Do higher education subsidies produce public benefits?, 1985 version

I spent the last day of 2012 tidying up my chapter in a book I am co-editing on the Dawkins higher education reforms (the aim is to publish in mid-2013 to coincide with the 25th anniversary of the government white paper). The subject of my chapter is the Liberal response to the Dawkins reforms, which turned into a story about the Liberal role in the long, convoluted path from the state-dominated higher education system created in 1974 to a more privately-funded, market-based system.

Mid-1980s Cabinet papers released today provide a bit more of the background. At this point, Labor was still committed to free education for domestic students. But the Department of Finance thought that this was a bad idea, and wrote a memorandum explaining why.

It has the usual material about free higher education not changing the socio-economic profile of students. But it also contains a version of the key argument in my Graduate Winners report:

While these external benefits [better organised and functing political and social systems, potentially lower crime, sickness, disease, application of research undertaken in conjunction with education] are of course very difficult to measure they are widely believed to exist. To acknowledge their existence however is not to make a case on efficiency grounds for the full public subsidisation of higher education: full susbidies would only be warranted if there were no private benefits at all which is not likely to be the case; most people would expect extra income, status, and work satisfaction as a result of tertiary education…

It goes on to note that there is no public benefit from hobby or recreational study, and there is a risk of over-investment – ie, there could be greater economic and social well-being from investing the same money elsewhere.

I don’t think Finance’s document quite describes the underlying logic of its argument, which 1) are there public benefits from a course? (if no, just leave it to the market); 2) If yes, are the private benefits large enough to attract students? (if yes to this question, just leave it to the market); 3) If the private benefits are not large enough, will public subsidies lead to enough public benefit to justify intervention?

But they are certainly right that a public benefit argument can’t possibly justify full public funding of higher education, as susbequent events showed.

  1. Very interesting but the link to the Treasury memorandum doesn’t work. Are you able to fix it? Thanks

  2. Naomi – Unfortunately there seems to be a problem with permalinks on the NAA website. The link they created from the summary page is incorrect, and the link I get after a search for the document seems to only work temporarily. The document is available, but you will have to do your own search.

  3. derrida derider

    “… are the private benefits large enough to attract students? (if yes to this question, just leave it to the market)”

    That doesn’t follow – the usual argument about positive externalities is that they result in SUBOPTIMAL production of the good, not ZERO production. IOW it should be framed as “are the private benfits enough to attract ENOUGH students” and, to the extent that the public benefits are significant, the answer is “No”.

    Plus this is focused purely on the efficiency case against free education – but there does exist an equity case. The claim that the introduction of free higher education in Australia did not change the mix of students seems dubious to me on several grounds (including my own experience but most strongly on the likely counterfactual).

  4. DD – Yes, your more precise version of the argument is similar to the one I used in Graduate Winners. How to define ‘enough’ is difficult of course, though I think we have a current surplus in all areas except health and engineering. However I don’t believe low student demand is the major cause of either shortage eara.

    GW also discussed the equity argument. Re Whitlam in particular, see this post. The summary: the mix of students on campus probably became more middle class, but the asbolute numbers of working class students increased. Because Dawkins had the policy sequence right – increase school completion first – he was far more signifcant than Whitlam in opening access. Plus loans seems to work as well as subsidies.

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