To Lower College Costs, Obama Should Focus on Supply and Demand

Robert G. Hansen is senior associate dean of the Tuck School of Business at Dartmouth University.

Last Friday, President Obama visited the University of Michigan and outlined a new plan aimed at limiting tuition increases at U.S. universities. There is no question that tuition increases have been high—as any parent or student paying the bills will attest. Earlier, in his State of the Union address, the president hinted at his approach: "Let me put colleges and universities on notice: If you can't stop tuition from going up, the funding you get from taxpayers will go down." The 4,000 Wolverines listening roared their approval.

This sounds like the pressure that the President and Secretary of Health and Human Services Kathleen Sebelius have been putting on health insurers. On January 12, for instance, Secretary Sebelius said in regard to one insurer's (Trustmark) rate increases, "It's time for Trustmark to immediately rescind the rates, issue refunds to consumers or publicly explain their refusal to do so."

[Read the U.S. News debate: Is a College Degree Still Worth It?]

In both of these cases, the administration would do better focusing on the underlying causes of price increases—the fundamentals of supply and demand.

A key reason for high rates of tuition increase, especially at private schools, is simply that the supply of freshman slots hasn't kept up with demand. Demand has been driven primarily by population increases and increases in enrollments by foreign students, but also by the increased realization that a college education is more valuable, and because of enhanced financial aid.

To give just a couple examples, undergraduate enrollment at Dartmouth College in the fall of 2001 was 4,118. This last fall it was 4,194, an increase of only 76 students. Meanwhile, Dartmouth received 22,385 applications for one of the 1,113 new freshman slots for the Class of 2015. In economics, we call that a shortage and even with non-profit institutions, such shortages lead to price increases.

The situation is the same at other excellent universities. Harvard had fewer undergraduates in 2010 (6,641) than in 2001 (6,660). Yale had 5,278 in 2000 and 5,279 in 2010. At Michigan, where Obama gave his speech, the situation is a little better: undergraduate enrollment at the Ann Arbor campus was 24,412 in Fall 2000 and 27,707 in Fall 2010, an 11 percent increase. Meanwhile, though, resident tuition at the Ann Arbor campus increased from $6,513 in 2000-01 to $11,837 in 2011-12, an 82 percent increase.

[Read: Today's Young Adults Suffering More Financially than Older Generations]

Coveted freshman slots at top universities are tickets to not only the middle class but to the kind of upward mobility that the United States needs to rediscover. They are indeed gateways, albeit increasingly narrow ones. Smart workers are what our economy needs in the long run to produce opportunities for all. We simply need to give more hard working youngsters the benefit of a truly great college education. This will require top universities to focus not just on improving the quality of the experience for a limited number but to also increase the number of students they admit—this is more important than limiting tuition increases. As endowments of the leading universities recover, politicians, and all who care about expanding opportunities should pressure boards and presidents to spend some of the money on opening up more spots in the class.

President Obama, the title of your speech at Michigan should have been, "President Coleman, Open These Doors Wider!"

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