The voucher battle begins

With ‘vouchers’ for universities seemingly on the political agenda, there are polarised views of their likely effects. I am saying that if the price signals are right they could bring supply and demand for university places into better alignment.

But critics warn that deregulation could produce a mismatch between what students demand and what the economy needs. It could also encourage providers to invest only in higher-demand and low-cost courses.

This is a bit like saying we need government schools because otherwise kids from poor families would get a bad education – using a failing of the current system as an argument in its favour. The Weekend Australian did not use what I told them about how for years a chronic oversupply of science places has existed alongside chronic undersupply of places in health-related courses, despite serious labour shortages in the health professions.

The applications data shows that demand for courses shifts towards labour market shortages (see figure three in the University of Melbourne submission to the Bradley review). The blockage in the system is in supply, which is largely controlled by the government. In practice, the government’s only steering mechanism has been new places, rather than redistributing existing places. If there are no new places, inertia prevails.

A strength of the voucher system (if combined with the correct price signals) is that it creates a permanently operating steering system operating via student demand and entrepreneurial initiatives by higher education providers. We don’t have to hope that a government a) has the information needed to act, b) has the inclination to act, and c) has the new money to act. These conditions existed in the mid-2000s, but apart from a few flow-on effects from Labor election promises have now ceased. We are back to drift.

There is no reason to believe that higher education providers won’t provide all courses for which there is demand and the price is right (indeed, history shows they will often provide even if the price is wrong). Everyone concentrating on the same areas would correct naturally; they won’t get enough students.

The issue is what happens when demand is low for a course believed to be of some cultural, scientific or strategic significance. The current policy is to force universities to subsidise those areas from their other operations. But the long-term incentive that creates is to avoid any area which may end up as low demand. The better policy approach would be to direct public subsidy to areas of possible market failure such as these low demand courses, and so create an incentive to offer them. Instead, we spend public subsidy on courses that don’t need it, such a business and law, and require universities to correct market failure with profits from full-fee students.

I’ve read many of the submissions to the Bradley review, and the only serious work on how to allocate university places is on the voucher side. It’s not enough to show some imperfection in the capacity of voucher systems to meet the economy’s need for labour; no system can perfectly predict what future job markets will do. Submissions needed to show how the centralised model could improve on its poor performance of the past. So far as I can see, nobody even tried to do this.

13 thoughts on “The voucher battle begins

  1. I think you are too optimistic on this — until they get rid of the price cap, I can’t see how it will make much difference (and I believe Julia Gillard has already said they will keep it). In particular, courses that require expensive things like clinical training will still be uneconomical and hence won’t be supplied, and courses that are infinitely expandable and have benefits of scale already compete for as many students as possible in a very voucher-like way. As far as I can tell, all we really have here is a name change. It will be interesting to see what is in the rest of the report.

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  2. Pleased to see that you are adding the caveat about getting the right price to your support for vouchers. However, (as you know) for the same reason that government can’t determine the right mix of courses, government can’t get the price right either. Even if the government scraps central allocation of courses, the higher ed sector will still be unresponsive to student and industry needs because of the ongoing price controls. Removing the price controls will enable universities to charge what the market will bear, but any taxpayer subsidy will just be a transfer to the universities, with no benefit to taxpayers.
    The best solution would be for the government to get out of the game of funding universities and fund students directly through income contigent loans. Free the universities to offer whatever courses they believe they can fill and charge whatever fees students are willing to pay.

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  3. ‘Submissions needed to show how the centralised model could improve on its poor performance of the past. So far as I can see, nobody even tried to do this.’

    I would issue a further challenge to central planing supporter. Not just in higher ed, but across the range of services provided by taxpayers. Please provide a coherent working model of how a central planning system can be responsive to users demands and provide taxpayers with value for their money.

    In all my years of study, in all the textbooks and journals I have read and in all my discussions with policy experts, no where have I seen or heard of such a model. Billions of dollars of taxpayer’s money is spent each year at providing a vast range of services, but no one that I am aware of has a coherent model of how to make the system actually provide the services that the users actually want.

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  4. Having just reread your afterword in The Unchained University, I take it your support of vouchers is due to a belief that it would be preferable to the current system rather than a particularly good policy in itself?
    Also, in paying Universities the subsidies directly without price controls produce an outcome any better than this:
    If you map child care inflation rates from 1980 to the present against the introduction of new government funding, it is clear that each new injection of cash has been followed by an escalation in the cost of child care. Government funding is making child care temporarily more affordable for families, but is failing to reduce costs in the medium to long term. As costs go up, the demand for increased subsidies intensifies and the cycle continues. Such a pattern of inflationary spending on child care is unsustainable, and according to the evidence, ineffective.

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  5. We are guessing at this stage, but presumably Bradley is recommending that prices to universities improve, just not that students pay more. The balance, of course, would come from the long-suffering taxpayer.

    Vouchers without price signals could have one perverse effect, which is to make life very difficult for low-prestige institutions. They have created a niche for themselves at the low-cost end of the international student market. But if they cannot differentiate themselves from higher-prestige institutions in the domestic market, they are at a disadvantage. I don’t believe any institution has a right to students, but they should be allowed to compete.

    Mitch – I don’t know the childcare literature. But I did start doing some work with Bruce Chapman on prices in the higher ed system, mainly to see if the FEE-HELP loan scheme was encouraging inflation. But in the early stages of the scheme, it was hard to distinguish between cost-padding or profiteering and what the scheme was designed to do, which is correct under-investment that may occur due to the weak capital market for undergraduate education. Also, we observe significant cost increases over time in international student fees, where there is no subsidy, no soft loans, and an internationally competitive market.

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  6. I don’t think that vouchers are the right solution for higher education. HECS based funding is sufficient. Beyond that Universities should be free to offer what students are willing to buy at a price that both find agreeable.

    Vouchers make sense for education that is compulsory. As such they should be used for primary and secondary schooling.

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  7. Just what the hell are you talking about Terje? Are you saying the current system already works like a market when Andrew has just explained how it doesn’t?

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