Inoculating Against Inequality in Higher-Ed

The economist William Baumol died in early May 2017, without much fanfare. He was brilliant, provocative, and an almost Nobel laureate. But his work nibbled on the academic-elite hands that fed him, which may explain the lack of ado.

Published on World Positive

In his book The Cost Disease, he described the way in which technology bifurcates society, observing that rapid productivity growth in the modern economy tends to settle unevenly on various industries, blanketing some in progressive cost-efficiency, and leaving others stagnant.

“Over time, the goods and services supplied by the stagnant sector will grow increasingly unaffordable relative to those supplied by the progressive sector. The rapidly increasing cost of a hospital stay and rising college tuition fees are prime examples…”

Baumol called his concept the “cost disease”, something akin to malaria, borne of the vector technology, and spread through its labor-saving productivity gains. He was keen to note the malady’s way of making things — important things — remarkably unaffordable and politically contentious for average citizens.

The most self-evident threat technology poses to the poor is its ability to unceremoniously replace them at work. As HBR recently put it, “The tech world as a whole has… contributed to income inequality by enabling automation of what was once human work.”

In industries like higher-ed, there is a clear risk of relegating the poor to low-touch productivity plays, which might not be bad per se, except for the part about perennially separating the poor from the rich.

Why does this keep happening? How might we stop it? A circuitous career through higher-ed — via Wall Street, university administration, grantmaking, and design — has given me time to think about this.

My experience in higher-ed runs the gamut.

I stumbled into it fifteen years ago by way of JPMorgan’s muni-bond department, cranking out bond sizings from the 48th floor of a tower on Park Avenue. By the end of two years, I was scooped up by one of the clients — The University of Texas System — and was soon running numbers from a low-rise admin building in Austin, dealing with issues like textbook affordability, credit transferability, and ultimately student access and affordability. From there I was tapped as chief-of-staff to the freshly appointed CFO of the University of California system, diving into everything from the UC’s first foray into online education to its Commission on the Future, a grand but strained attempt to reimagine a 143-year-old business model.

After the UC efforts flamed out (in a sunny, California way I might add), I somehow gravitated to the idea that grant money might be the answer to higher-ed’s problems and joined the Gates Foundation’s postsecondary team. I was soon writing white papers about the cost structure of higher-ed from a low-rise glass compound in Seattle. It turned out grant money was not the answer. So I called up IDEO, which conveniently had an immediate need: a client hungry for a solution that would help usher low-income, rural teenagers into college then onward into steady vocational careers. I was soon designing nonprofit educational business models on post-its from a pier in San Francisco.

I still design in the education space today, for IDEO and others. My winding path has given me a peek at the industry from nearly every seat in the house. My favorite projects over the last fifteen years have all had something to do with solving Baumol’s cost disease.

But I’ve also concluded that I’m done asking why higher-ed is resistant to productivity gains, at least for a time. The answers are both obvious and complex, low-hanging and entrenched, and anyway I’m not sure their answering will do much. I’m ready to think about something else.

But what?

I’ve come to wonder whether Baumol might’ve missed a branding opportunity. Is it so much a cost disease as it is a price disease? Sure, most pricing is cost-plus, and sure, the cost to produce various goods is cleaving along labor-productivity lines. But it’s price that average citizens ultimately experience. As prices climb, societal fences are erected. What if price went away?

This is not unheard of. Energy companies have been writing performance contracts for eons. I remember one at UT El Paso where the energy firm basically said, “Hey, we’ll spend $14 million of our own money to renovate your building. If you start saving money on energy bills, then you can pay us back from the savings. If not, well…that’s our problem.”

You also see this in the venture capital world. Accelerators, incubators, and VC funds invest upfront in exchange for a cut of the action once economic success is attained. They basically say to startups, “Hey, we’ll invest millions — and bring our experience and connections to bear where we can — to help you succeed. If you start making money one day, then we’ll take our cut and move on. If not, well… that’s our problem.”

Could colleges say something similar to students?

They can, and at least one or two of them do — through Income Share Agreements (ISAs), which allow students to get their schooling without paying any kind of price. Instead, they agree to pay back a percentage of their future income for a set period of time.

Purdue’s “Back a Boiler” program has seen a lot of press lately in part because it’s the only traditional institution in the ISA game right now, which by itself is fascinating. But what’s actually more interesting is the fact that Purdue is issuing these ISAs directly to students rather than letting banks or other private investors get in the middle.

Why is this so interesting? Because it’s an economic-playing-field leveler — notice no price fence when there’s no price — that incidentally also has the potential to solve Baumol’s cost disease.

How so?

If you’re Purdue in this moment — if you just cut a check from your endowment, and now you’re holding a bunch of contracts that give you the right to receive some slice of students’ future income — you probably want to get those students into good jobs. And over time, you probably want to do it more cost-effectively so that the next endowment check is a little smaller for a similar set of contracts. And a little smaller, and a little smaller. Baumol might’ve called such a pattern progressive productivity gains.

But traditional higher-ed has dropped bigger balls before. As observers of the field have rightly noted, the cost disease might owe its severity and endurance to the spigot of morphine that is federal financial aid, also known as Title IV funding. After all, it’s tough to put your heart into productivity gains when any crime of cost control can readily be funded. That’s why Purdue’s ISA approach gets really exciting when paired with Title IV temperance.

But anyone waiting for accredited colleges to kick the Title IV habit is crazy as a shithouse rat, which describes me circa 2015 when I earnestly thought that I and the rest of my IDEO team could convince the acquirers of Corinthian Colleges, Inc. to do just that. It was a wonderful lesson learned because it taught me that I needed to open my aperture wider than traditional higher-ed, which made me receptive and intrigued when I was introduced to Shereef Bishay, founder of Learners Guild, about a year later.

Learners Guild is a 10-month, in-person, on-ground college alternative for aspiring coders from the guy who co-founded Dev Bootcamp. But because it’s not a traditional college, it doesn’t receive Title IV funding, so it’s funded with ISAs instead. And because it’s not a traditional college, it doesn’t have an endowment, so it raised a pot of money from socially-minded VCs like Kapor, Lumina, and Obvious Ventures instead.

Like Purdue, Learners Guild issues the ISAs, rather than letting banks get in the middle, which means that, like Purdue, Learners Guild has progressive productivity gains baked into its model. But unlike Purdue, the entire organization runs on this approach, which means Learners Guild is not susceptible to the same irritations and inflammations as Purdue. Learners Guild is inoculated from Baumol’s cost disease.

Think about that.

Did we just discover a potential vaccine?

Yes. I believe so.