Break Up The Elite College Seats Cartel

Or How Competition Returns to Elite Colleges

Politicians sometimes talk about breaking up companies, but it rarely happens. There are lots of reasons for this. Firstly, a lot of companies are really hard to break up. Sometimes this is just a natural fact about companies. But other times, break ups are made artificially harder. For example, Facebook (now Meta) deliberately made itself hard to break up as a defensive business strategy. Essentially, when political discourse about breaking up Big Tech started heating up, Facebook worked on integrating Messenger into Instagram and its other products. It tried to tie all the code together in a hard to untangle web so that regulators would get scared by the challenge and give up on untangling the company’s previously separate product lines.

Beyond business challenges inherent to breaking up firms, there are also legal challenges. Essentially, breaking up companies on antitrust grounds is nearly impossible because the courts have adopted a radically narrow standard of consumer harm. Further, courts hate to drastically intervene in markets. As a result, few antitrust cases ever result in breakups anymore. Because of the challenges inherent in breaking up firms, natural, artificial, and legal, breakups rarely happen. This is why when politicians talk about breakups, few voters really believe them.

But elite colleges are different. They’re quite easy to break up, and you don’t need to go through the courts. Essentially, the key component of elite colleges isn’t their campuses, nor is it their professors, nor is it even their qualified student bodies. There are plenty of campuses, professors, and qualified students to go around. The key component of elite colleges is their resources, also known as endowments. These resources enable elite colleges to maintain strong brands by being ranked higher than other schools. The endowments allow elite colleges to afford things that other schools can’t. Furthermore, the large endowments operate through flywheel effects, because the more resources a school has, the higher its ranking, and therefore the more resources it is likely to attract from donors and others.

To break up elite colleges therefore, all you need to do is break up the endowments. Siphoning resources from school endowments is actually quite easy. You don’t have to file an antitrust suit. Instead, all you need to do is pass legislation. Congress could literally just tax the hell out of large endowments. It could then take those resources and endow new colleges. For example, if you assessed a 100% tax on every dollar above $10 Billion dollars at every single elite college endowment, you could endow dozens of new elite colleges. With one piece of legislation you could grow the size of elite college enrollment by an order of magnitude (10X).

For example, Harvard’s endowment is worth something around $50 Billion. If this year, you assessed a tax on Harvard for $40 Billion, you would leave Harvard with a $10 Billion dollar endowment, and enough money to endow four new Harvard caliber schools with $10 Billion dollars each. These new endowments could then go and buy or build new campuses. Instead of just one Harvard, we would now have five. You could repeat the process with Yale, Stanford, Princeton, MIT, Penn, and others too. Dozens of new elite colleges would emerge. Heretofore dead capital stuffed in treasure chests at elite colleges would finally become productive again. This project could instantly reawaken a vigorous competition for students, professors, and new programs.

There will be plenty of critiques of such a policy as unsustainable from the status quo alarmists, and in future posts I’m happy to address such concerns. But having outlined a practical and possible pathway towards breakups, let me expand on why this is so important.

Essentially, for decades elite colleges have stagnated production of seats. As Peter Blair and Kent Smetters conclude in a recent study, “If elite colleges were simply maintaining student quality, their total enrollments would have doubled or tripled since just 1990.” It’s not that the coursework at elite colleges has gotten more difficult since 1990 either; rather, the common quip on Harvard’s campus is that the hardest thing about Harvard is getting in. So why the scarcity of seats? If elite colleges are so good at teaching, why don’t they want to teach more students?

The elite colleges argue that they keep small class sizes because not everyone can handle the work. This is obviously false. Anecdotally, I think its fairly clear that in the fierce competition for limited seats, plenty of students get denied at top schools who could handle the work there. Further, there’s a reason that we’ve seen a new class of schools emerge. If you randomly took students from what has increasingly been dubbed “Ivy-Plus”, “New Ivies”, or “Hidden Ivies”, and swapped them with students at other slightly higher ranked schools, the academic results would be negligibly different, if different at all.

So if elite schools haven’t stagnated seats because of difficulty, why have they done so? My argument is that elite colleges stagnated seats because they’re participants in a hub-and-spoke cartel where the US News coordinates the production of seats amongst the elite colleges that are obsessed with prestige. Some other scholars or economists might argue that elite seats have stagnated not because they collude but rather because keeping small class sizes allows them to protect their brand by only enrolling students already likely to succeed. If you believe my explanation, they’re under-providing because of a corrupted market. If you believe the brand defense explanation, they are under-providing seats because its easier to select those likely to succeed than it is to actually teach something useful. Whichever of these two arguments you prefer, it is undeniable that elite colleges aren’t enrolling enough students.

The impact of this seat scarcity has been higher prices at elite colleges, which has eventually trickled down into higher prices at other schools also. Scarcity of seats leads to systemically higher prices. As we obviously want systemically lower prices, we have to start thinking about reducing the scarcity of seats at elite colleges.

Some might say there are other ways to expand enrollment that aren’t so drastic as breakups, but these types of solutions are actually inferior. For example, taxing endowments annually at a higher rate if they don’t expand seats to incentivize larger class sizes has been tried, and it hasn’t really worked. But even if the annual tax rate was jacked up, and it did work, it still would be an inferior solution because while such a incentive-tax might increase enrollment, it wouldn’t solve for the underlying structural issues of which low-enrollment is but one symptom.

Essentially, we have low enrollment because elite colleges are hyper obsessed with prestige. The prestige obsession is currently resolved, at-least partially, through rankings that rarely change much year after year because nothing really happens in higher education that would make anyone rethink the brand hierarchy that has slowly ossified in the public mind. But if you begin breaking up old endowments and endowing new schools, suddenly there will be a reason for students and parents to turn away from the rankings to more carefully assess the new programs being created and the new competition taking place for the best thinkers and best students.

Further, break-ups is the best solution to the winner-takes-most market structure of elite education. Essentially, schools like Harvard, Stanford, and Yale have so much money that they will always be near or at the top of the prestige competition. As a result, they will always attract future donations from big billion dollar donors who want to associate themselves with some of that prestige. Therefore, elite endowments correspondingly grow more than others. The result is that resources agglomerate towards to top. This extra capital becomes dead capital as endowments get bigger and bigger but schools like Harvard do nothing with these extra resources because they see no reason to expand enrollment. Essentially, the surplus money goes into a piggy bank with no productive plans apart from stock market speculation. This might seem harsh so let me be more fair. Sometimes, endowments speculate in art markets also. Basically, this money is taken out of productive circulation. At least, this is what we’ve seen over the last few decades.

Also, this winner takes most market structure is bad for innovation because Harvard, Yale, and other top schools don’t have to do anything particularly special to attract new capital. They don’t have to innovate in teaching. They don’t have to prove particularly successful with new innovative research. They don’t have to do anything apart from harvest their old brand names for new money. This might be why we’ve seen so little innovation in teaching methods in higher education for centuries. Essentially, lecture halls, exams, and midterms are all centuries-old methods. Can nothing better be invented? Surely it can, but there is currently no reason to try.

When new elite colleges are endowed, and competition begins on roughly equal terms by these elite schools, we will see far more seats, far less charged in tuition, far more offered in financial aid, and far more innovation in teaching.

Frankly, if you think low prices and more options makes for a better system, you should support breakups. If you prefer high prices and less options, don’t subscribe to this Substack. It’s probably not for you.

Break-Up the College Cartel!