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Scott Walker's Risky College Experiment

Peter R. Orszag is a Bloomberg View columnist. He is a vice chairman of investment banking at Lazard. He was President Barack Obama’s director of the Office of Management and Budget from 2009 to 2010 and the director of the Congressional Budget Office from 2007 to 2008.
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It's hard to believe that Governor Scott Walker's proposal to cut $300 million from the University of Wisconsin’s budget over the next two years would allow the school to maintain its quality. Walker would prohibit the university from raising tuition during that period, but instead give university officials more flexibility in managing contracting and construction projects.

The theory is that this flexibility could yield savings equal to at least 13 percent of what the state contributes to the university’s budget. Good luck with that.

Walker’s proposal provides a stark example of a broader trend that has been too little noticed: In the past three decades, many states have cut their appropriations for higher education, drastically eroding the quality of public universities.

As Tom Kane of Harvard and I have shown, states have tended to reduce higher education spending during economic downturns, but then have not restored the money during recoveries. The cumulative effect of this downward ratcheting has been enormous.

In 2000, states devoted 13 percent of their budgets to higher education. By 2014, that share had shrunk to less than 9.5 percent. If, over the past five years, allocations had kept pace with other types of state spending, then funding for public colleges and universities in 2014 would have been $16 billion more than it was. That's a loss of more than $1,000 per student enrolled in public colleges, in just the past five years -- and the trend has been going on for a few decades.

The myth has been that tuition hikes can offset these spending cutbacks. (In Wisconsin, Governor Walker isn't even trying for that.) In reality, they haven't. And it’s not surprising: Given that, 30 years ago, state governments contributed four times more than tuition to public higher education budgets, to offset a 20 percent reduction in state support, you’d have to raise tuition by 80 percent. State legislators are not willing to impose that kind of pain on students and their families.

Instead, the harm has been more subtle. In 1980, new associate professors at the University of Illinois at Urbana-Champaign and the University of Texas at Austin (both leading public universities) earned about as much as much as their counterparts at the University of Chicago and Rice University (leading private schools). By 2000, the public professors were earning about 15 percent less, and now it's 20 percent less.

In the late 1980s, eight public universities ranked in the top 25 nationally, according to the admittedly imperfect U.S. News and World Report assessment. The top one, the University of California at Berkeley, came in fifth. Today, Berkeley remains the top-ranked public university, but it has fallen to 20th place overall; two other public universities barely made the top 25.

If blunt spending cuts are not the answer, how can states better manage their higher education budgets? One unexpected strategy is to contain cost growth in health care. Professor Kane and I have shown that a big reason that state budgets have had to shift away from higher education has been increasing spending on health care. This is just one more reason why it’s imperative to double down on measures to improve value and constrain medical costs.

Another way that universities can address their budget problems is to vary students' tuition depending on their course of study.

But these can't be the only solutions. Governor Walker, however misguided his university-funding proposal, is absolutely right about the need to seek more efficiency in higher education. That said, it doesn't pay to pretend that flexibility on contracting and construction can do the trick.

Costs pressures in education have historically been driven by "Baumol’s disease": the rise in salaries for workers who aren't becoming any more productive. College lectures have historically required one professor per classroom of students, limiting the potential for increasing productivity. And yet professor salaries have had to keep pace, at least to some degree, with outside opportunities, where productivity gains have driven up wages. The result has been a cost squeeze.

The question many colleges have been asking is, can online learning defeat Baumol’s disease? After all, in a virtual classroom, one professor can teach a far larger number of students.

This question has been addressed in a new analysis by David Deming, Claudia Goldin and Larry Katz of Harvard University and Noam Yuchtman of Berkeley, and the answer is: maybe. In 2013, more than a quarter of U.S. undergraduates took at least one course online, the researchers found, and colleges with more online students charged lower prices. Tuition at Penn State World Campus (whose students are almost all online), for example, was more than 20 percent lower than at the flagship Penn State campus. The academics are quick to point out that the evidence on the quality of online learning relative to traditional methods is mixed, and that we don’t yet know how this will play out. Nonetheless, they cautiously conclude that advances in online learning technology might help lower the cost of higher education.

This can't happen fast enough to save the University of Wisconsin, however, if Governor Walker’s proposals are carried out. The flagship campus at Madison was ranked 47th nationally this year by U.S. News. Anyone care to bet on where it will be in the 2017 rankings?

(Corrects second paragraph to specify that a $300 million cut amounts to 13 percent of state support for the university budget, in an article published Feb. 10.)

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Peter R. Orszag at porszag3@bloomberg.net

To contact the editor on this story:
Mary Duenwald at mduenwald@bloomberg.net