A fairy tale from Gittins

I guess most of us know that Ross Gittins is more suburban accountant than economist. But this weekend’s columns has plumbed new depths when he describes the higher education industry in Australia as an oligopoly.  That would be the one with 37 public universities, 2 private universities and some 140 higher education providers which will be eligible to participate in the new deregulated world of higher education in Australia.

If he had bothered to google it, he would have found out that an oligopoly consists of a small number of essentially identical firms and where the most common measure is the market share of the top 4 firms.

The thing is that we already have a test about how competitive the market for domestic students will be.  That is is how competitive the market is for international students (something which Andrew Norton has pointed out).  There is a large difference in the fees charged to international students across Australian universities, attesting to the underlying competitive nature of the sector.

I do have one concern with the opening up of the market and that is that the old sandstone universities have effectively been gifted huge advantages in terms of real estate location, reputation, bequests, etc.  For this reason, these universities will be able to charge much higher fees and unless there is some limit to the debt that students can be incurred under the HELP arrangement, excessive risks may be transferred to the taxpayer.  I canvassed Henry Ergas’ solution in my weekend column – force the universities to share in the risk of non-repayment after a certain point.  There are other possibilities.

There is one other irony to recent developments and that is the return of CPI indexation of tuition subsidies, something which the sector fought so hard to alter.  But CPI indexation is being imposed all over the place (future hospitals funding, private health rebate, age pension) to the point that the CPI is the new black.

(By the way, I am not in favour of HELP debts being paid by estates (it is meant to a concessional loan) nor in the higher interest rate being imposed on existing debts.)

Here is Gittins’ fairy tale:

The greatest economic puzzle in the budget is Tony Abbott’s intention to ”deregulate” university fees in 2016. There’s a lot more to it than many people imagine.

Punters who make no profession of understanding economics think fees will skyrocket. Advocates of the change, who think they know more than the punters, say increases will be constrained by competitive pressure.

The more economics you know, the less certain you can be about how things will turn out. But you can make a pretty persuasive case that, for once, the punters may be closer to the truth than the advocates.

Abbott and his education minister, Christopher Pyne, plan two main changes: the deregulation of fees and changes to the HECS loan scheme. I’ll leave the loan changes for another day and focus on the fee changes.

At the same time as it permits unis to set their own fees for undergraduate courses, the government will cut its contribution towards the cost of courses by an amount that averages 20 per cent.

It will then reduce the annual indexation of its contribution, switching to the consumer price index, which doesn’t rise as fast as the unis’ wages and other costs.

So the government’s primary motivation is clearly to shift more of the cost of universities from itself and onto students. The 20 per cent cut will give universities an immediate and pressing reason to use their new freedom to increase the fees they charge, and the less-generous indexation will maintain the pressure for further increases.

Even so, the man who recommended that unis be allowed to set their own fees, Andrew Norton, is confident the initial increase will be no more than $6000 a year, taking annual fees to between $12,000 and $16,000, depending on the course.

The government is confident its various changes will increase competition between the unis, leading to greater diversity, innovation and quality, and giving us ”a world-leading higher education and resource system”.

The simple model of how markets work taught in introductory economics courses leaves may people with excessive faith in the ability of market competition to foster increased efficiency, constrain price increases and ensure customers get high quality.

Its promises are based on a host of limiting assumptions, which usually don’t apply. It assumes a very large number of small firms selling a homogeneous product to buyers with ”perfect knowledge” of the quality and other characteristics of what they’re buying.

In the tertiary education ”market”, however, we have a relatively small number of large and larger organisations, selling differentiated products of uncertain quality. We have oligopoly rather than ”perfect competition”.

We know oligopolists compete, but usually try to avoid competing on price rather than marketing. They have a degree of pricing power and their competition takes the form of rivalry – focusing on the behaviour of competitors rather than the needs of customers.

It’s misleading to describe giving unis freedom to set their own fees as ”deregulation”. Indeed, it’s silly to imagine higher education is anything like a market. Its ”firms” are owned by the state governments and highly regulated by the federal government. All its courses still have to be accredited by the feds which, they claim, guarantees that quality standards won’t fall.

Even the unis’ freedom to raise their fees – which the next government could reverse – comes with a string attached: fees charged to local students may not exceed those charged to overseas students.

There’s no profit motive. And, as any academic will tell you, unis are highly inefficient, bureaucratic organisations dominated by administrators. The safest prediction is that giving unis greater revenue-raising ability will lead to them employing more administrators.

How can uni fees be regarded as a ”price” in the textbook sense when people are lent the money to pay the price under a concessional loan they won’t have to repay for years?

In effect, universities have a government-regulated monopoly over a product that gives young people access to the country’s highly paid jobs. What will they do when the price jumps – abandon all ambition? Demand seems highly ”price inelastic” – unresponsive to price changes.

Our unis are protected from import competition by the high fees other countries charge foreign students. Within Australia, unis enjoy a degree of geographic monopoly. Sydney and Melbourne unis don’t really compete for students. Living costs can be high if you move to a regional uni.

The sandstone unis will be able to charge a premium that reflects their higher status, more central locations and lovely campuses. In a normal market, other unis would charge less than the big boys.

The simple model assumes consumers ensure prices reflect differences in quality. But where it’s hard to judge the quality of a product before you try it, many people reverse the causation and assume the higher the price, the higher the quality. This gives lower-quality producers an incentive to charge high prices.

In the early noughties, the Howard government allowed unis to raise their fees by 25 per cent. One small uni decided not to do so. It found its applications from new students actually fell. So the following year it put its fees up like all the others and its applications recovered.

In Britain, the Cameron government allowed unis to raise the £3000 annual fee they charged local students up to a limit represented by the £9000 fee charged to foreign students. Almost all of them took the opportunity to raise their fees to the maximum allowed.

Applications dropped by 9 per cent in the first year, but rose in subsequent years.

On the basis of all this, my guess is the sandstone unis will raise their fees a long way and the less reputed unis won’t be far behind them.

Their notion of competition will be to make sure no one imagines a lesser fee than the big boys is a sign of their lesser quality.

 

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38 Responses to A fairy tale from Gittins

  1. I stopped reading Gittins 20 years ago.

  2. Frederic

    I’m studying law at UNE and I suspect their fees will go down not up. Especially for distance education.

  3. min

    Sounds like some o f the examples given in Freekenomics where the day care centre charged/fined parents who were late to pick up kids. Number of delinquent parents increased. Perhaps they should read the story of the research on monkeys taught to use money to buy food it ended up with the females selling sex .

  4. I am the Walrus, Koo Koo K'Choo

    Judith, please don’t give oxygen to Gittins.

    Everyone knows he has nothing to contribute. I doubt anyone here has read a column of his in at least 10 years.

    Save yer legs for the important stuff.

  5. Andrew

    The simple model of how markets work taught in introductory economics courses leaves may people with excessive faith in the ability of market competition to foster increased efficiency, constrain price increases and ensure customers get high quality.

    Fuck me, that apply to the “carbon” (sic) “market” (sic) too?

  6. Andrew

    The problem with those who scream about the debt increasing is the lack of understanding in how the subsidisation and pricing of a university degree relates with the labour market and future earnings of graduates from those courses. Law graduates (hopefully myself in the coming years) will have a far greater earning capacity in the future than an Arts graduate, hence why I will pay more into the system(assuming I get into Law) . They also ignore the fact that for those who earn under the the $51,000 p.a do not have to pay back into the system, i.e. those who go into courses which do not produce high earning graduates or employment in general.

    Quite amusingly, I had KRudd’s friend Glyn Davis raving about the HECS system and how it was based on the concept of a ‘Chicago school economist, Milton Friedman’. Funnily enough, he is now claiming the complete opposite. Consistency is not a friend of the political left.

  7. Max

    The thing is that we already have a test about how competitive the market for domestic students will be. That is is how competitive the market is for international students

    The international education system is primarily an immigration scam. The young kids get the Permanent Residency, a $1mill property in Carlingford and before you can say yum cha their 150year old great-great grandparents are out here for a surf on our free medical system.

    I dont fancy Aussie kids chances when competing with them financially for the same education god-forsaken baby boomers got for free.

  8. johanna

    Judith, it is not a “concessional loan.” It is not a “loan” at all, because those who take the money can choose never to pay it back.

    Now, that is fine if the money is made available by a private individual or company who knows that they may never be repaid. But it is not all right when it is taxpayers’ money. And reinforcing the optionality of repayment by not taking it from deceased estates just highlights that only mugs or people who will profit greatly from their degree will repay their debt.

    People who work in chicken processing plants for low wages must be delighted to know that they are “lending” tens of thousands of dollars to priviliged gender studies graduates (and non-graduates) who are not required to pay it back.

  9. .

    Johanna – I am considering retraining in a “lower” kind of employ and the hours, freedom and wages are appealing.

    University is often over-rated unless you are self employed.

  10. Monkey's Uncle

    Judith, it is not a “concessional loan.” It is not a “loan” at all, because those who take the money can choose never to pay it back.

    By that reasoning, I guess most taxes are not compulsory charges but are essentially voluntary contributions. After all, anyone can basically choose not to pay most taxes by simply choosing not to engage in economic activity associated with the incidence of paying the tax. One can avoid paying the top marginal tax rate by working less, just as one might be able to avoid repaying HECS by keeping one’s earnings below the level where HECS repayments. What about the mining tax? Mining companies can avoid paying it by keeping their profits below the level where it kicks in. I guess that is voluntary too.

    One can avoid repaying other loans by filing for bankruptcy, so I guess they are essentially voluntary repayments that only mugs pay back, right? If there is any way to get out of paying it back, it is not really a loan according to Johanna logic.

    People who work in chicken processing plants for low wages must be delighted to know that they are “lending” tens of thousands of dollars to priviliged gender studies graduates (and non-graduates) who are not required to pay it back.

    Sigh! This is the typical line designed to appeal to the politics of envy and resentment amongst that section of the population that does not generally go to university. It is also nonsense. The fact is that we have a progressive income tax system. Low income earners are generally net recipients of government, once direct and indirect benefits are factored in. The idea that such people are effectively paying for someone else to go to uni is bulldust. The cost is more likely borne by high-income earners or corporations that pay large amounts of tax.

  11. Kingsley

    Judith I think you owe us suburban accountants an apology!!!!!

  12. Piett

    If he had bothered to google it, he would have found out that an oligopoly consists of a small number of essentially identical firms and where the most common measure is the market share of the top 4 firms.

    The thing is that we already have a test about how competitive the market for domestic students will be. That is how competitive the market is for international students (something which Andrew Norton has pointed out). There is a large difference in the fees charged to international students across Australian universities, attesting to the underlying competitive nature of the sector.

    Judith, on this I think Gittens is right.

    Domestic students are relatively immobile, in general, at least for undergrad. Growing up in SA, I never considered going to a non-SA university after high school. Neither did any of my friends. And Flinders was never really an option, since it would have entailed hours of bus travel. So the choice was Adelaide or UniSA — 2 alternatives, not 39.

    So, yeah, there is the potential to become an local oligopoly.

    Keep in mind also that it is, in practice, difficult to differentiate in quality. A law degree has to have a bunch of identical core subjects to get accreditation. Econ will have the familiar sequences in macro, micro, and stats. And so on. So what do they compete on? Marketing.

    Gittens says, “We know oligopolists compete, but usually try to avoid competing on price rather than marketing. They have a degree of pricing power and their competition takes the form of rivalry – focusing on the behaviour of competitors rather than the needs of customers.” Seems to perfectly describe the situation!

    International students are in a different position. They could come to any Australian city. So they can shop around, and take the best price anywhere for the degree they want — paying extra, if they can afford it, for the brand name of the uni. That would explain the large fee differences which Andrew Norton pointed out. But locals don’t behave like that, in general.

  13. Econocrat

    Gittens is a loon. I generally have no idea what he’s talking about, even before I’ve tried to work out if I agree with it.

  14. .

    Does Gittens realise the funding cut probably represents an efficiency dividend? He acknowledges how inefficient universities are.

    His idea that sandstones have it all is wrong. Sydney Uni has lost a lot of prestige lately. Smaller unis also have been previously limited in what courses they can run. Students also have to choose if they want to do law at uni, or as an articled clerk, or get a HR and plant operator licence…the competition comes from other potential careers and forms of training/accreditation as well as other universities.

    He has applied economic analysis but did not grasp the facts first.

    The real roadblock is licensing of universities and courses.

  15. Tel

    The more economics you know, the less certain you can be about how things will turn out.

    Gittins got this much right, the free market is a machine designed for the collection and distribution of information. The reason government cannot do the job of the free market is they don’t have the necessary information, nor do they have any workable way to process it. There is no other method to determine those prices other than to try it and see what people are willing to pay.

    I do seem to remember having a discussion very similar to this once before though:

    http://blog.qtau.com/2013/08/no-mr-president-rating-colleges-will.html

  16. Tel

    It will then reduce the annual indexation of its contribution, switching to the consumer price index, which doesn’t rise as fast as the unis’ wages and other costs.

    Ahhh, so wages in one particular sector are growing significantly faster than the rest of the economy… and it just happens to be the same sector where government is offering generous subsidies. Hmmm, I wonder if that’s a coincidence?

  17. Tel

    It’s misleading to describe giving unis freedom to set their own fees as ”deregulation”. Indeed, it’s silly to imagine higher education is anything like a market. Its ”firms” are owned by the state governments and highly regulated by the federal government. All its courses still have to be accredited by the feds which, they claim, guarantees that quality standards won’t fall.

    I can agree with him that we are far from a free market, so I guess the question is whether a little bit of freedom is better than no freedom at all? Of course we can’t just deregulate every detail all in one afternoon, it would be Whitlamesque, and destructive. If we want to get from A to B we need to visit all the points in between.

    Let’s look at the housing market… choice of land you can build on is regulated, what you can build is regulated, how you are allowed to build it is regulated, the size of the block, the type of house, every detail is regulated. So do we have a market for houses? Lots of people think we do. Far from perfect I grant you, but better than government-allocated soviet style apartment blocks.

    How can uni fees be regarded as a ”price” in the textbook sense when people are lent the money to pay the price under a concessional loan they won’t have to repay for years?

    Well, during the 80′s and 90′s we had a rising housing market with banks offering zero money down, and interest-only loans, and honeymoon rates, and we had rising asset prices and everyone knew you just couldn’t lose so no big deal if you used you house like an ATM and kept right on borrowing.

    Yeah, some people were indeed irresponsible with their home loans. No doubt some people will also be irresponsible with their student loans. Gasp! Lack of personal responsibility, that means we need government to set prices, right? Right?

  18. Suburban Accountant

    You can put all the economists in the world end to end and they couldn’t reach a conclusion.

  19. The idea that such people are effectively paying for someone else to go to uni is bulldust.

    Not if the uni student gets a highly paid job in the Public Service.

  20. Rabz

    I guess most taxes are not compulsory charges but are essentially voluntary contributions.

    Yes – as an economist, I worked this out many moons ago.

    I ruthlessly minimise my income, so as to minimise my income tax ‘contributions’.

    I buy most of my footwear and clothing online, from overseas, so as to minimise GST.

    I have not received a traffic fine since October 1987.

    There are many ‘taxes’ (and goodness knows, in this toilet of a country, there are many) that can be easily avoided.

    End of lesson.

    :)

  21. Rabz

    You can put all the economists in the world end to end and they couldn’t reach a conclusion.

    That’s just the sort of ridiculous generalisation I’d expect from your typical suburban accountant – cardigan clad cocksuckers, the lot of them.

  22. Rabz

    Oh – and to all those impressionable young peoples out there who might be reading this thread – do not go to University unless you absolutely, positively have to.

    It is a toxic environment, laden with pseudo-intellectual leftist plonkers who’ll never do an honest day’s work in their pointless lives – and this applies equally to both the faculty and the student body.

    If you’re not a ‘book learning’ type – don’t be afraid to learn a trade. You’ll end up better off than most university graduates anyway.

  23. Boambee John

    “better than government-allocated soviet style apartment blocks.”

    There was a (possibly apocryphal) story from the old Soviet Union back in the 1970s/1980s. Allegedly, an architect designed one of those “reinforced-concrete-brutal” multi-storey apartment blocks, but forgot to include a lift. Showing an unexpected sense of humour, the bureaucrats who allocated such apartments allocated him one on the top floor, as a reminder to do better in the future!

  24. .

    I’ve decided to switch, rabz…and I was good at book learnin’…

  25. Monkey's Uncle

    Not if the uni student gets a highly paid job in the Public Service.

    That is an interesting question, particularly considering that Johanna worked in the public service for many years. Were those poor put upon chicken process workers subsidising her wages when she worked in the public service? Or perhaps she thinks that the taxes paid by chicken process workers are hypothecated to specifically fund the cost of gender studies degrees?

    As a tribute to Johanna’s superior debating and intellectual skills, I am ordering a complimentary load of chicken shit delivered to her front yard!

  26. johanna

    Monkey’s Uncle beclowns himself:

    By that reasoning, I guess most taxes are not compulsory charges but are essentially voluntary contributions. After all, anyone can basically choose not to pay most taxes by simply choosing not to engage in economic activity associated with the incidence of paying the tax. One can avoid paying the top marginal tax rate by working less, …

    And so on. Apparently, using taxpayer funded services which incur costs (university) is the same as not getting out of bed and therefore not paying tax. How pathetic.

  27. johanna

    Oh, and MU, go and ask Tony Abbott how he would go without people to sort out the hundreds of thousands of communications he receives each year. As someone who did precisely that for former PMs and Ministers, please advise what your alternative is.

    Throw them in the bin? Or maybe the PM should be reading and personally answering letters and emails from last year, meaning that he/she can’t attend Cabinet meetings?

    Grow up.

  28. Matt

    I don’t where Gittins got his economics degree. His views don’t correlate with any university economics studies I have completed.

  29. Piett

    Johanna

    I was doing a similar thing in Defence — drafting Ministerials. There was a rule that every letter to the Minister, which was not a form letter, had to have an individually written response. My duties were almost 100% drafting those. I left after 3 years with my sanity in tatters. :)

  30. Monkey's Uncle

    And so on. Apparently, using taxpayer funded services which incur costs (university) is the same as not getting out of bed and therefore not paying tax. How pathetic.

    According to you HECS is essentially a voluntary repayment, as one can simply choose to earn less money than the income where HECS repayments kick in. By that reason, income tax is voluntary as people can also choose to work less and keep their income below the level where they start paying income tax. Either way, you can opt to stay in bed and not pay it.

    Oh, and MU, go and ask Tony Abbott how he would go without people to sort out the hundreds of thousands of communications he receives each year……yada yada

    Relax, sugar tits. I was just having a little fun with your apparent notion that the poor chicken process workers apparently finance most government activities. Of course I don’t believe that no one should ever draw an income by working for the government. Try and have a laugh occasionally, and not take yourself so damn seriously all the time.

  31. JC

    I dislike Gittins more anyone here, but why is it a given that university fees won’t go up. The issue, as I see it is that we end up with the botched system in the US where the government offers the loans and fees keep going up at a fast clip because the university knows that the government tap will never stop. There are no breaks of the system as you’d find in private market.

    For instance, there’s no way the government would stop lending for degrees in the soft sciences. What is the prospect of wynmizes major of getting a job? The private loan market would make that assessment and take the risk into account, but not the government.

  32. JC

    Here’s the problem as I see it with this plan. There’s the deep pocketed government funding every freaking degree which is offered and the universities can set their own fees.

    If the market was entirely private you would end up with lots of courses like wynmizes studies closing down because people simply wouldn’t pay up. It would get these reprobates out of the universities through market correction.

    This is not going to happen with HECS.

    This reminds me of the awful degregulation of the US Savings and loans crisis. You had protection on the liability side of the balance sheet while the asset side was relatively open slather. This is a recipe for problems down the road and could create another constituency for the left…. the angry loaned up wyminzes study major on the dole line , no prospects of a job and a huge loan to pay off.

  33. Andrew

    Yes, I know someone who studied Femiwyminz Studeez. Strangely enough, all it achieved was to make her unemployable, disrupted her future relationships, gave her entrenched leftist views which I had to wear myself out beating out of her (and which still periodically recur requiring follow-up treatment) and exposed her to sexual harassment from large lesbianish lesbians for a few years. The taxpayers basically paid to ruin the life of someone smart enough to get into a Masters.

  34. Token

    I guess most of us know that Ross Gittins is more suburban accountant than economist.

    That is an insult and a smear to surburban accountants who, as they have to ensure the businesses of their clients survive & grow, would quickly reject the crap Gittins peddles as crap.

    Seriously though, it must take a remarkably small intellect to be unable to see the flow on effects of the toxic sludge he peddles. That said, FauxFacts pay him a lot of money to mislead and do damage, so one should not be surprised he will condemn thousands of businesses so he can make thousands.

  35. Token

    The issue, as I see it is that we end up with the botched system in the US where the government offers the loans and fees keep going up at a fast clip because the university knows that the government tap will never stop. There are no breaks of the system as you’d find in private market.

    The question I would like addressed is how the changes will effect the TAFE, private college & adult ed market which have been focusing on providing tangible skills which have a direct benefit to business for a generation.

    The self indulgent nature of university academics distracts this discussion away from where it should be focused, the long term benefits to the economy by changing the focus from wymmynses studies to skills which will create wealth.

  36. H B Bear

    Gittens is to informed economics commentary what La Tingle is to political analysis.

    I find it extraordinary that either of them are employed, even by Fauxfacts.

  37. ar

    Gittins not Gittens… Just saying…

  38. Cardigan Clad

    Didn’t even need bait on the hook.

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