From the October 2012 issue of Research Magazine • Subscribe!

America’s Edge

Higher education remains a U.S. competitive advantage.

If the 2012 election campaign has plunged you into depression and convinced you that this country is going down the drain, an antidote could be a tour of a college or university campus. Wherever you may live, you’ll probably find a handful within a driving distance from your home. 

The American higher education system is unique. Nothing on the same scale or quality exists elsewhere in the world, and it provides an enormous competitive advantage for U.S. businesses and the military. American universities also award degrees to foreign students, training Indian engineers, European business executives, Chinese scientists and Jamaican athletes. Far from eroding its competitive edge, this openness only solidifies America’s leadership position, helping spread its system of values around the world. 

Leading Industry

American universities are the best in the world. There are some 2,500 accredited four-year colleges and universities, awarding over a million and a half bachelor’s degrees each year. The number of master’s degrees, according to the Council of Graduate Schools, stands around half a million and the number of doctorates exceeds 50,000 annually.

According to Times University Rankings, a U.K. firm, half of the world’s 100 best colleges and universities, and 30 of the top 50, are located in the U.S. The United States dominates higher education well in excess of its relative weight in the global economy, since it produces only around a quarter of the world’s GDP. 

Nor is it the case that the American educational system is heavily geared toward the opulent, or that expensive private colleges provide superior education. In the same ranking, 23 of the world’s best institutions of higher learning are U.S. state schools, offering affordable education to in-state students. The average cost of tuition, room and board at state universities is less than half the average of Ivy League schools. For example, 13 graduates of the University of Wisconsin have won the Nobel Prize, while 12 Nobel laureates teach at the University of Michigan.

Thanks to state schools, the U.S. remains a land of opportunity: Some 70,000 students are enrolled at the University of Arizona, while in the large state universities of Minnesota, Texas, Florida and Ohio enrollment exceeds 50,000. 

Silicon Genesis

Universities, and the pioneering research they do, are the foundation of modern entrepreneurial capitalism. Silicon Valley came into existence half a century ago around Stanford University, when Frederick Terman, the provost at a previously sleepy private school, expanded its engineering and science departments with an eye to conducting research that could have commercial applications. A small community of venture capitalists then coalesced around Stanford, starting with William Henry Draper III, who founded the first West Coast venture fund in 1959. 

The early venture funds were behind some of the most successful modern businesses that became household names and transformed the world while making investors trillions of dollars. Even more important, they created a model for entrepreneurial capitalism that has been replicated around dozens of colleges and universities, in Austin, outside Boston, in the Raleigh-Durham area and elsewhere. Specialized industry spinoffs transformed San Diego into a global biotech hub and helped revitalize moribund rust belt cities. 

Over the past three decades, American college degrees have been in high demand. The number of international students studying in the U.S. has grown dramatically in recent years, reaching an all time high of nearly 700,000 in the 2011-12 academic year. The growth of foreign enrollment is indicative, since international students typically pay full tuition, either from their own pockets or getting scholarships from their governments. In any case, more than domestic enrollment, it provides a measure of the supply/demand relationship.

Since the early 1980s, the cost of an Ivy League education has gone up twice as fast as inflation, on average, and it now costs over $50,000 a year. There has been a tendency to present tuition growth as a problem, but in large measure rising tuitions, increased enrollment and an influx of students from abroad reflect demand for U.S. degrees. And, while many students emerge from college saddled with debt, that also represents a rational calculation: An academic and professional degree greatly increases earning power and quality of life.  

Problems Looming

American universities had a great run over the past 30 years or so, but the situation is becoming more uncertain, reflecting a difficult economic environment. Middle class incomes have not kept up with rising cost of education. The cost of a year at a private college doubled in inflation-adjusted terms since 1982, while real incomes of the middle fifth of U.S. households increased by only around 10%. Even the next highest fifth of households, representing the solid middle class, saw real incomes rise close to 20%. Worse, average incomes and net worth were hit by the 2008-09 recession and the subsequent anemic, jobless economic recovery. Even as a bleak job market for recent graduates has encouraged young people to stay in school longer, staying in school has become less affordable.

College endowments, on which schools often depend, lost money in the financial crisis and, even though they have been largely rebuilt, returns on investment have remained poor. The Dow Jones Industrial Average has now been flat for more than a decade, and in inflation-adjusted terms it is down by about a third from its 2000 peak. Interest rates and risk-adjusted bond yields are unprecedentedly low. 

Even more worrisome for colleges are cuts in public spending, which are already impacting state budgets and will inevitably hit the federal government. The state university system in California, the nation’s best, has been facing severe cuts in state support for years. In 1990, the state paid for nearly 80% of the cost of educating an in-state student in the state university system. Today, it is paying for less than 40%. Budget cuts are hitting most state universities. They had to raise tuition by 8.3% in the 2011-12 academic year, even faster than private schools.

The fiscal cliff facing the federal government at the start of 2013 will hit colleges and universities even harder. Educational grants, subsidies and student loan programs are very likely to be curtailed, and even defense and home security research, an important source of revenues for schools, may fall under the knife. 

Age of the Superrich

While the incomes of the middle class have been mostly flat in inflation-adjusted terms, the top 5% of U.S. households have done extremely well over the past three decades. Their incomes have grown by nearly 60% after accounting for inflation. Many people who write about education complain about problems a poorer middle class is causing for higher education. Often overlooked are the benefits colleges derive from the generosity of the new class of highly successful entrepreneurs and the financiers who back their ideas.

Sums involved are extraordinary. The Stanford Challenge, a five-year fundraising campaign concluded at the end of 2011, which straddled the financial crisis, raised over $6.2 billion. Stanford’s endowment stands at nearly $17 billion, similar to that of Princeton. After growing $4.4 billion in the latest fiscal year, the Harvard endowment has reached $32 billion. It stood at $4.7 billion at end-1990.

And then there are the gifts paying directly for the construction of buildings, the purchase of equipment and other investment. New York Mayor Mike Bloomberg, founder of a media company, over the years donated to his alma mater Johns Hopkins a total of $800 million. At Cornell, a new computer technology building is nearly completed, paid for with a $25 million initial grant from Bill and Melinda Gates. A Cornell alumnus has given a gift of $360 million for the establishment of a new engineering and technology school in New York, modeled on the highly successful research departments at Stanford. The purpose is to create a new Silicon Valley in and around the New York metropolitan area.

The funds colleges now collect from their alumni are well in excess of what government largesse can provide in this era of public sector contraction. That’s a key U.S. advantage over many foreign countries, where the culture of private giving is far weaker. Moreover, with endowments returning to the elevated levels seen before 2008, universities can afford needs-blind admission policies, taking students strictly on merit.  

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