The Profit Myth

The Cato Institute has a new paper out essentially accusing all universities of being for-profit and concluding that public policy should therefore, “encourage competi¬tion. Regulations should not favor nonprofits over for-profits.”

According to the paper, by Oklahoma State University’s Vance Fried:

Undergraduate education is a highly profit¬able business for nonprofit colleges and universi¬ties. They do not show profits on their books, but instead take their profits in the form of spending on some combination of research, graduate edu¬cation, low-demand majors, low faculty teaching loads, excess compensation, and featherbedding. The industry’s high profits come at the expense of students and taxpayer.

Oversight of federal student-assistance programs is laudable, but should not be limited to for-profit colleges. Federal aid to nonprofit colleges should also be a matter of great concern. Indeed, tax¬payers’ annual commitment to nonprofit schools is much higher than it is to for-profit institutions.

This is an interesting point, and kudus for Fried for trying to figure out a way to really reduce the cost of college, but this very long-term thinking (reduce the cost of college by massive deregulation) is very theoretical and has never been tried anywhere. In fact, the United States has far more colleges than anywhere else on earth and they’re still the most expensive. Why is that?

Furthermore, this “nonprofit colleges make some money too” point this isn’t really much of a surprise. Yes, if an institution’s make money and then reinvests that money into the organization, in the form of infrastructure, faculty benefits, etc. that might be a waste of money, but it’s hard to really demonstrate it. Spending money on research, graduate education, low-demand majors, low faculty teaching loads, and generous compensation is just what research universities do. That’s not wasteful by definition. Indeed, those things benefit students, though admittedly it’s more indirect than actual undergraduate teaching.

Universities might cost too much, but then just explain why they cost too much. Every organization has overhead. Profit is money paid out to the owners. The money colleges have in excess of the “true” cost of educating students, which Fried assumed at $8,000 a year, for some reason, is reinvested in the institution. That isn’t profit; reinvesting money back into the institution is the definition of nonprofit behavior.

That’s fine if Cato thinks universities are overpriced (they certainly cost more than many Americans can afford) but find a real way to argue that. This is just stretching profit to the point where the word has no meaning.

Daniel Luzer

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer