According to CNBC (see College Costs Keep Soaring):

The cost of attending a four-year nonprofit private college increased 4.3 percent in the 2009-2010 academic year compared to a year ago, bringing the average annual price to $35,636, according to an educational trade group.

Growing at an even greater rate was the cost of going to a public college. Public in-state college costs rose 5.9 percent, bringing the average cost to $15,213.

MY COMMENT: The cost of tuition at public colleges is currently increasing at a faster rate than at private colleges because public schools are beholden to battered state budgets. Nevertheless, they still represent a significant value (assuming there is little difference in the underlying quality of education across the two).

We certainly can debate the quality/price tradeoff between public and private universities, and I think families would be well served to carefully consider not just the sticker price, but the quality of the education along with the career services that students are likely to receive in exchange for that price. As I mentioned in a previous post (see The Future of U.S. Higher Education):

I agree that the cost of higher education might price some out of the market entirely. However, …the cost of higher education, coupled with what I view as a fundamental shift in consumer behavior as a result of the recession, will more likely usher in a shift in consumption versus an end to consumption.

Gone are the days of taking on exorbitant amounts of debt to send children to private institutions with tuition (not including living expenses) of $40,000 per year, or more. Instead, families will increasingly opt  for public universities with tuition in the $10,000-$15,000 range.

For example, families in Texas might start asking tough questions like, “Is the difference in the price between Harvard and the University of Texas really worth the $120,000 difference?” I am not willing to argue that real differences between being educated at a private university and a public university do not exist; however, I am not sure whether those “benefits” (to the extent that they do, in fact, exist) justify the additional premium in all cases. And those considerations are likely to impact the decisions of consumers.

In addition, as I mentioned in another post (see More on University Enrollment and Affordability, quote from a WSJ article):

Facing shrunken savings and borrowing options, parents and students are making some tough trade-offs in choosing and paying for college, suggesting some shifting attitudes toward higher education may endure beyond the recession.

For me, this is where the action lies. It will be interesting to see whether the financial crisis ushers in a structural shift in consumer attitudes and behavior that ultimately puts a cap on the rate of tuition increases. My guess would be yes.

From Bloomberg (ht Aviad): Princeton and Harvard Raise Prices as Economy Burns

Life on top means not having to lower your prices.

…the cost of a year as an undergraduate at Harvard and Princeton has risen through boom and bust. Tuition and fees at Harvard jumped 67.8 percent over the decade; at Princeton, they increased 43.4 percent.

That hasn’t dented demand. Freshman applications at Harvard…rose by 60.9 percent over the last 10 years. At Princeton…demand rose by 47.7 percent.

“It would appear that an undergraduate degree at a place like Princeton is actually a Giffen good…” [said Jay Diamond]

Well, not exactly. By definition, a Giffen good is one for which consumption rises with rising prices. That’s not really characteristic of the market for a university education. The reality is that the demand for spots at elite universities has exceeded the supply by various multiples for years. Moreover, foreign demand for elite US colleges and universities has exploded over the past few decades. If anything then, the stylized facts presented in the Bloomberg article simply suggest that tuitions have been set at below market-clearing prices. For this reason, elite private universities still enjoy a fair amount of pricing power.

But increasing tuition through the recession is not unique to Harvard and Princeton (see Why College Costs Rise, Even through a Recession).

If you have paid a college tuition bill recently, perhaps the sticker shock has abated and your children have been good enough to friend you on Facebook so you can see what they are doing on your dime.

What probably still lingers, however, is the desire to ask some pointed questions of the people who are doing the educating. Where does all that money go? And why can’t the price tag fall for a change?

Earlier this year, the National Association of Independent Colleges and Universities announced with some pride that the average increase in tuition and fees at private institutions this school year would be the smallest in 37 years — 4.3 percent, just a little higher than inflation.

Is this where we are supposed to stand up and cheer?

As I have argued on this blog, the market for a college education is, without a doubt, subject to the forces of supply and demand (see Enrollment Drops at Private Colleges and More on University Enrollment and Affordability). It’s just that there are anywhere from three to five times as many applicants at the “traditionally” elite universities as there are spots. Because elite private universities are oversubscribed several-fold, they are less likely to feel the impact of the recession on the demand side (although they have certainly felt the haircuts to their endowments).

For private universities without the strong brand recognition (or the endowments) of the more storied programs, the reality is likely to be quite a bit different. Private universities without well-established brand names will be forced to make a stronger case for their value proposition vis-a-vis the public alternative (see The Future of US Higher Education).

I’ll be back from vacation next week, hopefully rested and ready to return to a more regular regimen of posting. In the meantime, I thought I’d share an article that caught my attention during a week otherwise occupied by beach reading, …and playing with my kids.

For those of you who follow this blog, you know that I have an interest in the job market for MBA graduates. As I have argued in the past, as difficult as the job market has been for MBA graduates from the class of 2009, it is my expectation that that the job market will, unfortunately, turn out to be worse for graduates from the class of 2010 (see Visit to the FT and Crisis for MBA Grads). I was therefore not surprised to come across an article in yesterday’s New York Times  detailing the difficulty that Law students have been having on this year’s market (see Downturn Dims Prospects).

This fall, law students are competing for half as many openings at big firms as they were last year in what is shaping up to be the most wrenching job search season in over 50 years.

New York University, Georgetown, Northwestern and other top universities confirm that interviews are down by a third to a half compared with a year ago, while lower-ranked schools are suffering more. What is more, when interviews finish in a few weeks, even fewer offers will be extended, said Howard L. Ellin, the chairman of global hiring at Skadden, Arps, because many firms are interviewing students for slots they may not fill.

We were already in recession at this time last year. So if interviews are down 33-50% from last year’s already depressed level, how bad must the market be this year?? Wow!

Although the New York Times article is specific to the market for attorneys, the job market for Law School grads shares many similarities with the market for MBA grads. Interviews start a bit earlier for law graduates than business graduates; but as with law, the lion’s share of the MBA interview activity takes place in the Fall.

And even if the broader economy is improving (and I am not quite convinced improvement is the word to characterize it, stabilizing is probably more accurate), it will be quite some time before the market for MBA grads picks back up, as many companies do not foresee robust growth. So not only are graduates competing for fewer overall slots, but they are also competing with the unemployed and under-employed (individuals who are working part-time for economic reasons, and similarly-credentialed graduates who took whatever jobs they could find).

So unfortunately, no green shoots for grads thus far…

A hearty hat tip to Muir for sending this along. Hysterical! Enjoy…

If for whatever reason you cannot view the embedded video, you can see the video by clicking through to MBA Ethics Oath.

After my recent posts on university enrollments and affordability (see Enrollment Drops at Private Colleges and The Future of U.S. Higher Education), I received an email from Marc Scheer, author of No Sucker Left Behind: Avoiding the Great College Ripoff. On his site I found a link to a recent Wall Street Journal article (see Weighing Price and Value when Picking a College) that describes some of the very same effects that I anticipated in my earlier posts.

According to the Wall Street Journal:

Facing shrunken savings and borrowing options, parents and students are making some tough trade-offs in choosing and paying for college, suggesting some shifting attitudes toward higher education may endure beyond the recession.

Old dreams of adult children earning degrees from elite, door-opening colleges or “legacy” schools attended by relatives are falling away in some families, in favor of a new pragmatism. Other parents and students are doing a tougher cost-benefit analysis of the true value of a pricey undergraduate degree.

…Joseph Losco, an expert on the history of education, calls “one of the strange things” about the economics of higher education: “Universities and colleges don’t compete on price.” In fact, some college administrators fear lowering their sticker price will hurt their image…

Consumers have been complicit, largely because…“the baby-boomer notion that parents should give it all up for the kids.” In a May 2008 survey of 720 parents of college students by Gallup and Sallie Mae, a student-loan company, 46% said they had never, at any point, ruled out any colleges for their kids based on costs.

But now, “families are much more price-conscious and value-conscious,” Dr. Losco says. A soon-to-be-released Sallie Mae-Gallup study of 1,600 college students and their parents, conducted in March and April, says parents are increasingly anxious about tuition—and students are more skeptical about the value of a degree, compared with the survey from a year earlier.

Such thinking bucks the cultural view that an elite college degree is “the gold standard for both parents and students … validating their worth in society,” Dr. Losco says. Now, more “parents are saying, ‘I don’t have the money to get you where you want to go,’ ” he says.

Even when the economy picks up, some of this new price-consciousness is likely to endure. The engines that have enabled college costs to soar—easy credit, home-equity loans and growth in savings—have stalled. Total college costs are already up 67% in the past decade at private colleges and 84% at public four-year universities, based on College Board data, and graduates’ wages haven’t kept pace.

The percentage of students from middle-income households who are attending state schools is rising, and more lower-income students are enrolling at community colleges, the study shows. “We would expect to see an even greater shift” next year, a Sallie Mae spokeswoman says.

Interesting stuff! Check out the full article.

Given my interest in the history and development of universities and colleges, I found today’s article about private college enrollments interesting, though not entirely unexpected (see Enrollment to Drop at a Third of Private Colleges). According to Bloomberg:

Almost a third of U.S. private colleges expect freshman enrollment to decline in the 2009-2010 school year as families struggle to pay bills and hold down debt, according to a survey.

Fourteen percent of schools surveyed from May 18 to June 19 predicted new undergraduate student enrollment would fall more than 5 percent…Forty-four percent of the schools said tuition deposits for the semester that starts in September declined from a year ago.

…students are struggling to afford college because of the recession…

“This is the most nail-biting season in memory for the admissions staff of some of these places,” Tony Pals, a spokesman for the association [National Association for Independent Colleges and Universities], said in an interview.

These data are consistent with the sentiment that I expressed in December of 2008 (see The Future of U.S. Higher Education). At the time, I suggested that there might be a fundamental structural shift in demand for private university education.

…the cost of higher education, coupled with what I view as a fundamental shift in consumer behavior as a result of the recession, will…usher in a shift in consumption…Gone are the days of taking on exorbitant amounts of debt to send children to private institutions with tuition (not including living expenses) of $40,000 per year, or more. Instead, families will increasingly opt  for public universities with tuition in the $10,000-$15,000 range.

For example, families in Texas might start asking tough questions like, “Is the difference in the price between Harvard and the University of Texas really worth the $120,000 difference?” I am not willing to argue that real differences between being educated at a private university and a public university do not exist; however, I am not sure whether those “benefits” (to the extent that they do, in fact, exist) justify the additional premium in all cases. And those considerations are likely to impact the decisions of consumers.

If frugality represents a fundamental structural shift in consumer mentality and behavior (as I believe it does), individual universities (private universities especially) would be well served to carefully consider what that might mean for their institution in the coming years, and prepare accordingly.

My schedule has kept me on the road for the better part of the past few weeks. I first traveled to Los Angeles, then San Diego, and then on to Cape Cod (with a brief one-night stopover in New York). The bookends of the trip (LA and Cape Cod) were largely recreational. The San Diego leg was strictly business, where I attended the Annual Meeting of the Academy of International Business (AIB).

The AIB meetings were fun, as usual. I got to participate in Academy business, discuss research with colleagues, catch up with friends, and attend some parties (which, not unexpectedly, were subdued compared with years past). In LA and Cape Cod, I spent my time largely with family and friends.

Last summer, while in Cape Cod, I made the following observations (see Musings Après Vacation):

1. “For Sale” signs on homes were abundant
2. There was, uncharacteristically, little traffic on the drive between New York City and Cape Cod
3. Our usual haunts (e.g., Cooke’s, Four Seas) seemed unusually quiet

This year I’ve noticed that “For Sale” signs have stopped growing like weeds. Although there continue to be more homes for sale than I am accustomed to seeing in a usual summer, there are certainly fewer than last year. This stylized fact seems to reflect an improvement in home inventory conditions; however, I am hesitant to characterize it as such for certain, as it could simply be a reflection of a substantial “shadow inventory” of homes (see Calculated Risk for information on shadow inventory and huge shadow inventory).

One thing that I have noticed much more of this summer in and around Cape Cod is a huge increase in “For Sale” and “For Rent” signs for commercial real estate. Many buildings have been abandoned. Many are available for sale/lease. There is an incredible amount of vacancy at the local strip malls, and even at the Cape Cod Mall. This is consistent with commercial real estate as the next shoe to drop in this cycle (see Commercial Real Estate Time Bomb).

Note: I travel to LA quite frequently too, and the trends struck me as similar to those that I described for Cape Cod. I noticed fewer homes for sale on this trip than on previous (the same caveat regarding “shadow inventory” applies). Likewise, there has been a noticeable increase in signs advertising the sale/lease of commercial real estate.

Insofar as getting in and out of NYC on summer weekends (and in and out of Cape Cod), the highways seem slightly more trafficked than last summer. But again, the crowds are far from normal. Ditto for foot traffic at our local haunts. Although business seems a bit better than last year, it is way off from what I would characterize as normal, healthy summer activity.

In concluding last year’s post, I wrote:

Now I realize that the anecdotes that I’ve shared simply represent one person’s observations (an n of 1 as we like to say in the business), but if my experiences thus far this summer are any indication, I think we’re in for a long and difficult slog. I have never seen anything quite like it…

Not much has changed from last year. Economic activity continues at depressed levels. The best I can say is that we may have found a floor. The question remains: Where do we go from here??

As I have suggested in previous posts, the immediate growth engine for the U.S. economy is unclear. I see some potential in alternative energy, nano-technology, and biotech (specifically, genome mapping and its associated applications). However, I am skeptical that those industries will grow fast enough to quickly bring about robust growth. Although the U.S. economy will likely return to growth in 2010, there is a decent probability that the recovery will be a weak one.

Oh yeah, …and I’ll be back from vacation next week.

I have a recent Op Ed in the International Business Times discussing Business Schools and the Financial Crisis. In the article (see Knowing What and How, Without Wondering Why) I address what I see as some curricular challenges that Business Schools will face in the wake of the crisis.

While I believe that the criticisms of Business Schools are largely overdone, I argued that we need to encourage students to think more deeply about the concepts, tools, and formulae we present in class, rather than simply seek to apply them. Moreover, I have advocated for a curricular approach that favors analytical skills over simple technical skills. I wrote:

Business schools have been criticized for espousing and promulgating models of individual behavior based on economic self-interest. They have been blamed for failing to impart ethics; emphasizing shareholder profit maximization above all else; encouraging short-term profitability at the expense of long-term organizational health; and for helping design and create the exotic financial instruments that helped get us into this mess.

I agree that the economic system is structured in a way that sometimes provides management an incentive to enrich themselves at the expense of shareholders, or shareholders at the expense of other stakeholders. However, I believe that the criticism of business schools as encouraging individuals to act in a self-interested, even opportunistic, manner is largely overblown. Our teaching in that respect is less normative than descriptive. We seek to describe human behavior (which tends toward self-interest) rather than encourage our students to act in such a fashion. As evidence, look no further than the financial crises that preceded the current one. Many of those occurred before the advent of business schools, yet share some of the same self-interested human behaviors at their core.

This does not mean that business schools are beyond reproach. It is true that the development of some financial derivative products have been based on models that have come out of business schools. Moreover, although we have long understood the consequences of self-interested behavior, we have not been very effective in creating tools to keep such behavior in check.

However, our greatest challenge as an enterprise comes not from the development of complex models, but in the manner in we teach students to use them. That is, we are quite good at teaching students what to do and how to do it. However, we do not prepare them well enough to ask tough questions about why we are doing it in the first place, and why it matters in the grand scheme of things.

We produce skilled and proficient technicians who know how to calculate the net present value of a revenue stream. We teach students how to accurately value assets and price risk given existing formulae. We explain how firms can streamline operations in an effort to create optimal organizational structures.

Yet for all those positive contributions, we do a poor job when it comes to questioning the validity of the assumptions underlying the pricing models that we teach, describing the boundary conditions of such models, and integrating across disciplinary boundaries to create a greater understanding (and appreciation) for how individual parts interrelate to affect the whole.

To read the Op Ed in its entirety, please visit Knowing What and How, Without Wondering Why.

Although I wrote the piece with Business Schools in mind, I do not think that it is purely a Business School phenomenon. I think the issue generalizes fairly well to a broad class of managerial failures that ocurred during the crisis. That is, managers perfected execution, but failed when it came to analysis. It reminds me of the now infamous Chuck Prince (then CEO of Citigroup) quote, “As long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

Too bad most kept dancing, without wondering whether dancing was the right thing to be doing.

In previous posts (see Chrysler Still Needs a Miracle or Chrysler/Fiat Update) I suggested that the Fiat/Chrysler deal looked increasingly like a longshot. Fiat was asking for deep concessions from both the auto union and Chrysler’s creditors, and it seemed unlikely that Fiat was going to receive those concessions.

But over the past few days, the Obama Administration, the auto union, and Chrysler’s creditors seemed to have come to some sort of understanding (see Treasury Close to Deal with Chrysler Creditors, Chrysler Reaches Agreement with UAW, and UAW Gets 55%).

Hallelujah??

Maybe, but not so fast. Several issues remain:

1. Creditors must agree to the debt cancellation.

According to the NY Times:

Chrysler has about $6.9 billion in secured debt owned by big banks like Citigroup and JPMorgan Chase and a group of hedge funds. Under the proposal, all of the debt would be canceled in exchange for $2 billion in cash…

The Treasury drew up the latest proposal in consultation with Chrysler’s biggest secured creditors, which hold about 70 percent of the company’s secured debt. It requires approval by almost all of the secured lenders. That could be difficult as some lenders, including several hedge funds, may hold their ground and reject it.

2. The issue of pay for union workers must still be resolved. Although Chrysler, the federal government, and the union have come to terms with respect to pension and benefits, my understanding is that they have not yet reached a meaningful agreement to reduce wages. Just how important are wage reductions to Fiat? That remains to be seen. According to the Michigan Messenger:

The new agreement does not cut wages, but it does apparently reduce Chrysler’s commitment to pay into the UAW-run retiree health care fund.

3. According to the latest accord, the auto union will get a 55% equity share in Chrysler. The US government will get a 10% share. Fiat would get a 20% share. Where does the other 15% go? Is this 15% set aside for Fiat depending upon whether it meets performance goals? Will this 15%, or a portion of it, get doled out to Chrysler’s creditors? This was not entirely clear to me.

4. Ultimately, Fiat needs to agree to be party to the alliance. Until that happens, there is no deal. Time will tell if these concessions are enough to convince Fiat that the deal is worthwhile.

Nevertheless, given the concessions that all parties have made to help Chrysler avert bankruptcy, a Fiat alliance seems far more likely today than it did as little as one week ago. Chrysler is no longer looking for a miracle. Perhaps now just a random act of kindness.

But assuming a Fiat/Chrysler deal goes through, the question then becomes: Is this the best outcome for Fiat, Chrysler, and the auto industry? It is not entirely clear. The global auto industry continues to be plagued by massive overcapacity. Keeping a weak competitor around will certainly not resolve systemic overcapacity.

For Fiat, it might be a bit premature to re-enter the U.S. market (the most competitive auto market in the world) and sign on for a complicated global expansion/integration (see Fiasco for Fiat?). Let’s also not forget that Fiat is a firm that, as little as two years ago, was on the verge of bankruptcy itself.

Finally, for Chrysler, it is not clear that its products (even with technology infusions from Fiat) can improve quickly enough for it to once again become a profitable enterprise. For this reason, and as I’ve mentioned before, Chrysler likely needs more than Fiat and an additional $6 Billion infusion from the federal government to survive.

So even if the deal goes through this week, it is entirely possible that Chrysler might end up right back in the same place – on the verge of bankruptcy.

And we wait…

The big story today is the Obama administration’s decisions regarding GM and Chrysler aid (see US Lays Down Terms for Bailout). I won’t spend time re-hashing the specifics; instead, I will provide commentary on the plan as it has been advanced, assuming you already know the specifics.

Overall, I think this plan represents a sensible approach. It recognizes that there is substantial heterogeneity across GM and Chrysler. Their importance to the broader economy differs. GM is obviously the more systemically important firm of the two. Moreover, the two are not on equal footing with respect to future prospects. GM’s product portfolio moving forward is far superior. For these reasons, I have been an advocate of treating GM and Chrysler differently (see Pre-Packaged Bankruptcy, Preventing Moral Hazard, and Aid for Chrysler? Just say No! for details).

Kudos to the auto task force for recognizing this and responding accordingly. As a result, the Obama administration has committed to seeing GM through this crisis. Chrysler, by contrast, is on its own.

The Obama administration will provide additional aid for GM, and has committed to an out-of-court restructuring, provided GM receives substantial concessions from its creditors and its union. In the absence of a meaningful agreement with the UAW and bondholders, at the very least, the US government has pre-committed to act as GM’s DIP financier in bankruptcy, and guarantee its existence through the restructuring process (see Could GM Survive Bankruptcy?). The threat of bankruptcy for GM (hopefully a credible one) should be enough to elicit cooperation from the bondholders and the UAW.

With respect to Chrysler, this is the beginning of the end. The administration has told Chrysler that it has 30 days to strike a deal with Fiat or else it will not receive any additional public funds. This creates a dilemma for Chrysler. It needs Fiat to survive, but Fiat needs the US government to commit a significant amount of capital before it agrees to any deal. After all, Fiat does not intend to inject capital into Chrysler (see Fiasco for Fiat and Chrysler and Fiat Revisited). What is clear is that Chrysler would require significantly more to survive than the $6 Billion that the government has promised in the event that they strike a deal with Fiat (see GM, Chrysler Need More Aid than Requested). Fiat knows that. Moreover, the likelihood that the US government will continue to throw money at Chrysler (in excess of the $6 Billion promised), even if they strike a deal with Fiat, is remote. Fiat knows that too.

So the writing is on the wall. Chrysler is likely finished.

What is unclear to me from the plan as it has thus far been outlined, is whether the US government acts as the DIP financier when Chrysler goes bankrupt, or whether it allows Chrysler to be liquidated. Obama seems to be hinting (as I listen in real time) that the government will act as DIP financier to Chrysler, …but I am skeptical.

Irrespective of whether the US government acts as Chrysler’s DIP financier, Chrysler will serve as a lesson to GM, its creditors, and its bondholders union. Allowing Chrysler to go bankrupt should be enough to wake up GM’s creditors and bondholders union to the reality that US taxpayers will not support them indefinitely.

As a first shot over the bow, the Obama administration began by ousting Rick Wagoner.

UPDATE @ 11:30am

One last point, some have been asking why not just impose bankruptcy now (at the very least for Chrysler) if that will be the endgame anyway. I think the answer to this question lies in the shock that would have reverberated throughout the market. A sudden bankruptcy would have caused panic among stakeholders of all sorts. At this point, bankruptcy for Chrysler is all but assured. Bankruptcy for GM is a real possibility (perhaps 50/50). So the point of today’s action (stopping just short of imposing bankruptcy) is to forewarn market participants. Given this information, it would be prudent for those who have a stake in this outcome to get their affairs in order.