Helping the Rich Get Richer

Last year Caroline Hoxby published an NBER working paper on college admissions in which she argued that elite colleges have become more selective over the last 50 years because “the elasticity of a student’s preference for a college with respect to its proximity to his home has fallen substantially over time and there has been a corresponding increase in the elasticity of his preference for a college with respect to its resources and peers.” That makes sense: travel, communication, and information are all much cheaper than they were in the 1960s.

But Hoxby also notes that the measure commonly used to bolster the idea of short-term tightening in admissions selectivity–the percent of applicants who are admitted at individual institutions–is basically worthless, because it includes an unknown but presumably large number of applicants who aren’t serious candidates. If someone with 2.5 GPA and a 950 SAT applies to Yale it drives down Yale’s admit rate, but it doesn’t make it any harder to get into Yale.

If that’s the case, why does it seem like students are increasingly anxious about getting into elite colleges?  A chart from Hoxby’s article offers one possible possible answer:

The chart shows the change over time  in institutional spending on student-related activities (which excludes research and service) in constant 2007 dollars. The top line represents institutions that were in the 99th percentile of admissions selectivity in 1962. The second line represent those in the 96th – 99th percentiles. The third line is the 91st to 95th. The other lines represent selectivity deciles, in descending order.

The chart shows a massive winner-takes-all effect in higher education. At 90 percent of colleges and universities, spending has grown steadily but unspectacularly over time. The top one percent, by contrast, have seen a huge run-up in wealth, much of it in the last 15 years.

So perhaps heightened admissions anxiety is more rational than it seems. The odds of getting the prize may not have shifted much in recent years. But the value of the prize itself has grown tremendously.

This also raises the question of whether there’s any upper bound on the height of the top one percent line at which point society will limit expensive tax subsidies for elite colleges. Consider the common case of a wealthy alumnus of a Top One Percent University making a large tax-deductible donation to his alma mater around the same time that his son or daughter is getting ready to apply to college.

First the taxpayer subsidizes the donation itself to the tune of thirty-some percent, with the money being split between the donor in the form of a reduced tax liability and the institution in the form of a larger donation. This despite the fact that everyone understands the donation is hardly “charitable” but rather an exchange of money for services, the service being an increased likelihood of the alumnus’s offspring being accepted for admission.

The university deposits the check in its endowment fund, which doesn’t pay taxes on capital gains. It then uses those taxpayer-subsidized investment profits for a number of possible purposes, such as paying the salaries professors with household incomes in the top five percent nationally, or buildings for students who disproportionately come from households in the top one percent nationally. Sure, some if goes to scholarships for low-income students–the handful of low-income students who are admitted, that is. But this is overwhelmingly a case of multiple expensive government tax subsidies for exchanges of value between very wealthy individuals and very wealthy institutions.

Meanwhile, community colleges are turning away tens of thousands of displaced workers and first-generation college students for lack of funds and staff at Bottom 90 Percent Colleges go years without getting a raise. How is this a smart use of scarce public resources?