This year, the federal goverment has budgeted to spend around $4 billion subsidising higher education tuition. Strangely, though most people in higher education politics think we should spend more than this, nobody seems quite sure what this expenditure is supposed to achieve. The Bradley report confessed that ‘there is no easy basis on which to determine the “right” mix of public and private contributions’. This was not just an empirical problem; it was a conceptual problem too.
The most defensible theory of higher education subsidies is that by fiddling with prices via subsidies demand for education is increased to socially desirable levels and/or supply is increased by making it more attractive for higher education providers to offer disciplines that might otherwise be under-supplied.
Behind this theory is an argument about externalities. In comments over the weekend, commenter Rajat Sood suggested that the widely varying share that Commonwealth subsidies make of per student funding, from as little as 16% for law to more than 80% for science, may reflect (at least approximately) the ‘social externalities’ involved. The idea here is that because not all the benefits of higher education are captured by the student, in a pure market they won’t pay the prices set and higher education will be ‘under-produced’.
But this theory does not fit with current system design. Under the quota system, suppliers do not receive price signals, so they cannot respond to extra demand or provide extra supply. Under a voucher scheme, they would receive price signals. But as my Issue Analysis paper argued the effect of the combined subsidy-price cap system recommended by Bradley would mean that suppliers would receive price signals that would encourage them to reduce supply below what a pure market would provide. So the effect of Commonwealth fiddling with prices would be the opposite of what the externalities theory says it should be.
This leaves a demand-side justification. Of course it is difficult to decide on the ‘optimal’ number of graduates, but as I have long pointed out there is no clear labour market need for graduate output at historical levels, much less all the unsuccessful applicants whose demand-side applications were rejected. As demand well exceeds needed supply, it suggests that subsidies are too high rather than too low.
A narrower version of the demand-side argument looks at the possibly differential effects of prices on low SES groups. The evidence for differential effects is very weak, but even it wasn’t it would not justify across-the-board subsidies for all students.
A less outcomes-oriented of the externalities argument seems to be that while subsidies may not actually increase socially desirable output of higher education, people who go to university should nevertheless be rewarded for producting them. The idea that students receive a flat percentage of the cost of their education (considered by the Bradley committee, but not recommended) might incorporate some version of this idea. Since we can’t easily quantify many claimed externalities, we just use some overall percentage that seems about right.
But the difficulty with this is that if we spent all our money subsidising hypothetical externalities, there will be little left for programs that might actually remedy genuine ‘market failures’. Without the flat percentage, this is what has happened in recent years. The funding ‘agreements’ signed by universities specify that they must protect certain disciplines, but provide no funding to do so. The same funding agreements subsidise courses like law and commerce that have no obvious need for any subsidy. So profits on international student markets subsidise public policy goals, while public spending subsidises future lawyers and accountants. Things seem to be the wrong way around.
It’s difficult to escape the conclusion that much of the money spent on tuition subsidies doesn’t serve any public policy purpose at all. It is part churn, part redistribution to graduates, and little or no public benefit.