More bad reasons for reducing HECS

Yesterday’s OECDitis seems to be spreading to the nervous Coalition backbench, with two MPs reported (no link, sorry) in today’s Australian as favouring reduced HECS.

West Australian Liberal Mal Washer made the old argument about HECS being a disincentive, plus one I had not seen before:

The reason for HECS originally was the assumption that people with university degrees have higher incomes. With the construction and mining boom, that is no longer the case. We should reduce it, we need to pull it back.

Like the ALP, Dr Washer is getting rather carried away with the importance of mining and construction. Fewer than one in ten Australian workers are employed in either of these industries. And as I noted last year, the relative income advantage of bachelor-degree graduates has declined only very slightly since 2001 (and may be due only to more able and experienced workers being moved to the postgraduate column).

South Australian Liberal Senator Cory Bernardi’s suggestion was no better. He suggested a reduction in HECS for students who undertook volunteer work in the community. But if they are effectively being paid via reduced HECS, it is not volunteer work, is it? And if we are going to pay people to do community work, why not employ the best applicants for the work, rather than the people who happen to have a HECS debt?

Sadly, from the Opposition leader to the government backbench, the higher education ideas offered by our politicians are either obviously daft (like Bernardi’s) or easily discredited (Washer, Rudd).

26 thoughts on “More bad reasons for reducing HECS

  1. Andrew, while the demand for higher education might be inelastic, I doubt that it is perfectly inelastic. As such, an increase in HECS will probably reduce demand for university places to some extent. Similarly, a decrease in HECS might stimulate demand for university places to some extent. However, since demand currently exceeds supply, the impact on demand would need to be substantial before it became a major concern.

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  2. Damien – I agree that demand for higher education cannot be inelastic. What gets forgotten here is that price signals serve a useful function in steering people’s activities. If anyone rationally thinks that HECS is too high now for them now, they probably have no intention of working in a ‘graduate’ job for sufficient number of years to earn enough to justify the outlay. But if that’s the case, why are we subsidising them? They are probably not going to use their knowledge or skills for anyone else. While of course there is nothing wrong with acquiring knowledge for its own sake, this is a recreational activity for which the student should pay full fees.

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  3. The rationale for the subsidy (as opposed to the income contingent loan) component of fees is the interesting question. Presumably, the subsidy exists because there is some market failure that would result in too few people undertaking higher education without it. What is the nature of that market failure? It might take the form of a Pareto relevant positive externality associated with having a highly educated population. This might be a social externatity or it might take the form of increased attractiveness as a location of operation for foreign businesses. It is not clear that it matters whether or not all of those who recieve education actually work in jobs that require its use for this positive externality to be present. Of course, there is an additional question about whether it is higher education or school education that is most relevant for these types of externalities.

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  4. Damien why do you keep talking about market failure and never mention the opposite side, i.e. government failure?

    Is it just because it’s harder to identify than market failure?

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  5. I think Damien’s point in (4) is a valid one. If we subsidise HE because we value tertiary education above its income-generating potential, we should not care whether or not graduates work in graduate jobs. However, I am then unsure of what to make of Damien’s final sentence in (2). If HE subsidies did accurately reflect society’s view of positive externalities from tertiary education, why would any change in the number of tertiary students be of policy concern? Perhaps I have misunderstood the point. In any case, I am very sceptical of the existence of these positive externalities to begin with.

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  6. Rajat — you should take some first year classes at lower level universities and then see whether you are sceptical of the existence of positive externalities. Even in the worst case, you are helping a reasonable proportion of students learn how to write well enough such that they could do jobs that require the occasional report/succinct email to be written (these are the students people most complain about incidentally). Perhaps its an expensive way to do it — but there are certainly some positives from it.

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  7. conrad, I don’t think writing well is a positive externality of tertiary education. The costs and benefits are largely reflected in market prices (eg for labour) or experienced by the person him or herself.

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  8. Rajat — The way I look at it is that if universities produce literate workers and businesses need them (which seems likely given the areas of job growth in the last decade), then having a moderately literate population should increase overall workplace productivity, which we all benefit from indirectly (unless this trades off unfavourably with the 3 years people take out of the workforce).
    There are lots of more obscure positive externalities which are hard to measure that people argue about incidentally. Its hard to imagine places like Silicon valley existing without universities, and this has huge benefit for all of the US — Lots of the technology that had large start-up times began its life in universities (comptuer chips and a lot of the biotech stuff), and this requires highly educated workers. An example of just having a generally well educated population is that some people attribute part of the economic rennaisance Ireland had due to a highly educated workforce (combined with good economic policies). A more indirect example are health care costs. More educated people have better health outcomes in general — which saves the government money and therefore you indirectly.

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  9. conrad, I suppose the question is whether increasing someone’s (work) productivity should be seen as conferring an externality on the community and hence warranting public policy intervention. I think that is going too far – I see how productive someone is, and hence how much they earn in the labour market, as a matter of individual circumstances and choices. If may warrant intervention on the grounds of equity, but not on the grounds of efficiency. If, however, increasing a person’s productivity through tertiary education does confer a positive externality, then anything that makes me more productive and leads to me getting a pay increase should be subsidised. That sits oddly with having a progressive income tax system, which penalises people for becoming more productive.

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  10. Conrad and Rajat – And of course showing a positive externality is not in itself an argument for subsidy. It is only if the positive externality would be underproduced in a market that there is even a prima facie case for a subsidy.

    Writing well should be taught in schools anyway.

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  11. I think the devil is in the detail here — its really a matter of working out which areas need to be subsidized and which do not. Sometimes the positive externalities are going to be obvious and sometimes they are not.
    Perhaps the most obvious examples are in education (teachers) and health (nurses), because the market is a mess because a large enough proportion of the population doesn’t want to pay for these services but wants (and gets) them anyway. Hence the wages of these people are artificially low as the government doesn’t want to pay the real cost. The education subsidy therefore works as a subsidy into these professions, which benefits us all.
    There are less obvious examples out there, such as having people in science areas that don’t make money for business, but help you a lot (I’ll ignorantly say e.g., meterology). The problem with these is that only some percentage of people are ever going to be good at them, and it isn’t apriori obvious who will be (like trying to find people good at sport). Thus to get enough you not only need to over-produce them, but you need to pay for them too, as there is no real market for them that would allow thier wages to move in the way that, say, a good CEOs might.

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  12. Conrad – I think subsidies for nursing and teaching may be shrewd moves. Possibly, they encourage people to invest their human capital in those fields, which because of the sunk costs they are then reluctant to leave. It is cheaper than paying them a premium to stay.

    But it is pretty clear that we have too many science graduates, so that subsidy is inefficient.

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  13. I’m just not sure that you can conclude we have too many science graduates simply by looking at the employment numbers. There are areas like biology that I’m just going to call high collateral-damage areas. What I mean by this is that if you want to have a biotech industry, you basically need the right end of the distribution (i.e., the really smart guys that do postgraduate work). This means you need enough graduates to become post-graduates, and enough of them that are smart. These might only be a fraction of what you started with and they might be very hard to initially identify — but if you need them, it might be the only way to get them. This of course means the left-part of the distribution ends up in jobs not related to biology, which I’m going to call the collateral damage end of the distrubtion. (the same logic applies to sport — I presume most people that go to the AIS and the like get approximately nowhere)
    This is a constant source of disagreement incidentally — there have been a few article in the Nature Careers section discussing these sorts of things over the years (generally what these people end up doing). Its worthwhile noting that for some fields like biology, I think there is generally thought to be great oversupply (in the US) of people with PhDs. People blame universities for training too many. However, I’m sure this must be incorrect, since the salaries of people that get jobs in the area is high. If there really was such oversupply, this should not be the case. It seems to me that what is really going on is that there is an oversupply of not very good people (who don’t want to admit it, since they have PhDs), but no over supply of good people. You see this all the time in universities — so many PhD students are produced, but very few end up being good at research.

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  14. If you are looking for the benefits of a literate and broadly educated population you should be able to get them from twelve years of school education.

    In addition there should be some kind of multiplier effect from the increased proportion of baby boomers who went to uni compared with previous cohorts. I mean that the children of uni graduates should be better equipped to make use of the educational opportunities that are available. I wonder if there is any evidnce of this?

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  15. Rafe, you and other people can complain about the high school system as much as you want. But in the end, nothing is going to change in a hurry — in fact, the trend over the last twenty years or so has surely been down, and I imagine it still is. It therefore isn’t an arguement against universities providing postive externalities in that area, and it also isn’t surprising employers want people with degrees, even if they are not directly related to the job.

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  16. Er, why do we want a biotech industry, conrad? According to your account, biology works like the music industry (few hits, many misses) and we don’t need intervention there to produce artists who are commercially successful. Perhaps biotech needs an “Australian Idol”-style campaign to get the right candidates?
    As for teaching and nursing, I think the shrewdness of getting people to train in these areas is that it makes the incremental cost of changing career quite high – ie there is a strong path dependence to career training. So if a certain career is poorly paid or underappreciated, it makes a kind of sense to use some shiny trinkets to get young and naive kids in the door in the hope of trapping them there for as long as possible.

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  17. Rajat, why do degrees in teaching and nursing result in higher incremental costs for their holders when switching careers than other degrees? There are plenty of generalist positions that do not require specialised university training. A BNursing or a BEd would be every bit as appropriate for these jobs as a BBusiness or a BA or a BSc or a BEc or a LlB or a BEng or a BActSc.

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  18. Rajat,

    I’m just using biotech an example. The reason I use it is the government says “biotech is good”, and am therefore pointing out what that means to the graduates in the profession if the government wants to create/support such an industry (I’m not saying we need it at all). There are lots of professions where this prinicple holds incidentally — some I didn’t even realize until recently (accounting, for example — there was a little exchange in the Australian a few weeks ago from someone complaining no-one wanted to employ people with simple pass-degrees, yet accountants still have good salaries). THe other really obvious one is law. Of course, the government doesn’t need to subsidize the previous two.
    Inicidentally, this idea that you can underpay teachers in the long term and offer a few trinkets to get them in is evidentally false. It might work for a while, but in the end you can see the consequences yourself (dull teachers that don’t teach well). I imagine this happens in lots of professions that see a decline in pay/conditions over time.

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  19. Damien, I think it’s partly the degree and partly the nature of the career. If you do a BA or BSc and end up working in sales or marketing, or even the bureaucracy, I think the transition to working in a company or in a different role in a company is quite different from leaving, say, a school or hospital environment to work for a corporate. Just my prejudice perhaps.
    conrad, are we agreed then that subsidising science degrees is unnecessary (from an efficiency perspective)? As for dull teachers, the question is whether they are less dull, on average, than they would be if the Government used the money it uses to subsidise teaching degrees for higher teacher salaries. That is effectively what Andrew is saying and it’s obviously an empirical question.

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  20. Rajat, I’ve no idea whether subsidizing science degrees is worthwhile from an efficiency point of view (I don’t see science as a single entity for that matter — you might need one type more than another). Some governments have benefitted a lot from it (e.g., Singapore, the US) some places culturally similar have wasted money doing it (e.g., Hong Kong). A lot of areas in science end up like winner-take-all situations, which means that if you don’t do it properly you are just wasting your money. All of the analyses I have ever seen looking at it are biased one way or the other. The government, for example, is telling us we need more physicists, and that surely isn’t true (physics graduates have high unemployment rates and low salaries — the ones my comments pertain to are those with high unemployment rates and high salaries). Similary, the mining industry wants more mining engineers, who probably are needed. However, I fail to see why they can’t come up with the money themselves, given the zillions in profit they make. Alternatively, if you want an audiologist (who needs some science background), the subsidy is probably worthwhile, otherwise there would be far too few.
    As for teachers, I think we should pay them more (if you want good teachers — it has been possible to fail high school and still become a primary school teacher in recent years, so the standard is not exactly high). This is because I believe increasing/reducing HECS makes next to difference as to who becomes a teacher (especially if teachers were taken from the post-grad diploma pool, vs. the degree pool — something which I notice was a recommendation of the previous report). Unfortunately, I imagine salary increases cost a lot more than subsidizing degrees, so if you just switched the money over, it wouldn’t make much difference.

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  21. I agree with Conrad that science should not be seen as a single entity, though it is a single faculty. But at the aggregate level we have too many places, as supply of them has exceeded demand for many years, and demand for graduates has been less than supply. This AVCC report shows good demand for the 90+ ENTER school leavers, the main group to be concerned about for the researchers of tomorrow. But even at unis like Melbourne, teh cut-off is in the low 80s, meaning science has a much longer tail of relatively weak students compared to other faculties.

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  22. The same is true for most general degrees and even, to a lesser extent, some specialist degrees. Clearly someone who completes a BSc might have majored in quant subjects like maths or stats, they might have majored in experimental subjects like physics or chemistry or some parts of biology, or they might have majored in field subjects like geology or some parts of biology. The costs of teaching these subjects and some of the skills learnt will be diferent. Similarly, a student completes a BA might have specialised in philosophy or archeology or anthropology or history or geography or sociology or some other area. The cost of teaching these subjects will vary, as will some of the skills learnt. But even a student who complete a more specialised degree like a BEc may differ. Some will have specialied in economics, some in econometrics and some in economic history.

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  23. I just stumbled upon this blog and don’t actually agree that the suggestion of hecs reduction for volunteer work is daft. In fact it allows students to make the choice for themselves about their hecs cost whilst supplying a benefit to the community. I volunteer and it is very hard to involve people in a purely altruistic fashion but we need people to do more. If people can get $110 week for joining the reserves then why not pay them (or give them benefits) for aiding in other important projects. There are plenty of deserving projects and frankly students have the time and it would look good on their CV.

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  24. Andrew, paying people to volunteer their time would require much administration cost to ensure that they were in fact turning up and doing their job. Army reservists are part of the military with quite specific consequences for failing to turn up for duty. Your proposal would turn volunteer organisations into just another extension of the state and add bureaucracy to the good work of charities to meet government funding conditions. If it looks good on students CVs when they volunteer, then they are already benefitting in future income potential. We don’t need more involvement of the state into the voluntary and charitable transactions between people.

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