing government regulation. Both those claims have enough of a whiff of plausibility to give them political appeal, especially to a fearful public in the grip of an economic crisis. But the re-vitalization of government ultimately requires tough reforms to arrest the exploding cost of health care and education.