This cartoon by Matt Golding in The Age encapsulates the general consensus about yesterday’s policy announcement. Last night I was having two Facebook debates – one with a group of my left-wing friends and another with a group of my right-wing friends. The lefties were were unhappy about the so-called efficiency dividend while the right-wingers were happy that an implicit subsidy to HECS* was being wound back.
Okay – the efficiency dividend is a good idea – poorly implemented. What will happen is that university management will undertake a whole of bunch of changes that will maximise the inconvenience to highly visible and highly noisy parts of the university system. According to the Grattan Institute more than 50 per cent of university employees are not academics. If universities were instructed to reduce the number of non-academics senior management would reduce the number of librarians or student support officers and the like. This is a form of rent-seeking that always follows from efficiency dividends. The secret to successful policy is to specify the types of efficiency that needs to be delivered. There is a lot of administrivia that happens in universities. Grab hold of a university organisational chart and count the layers of management. So a policy that required universities to reduce the number of reporting relationships by 50 per cent would generate huge savings.
Universities have simple objectives – they generate, preserve, and transmit knowledge. There is no reason why complex organisation is necessary to perform those functions. So efficiency dividends should be targeted at the organisational structure. No organisation needs to have deputy assistant pro-vice chancellors. Okay – that title might be a slight exaggeration but there is a lot of make-work within the system that is generated when the flunkies have flunkies all justifying their very important job that means they can’t teach or research.
So what about my argument with the right-wingers? At the heart of the HECS debate is the view that there is some sort of market failure and HECS is a market based solution to that failure.
It is true that as a society we don’t want to see smart people being rationed out of the education system on an ability to pay principle. That is an argument for welfare, not an argument to subsidise the entire education system. The market solution to paying for education is that everyone pays their own way. If they cannot pay their own way they then need to borrow the money or get a job. In this sense investing in your own education can be viewed as any other investment or business start-up.
The argument that the banking system cannot or would not provide loans to students to finance their own education is simply false. In that sense the HECS system crowds out the private sector. A zero-interest income contingent loan from the government will always trump an at-interest loan that must always be repaid.
The policy announced yesterday eliminates the discount for paying upfront – this can be viewed as reducing the subsidy to students. I, however, think it is just a tax increase – another one of Swan’s stunts of calling a tax increase a ‘saving’. There is wriggle here, however. Paying HECS upfront reduces a lot of uncertainty as to whether the loan will be paid back. It also reduces the amount of government borrowing necessary to finance the loan and administration costs etc. etc. Maybe the present value of those costs is not 10 per cent of the loan value – but it isn’t zero either.
Good policy in this area would involve less crowding out. So the government should charge a real interest rate on the loan. This would provide an incentive for the private sector to enter and offer loans (most likely for early payment of upfront fees) and individuals would do their sums and make a choice. So the government would then be providing a safety net for those individuals who would otherwise be rationed out of the private sector, while the private sector competed to finance everyone else.
Debating education policy with free-marketeers is difficult because we all make nirvana economics mistakes. We all agree the education market is highly distorted and we all propose market reforms but do so without specifying what a free market system in education might look like. My ideal is that everyone who can pay for their own education do so. It doesn’t worry me if that means parents pay for their own children’s education – after all children are a private good and children are a choice. That means fees for those who can pay and welfare for those who cannot.
* Yes, I know it isn’t called HECS any more. I’m talking about the income-contingent zero-interest (but CPI-adjusted) loan that is made to Australian students.