Blog Post

AEIdeas

The chart above shows in the percentage increases between January 1998 and July 2016 for: a) the overall CPI for all items (+48%), b) the CPI for college textbooks (+181%), and c) the CPI for recreational books (-4.2%). In real terms, college textbook prices have increased by 90% while recreational book prices have fallen by more than 35%. (The increases in the real rates were calculated using the formula: (1 + Nominal Rate) = (1 + Real Rate) (1 + Inflation); and solving for the Real Rate.)

The huge divergence in book prices over times — college textbooks getting significantly more expensive while recreational books are getting significantly less expensive — would suggest that the college textbook publishers can’t really blame rising publishing costs for the exponential rise in college textbook prices. Rather, a better explanation would be that the college textbook market is insulated from the normal market forces that would lead to falling, not rising, book prices over time, like the recreational book market.

One way the textbook market is insulated from competition and market forces is that the professor, not the student, makes the decision on the textbook for a course, and it’s probably the case that many professors are unaware of the retail cost of the books they assign for their students. And once the professor decides on a textbook, there are no substitutes for the new edition of the book assigned. If a professor assigns Mankiw’s Principles of Economics textbook, students can’t substitute McConnell’s Principles of Economics textbook.

Another reason for skyrocketing textbook prices could be that they are being fueled by easy and cheap credit in the form of student loan debt, which now exceeds $1.36 trillion and has doubled in less than eight years, and tripled in the last decade! Students borrow money not just for college tuition and fees, but also to finance the purchase of textbooks that now routinely cost more than $300, and sometimes approach $400. For example, here are the top ten most expensive textbooks currently for sale at the University of Michigan-Flint bookstore:

There are more than 70 fall courses with assigned textbooks that will cost students more than $300 (new), and more than 360 fall courses with assigned textbooks priced above $200 (new). Yikes! Assuming an average textbook price of $250, students would spend about $10,000 over a 4-year period if they are taking five classes per term.

Bottom Line: The astronomical rise in the price of college textbooks is part of the unsustainable “higher education bubble,” which now even has its own Wikipedia listing here, and which Glenn Reynolds wrote about in his 2012 book “The Higher Education Bubble,” summarized below (emphasis mine):



America is facing a higher education bubble. Like the housing bubble, it is the product of cheap credit coupled with popular expectations of ever-increasing returns on investment, and as with housing prices, the cheap credit has caused college tuition to vastly outpace inflation and family incomes. College tuition payments have rapidly risen far faster (tuition and fees up 440+% from 1982 – 2007), vs. cost of living increases of 106% and family income growth of 147% during the same period, while the rate of return for a college degree is decreasing. Now this bubble is bursting. Glenn Harlan Reynolds explains the causes and effects of this bubble and the steps colleges and universities must take to ensure their survival. Many graduates are unable to secure employment sufficient to pay off their loans. Already we have about $1 trillion [now $1.3 trillion] in outstanding student loans, many in default (payments are being made on just 38% of the balances, down from 46% five years ago), and they can’t be discharged through bankruptcy. As students become less willing to incur debt for education, colleges and universities will have to adapt to a new world of cost pressures and declining public support.

As far as college textbooks, the new era of $300-400 textbooks seems to be clearly unsustainable in the face of a growing number of competitive, low-cost alternatives like free/low-cost online textbooks from Open Stax College (about $40 for a printed version) and Boundless ($30 online textbooks in 25 subjects). Here’s my economic forecast for the college textbook market: Expect continued and very strong hurricane-strength gales of Schumpeterian forces, with a high likelihood of creative destruction and market disruption for traditional textbook publishers selling $300-400 college textbooks, accompanied by huge tsunami-level tidal waves of increased consumer surplus for college students in the future.

In conclusion, it’s a great time to invoke Herbert Stein’s Law: “Trends that can’t continue, won’t.” The rising trend in college textbook prices has to qualify as one of those trends……