Category Archives: Higher education externalities

Is a public-private ‘balance’ a useful higher education funding idea?

For several decades, Australian higher education policymakers have been interested in the idea that there is a desirable ‘balance’ between public and private contributions to the cost of higher education, and that a distribution of public and private benefits should inform this.

In an earlier post, I argued that a Deloitte Access Economics report released this week had come closer than any previous work to calculating a distribution of public and private benefits of higher education. What I am not convinced of is that such a calculation is useful for policymakers.

Sometimes an analysis of personal benefits and public benefits, as distinct from some ‘balance’ between them, will be helpful. In the Deloitte report (p.10) they argue that:

The economic policy rationale for governments to support higher education is the existence of a ‘market failure’ – specifically, the existence of the public benefits described above and the fact that, in the absence of government funding, the decisions by providers and students will not drive the system toward its socially optimal operation.

Economic theory suggests that students will choose to acquire knowledge where their expected private benefit is at least equal to their cost of education. If at least some public benefit exists, then this decision-making process will result in a suboptimal level of knowledge transfer activities.

In order to increase levels of knowledge and maximise the total net social benefit of higher education, governments need to be able to identify the public benefits being created, such that appropriate subsidies can be derived and applied. Identifying the relative split between public and private benefits may then inform the relative subsidy payments based on these dimensions.

Apart from the sentences in bold, I agree. I have made similar arguments myself.

The problem with the first bolded sentence is that the presence of public benefits does not of itself lead to sub-optimal levels of education. This will only happen if the total net private benefits are too low to justify enrolment. In those cases, tuition subsidies reduce costs and make it easier to get to positive net private benefits. This may encourage prospective students to enrol when otherwise they would not.

The main argument of my 2012 Graduate Winners report is that even though market failures are possible, with income contingent loans there are only limited empirical circumstances in which they actually exist.

In most cases the private benefits of higher education are already so large – Deloitte, like previous research, identifies hundreds of thousands of dollars or more extra in lifetime income (p.34) – that the tuition subsidies are unlikely to sway the decisions of someone acting in their rational economic self-interest. Subsidies at the levels historically seen in Australia usually add relatively small amounts to net private financial benefits that are already large enough to attract students to higher education. And this is before we take into account other factors influencing people to attend higher education, such as interest in their field of study, access to particular careers, the lifestyle experience of campus, status, and keeping parents happy. Read more »

The quest for a public-private higher education funding ‘balance’

Despite some contrary-sounding quotes from me in yesterday’s Australian, I think a new Deloitte Access Economics report on the public and private benefits of higher education is both a valuable overview of the literature and a significant contribution in its own right to the Australian analysis of this topic.

My criticisms relate primarily to the conceptual framework given in the original brief from the Department of Education, which I will turn to in another post. This brief in turn was based on an idea with a long history in Australian higher education politics, that there should be a ‘balance’ between public and private contributions to higher education costs, which should be related to public and private benefits.

The 1988 Wran report, which led to the introduction of HECS, argued that students should contribute to the cost of their education because they typically derived a private financial benefit from a degree. It noted that there were public as well as private benefits from higher education, but it was hard to apportion them (p. 53). This was a reason for not using analysis of either to set student contribution rates – instead, they went for a percentage of costs rather than benefits. In the version of HECS announced by the government there was a flat student contribution rate equivalent to about 20 per cent of average per student costs.

Empirically, the Wran committee could not find a way to make a distribution of public and private benefits work as a pricing mechanism. Conceptually, however, there was a certain logic to it. If students should pay for the private benefits they receive, shouldn’t the public also pay for the benefits it receives?

In 1996, announcing big cuts to per student public spending on higher education, the government echoed the Wran report, saying that although the ideal balance between public and private contributions could not be precisely established, the private benefits were substantially greater than those implied by the current HECS rates. Private benefits ended up doing almost all the policy work – the new ‘differential HECS’ rates were mainly linked to assumed future income. The higher the potential income, the higher the HECS rate. Read more »

Increasing public returns to higher education by cutting public funding

The Fairfax papers are running a story this morning saying that:

“Australia bucks the international trend as one of only five OECD countries where the public profits at a higher rate than the individual. It ranks second out of 29 countries – behind only Britain – for the biggest benefit to the public, while in 24 countries the private rate of return outweighs or equals the public rate.

Economist David Richardson from The Australia Institute says the OECD study “demolishes the claim” that higher education benefits individuals more than the public.”

But these OECD figures don’t show what Fairfax or Richardson think they do. This is because the financial benefits of education are largely independent of public investment in education. For students, they are earnings gap between one education qualification and some counter-factual. For the government, they are the additional tax revenues (and possibly welfare spending savings) on the same counter-factual.

What the Graduate Winners report argued was that government subsidies are a largely redundant addition to the already large private benefits of higher education. Therefore they don’t have a major effect on incentives, provided there is a good loan scheme like HELP. The government can reduce them without having effects on behaviour – which is what has happened in Australia.

Since 1989, Australia has reduced public investment per student in nominal terms twice and reduced it in real terms in many other years. After all these cuts, higher education participation rates are at record levels.

But because the private financial returns to education have grown over much of the time, and the public benefits are essentially taxes on those private earnings, the government is getting the same or greater financial benefit on a lower initial investment. Consequently, their returns on dollar investment have being going up. Further cuts to public spending would further increase public rates of return. Read more »

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.

What do OECD comparisons tell us about Australian higher education funding?

In The Australian this morning, Simon Marginson suggests that there is something wrong with the methodology in Graduate Winners.

He starts by accusing Grattan of starting with conclusions and backing them with ‘selective studies’ and cherry-picking data from other sources. My colleagues who did the empirical work for Graduate Winners are very unimpressed with this impugning of their professional integrity. We started with the public benefits claimed in the base funding review, and looked for whatever primary Australian data we could find. There was no cherry picking, no selectivity – and nobody has come forward with anything Australian that we missed.

Particularly on the non-financial benefits, I can confidently say that nobody in Australia has ever analysed this issue as carefully and comprehensively as we did. Jim Savage’s work on this did not get the attention it deserved due to the political controversy over tuition subsidies, but his technical paper has to be the starting point for any future work in this area.

Marginson’s alternative methodology is to look at OECD comparisons, stating that ‘it is significant that the Grattan report carefully avoids both the method and content of the OECD. It would have us believe Australian higher education has nothing to learn from global comparisons.’ Given how often this point has come up, in hindsight perhaps I should have included a section on this subject. But I don’t think the OECD funding data in itself tells us much other than that countries have very different mixes of state and private funding, and that these are reflected in their higher education financing systems. A high fee university system would not mesh well with Scandinavian tax rates. But it does fit with the lower tax rates in Australia, the US or Japan.

Similarly, I find Marginson’s claim that other countries report stronger relationships between education and social engagement uncompelling (we report this fact, he did not need to go to the OECD). American colleges and universities expressly inculcate civic values, Australian universities very rarely do so. The differences between the countries reflect the different histories of their higher education systems, and not public funding levels.

If I had 15 minutes to prepare a debating case on higher education, I probably would turn to the OECD for some handy facts and figures. The key OECD document is called Education at a Glance for a reason. But if as was the case I had months and the help of colleagues to explore the Australian data and think through the conceptual issues, that is surely preferable. In my mind the two big issues in higher education public funding are whether it causes significant additional public benefits (on top of those that would be derived from a market system), and whether there are access implications from fees. We focused on these big issues.

In any case, if we had used OECD data it would have tended to support our conclusion that the level of public funding is not the key variable in higher education systems. As I showed in an earlier post, there is no evidence that lower fees result in higher attainment. Indeed, the data suggests the reverse. One of my colleagues updated our analysis today with the latest Education at a Glance data, and (unsurprisingly) it shows again that high fees and high attainment tend to go together.

Even if OECD comparisons were a better methodology, they don’t always get Marginson where he wants to go.

Should the government redistribute student fees between universities?

In an AFR op-ed today (not behind a paywall – things are improving), Macquarie Uni VC Steve Schwartz suggests some egalitarianism for universities.

If fees are deregulated, the more prestigious universities would charge higher fees than others. Schwartz suggests that if they did, their government subsidy should be reduced, and redistributed to other universities.

The reason is regulatory – the new Tertiary Education Quality and Standards Agency is imposing standards on all universities, but it is hard for the poorer universities to match the standards of the wealthier universities.

I doubt TEQSA will require all universities to be the same. A university licence to operate depends on meeting minimum standards, not being identical to all other universities. That said, there is a tendency in the standards released to date to codify common practices, some of which are of doubtful necessity. If this continues, the universities in the best financial position to try new things will tend to set the standards over the long term. Read more »

Why does the base funding review panel think lawyers should pay less for their education, and teachers and nurses more?

The most contentious aspect of the base funding review report, released today, is likely to be its proposal to change the basis of public subsidy for higher education.

At the moment, the public subsidy is not explicitly based on public benefits. Effectively, it’s just what’s left after student contributions are deducted from total per student funding by discipline. Total funding is loosely derived from a study of higher education expenditure 20 years ago, while student contributions are loosely based on differential HECS introduced in 1997. Differential HECS was in turn based roughly on average private earnings of graduates in particular disciplines. So law and medical students paid the most because lawyers and doctors earn a lot. Education and nursing students pay lower amounts, because teachers and nurses have modest salaries.

According to the base funding review, public subsidy should be based on the government paying for public benefits. They say the public benefits are equivalent to between 40% and 60% of total annual expenditure per student. These public benefits are defined as miscellaneous non-pecuniary benefits to society, plus the ‘direct fiscal dividend’ from the additional taxes graduates pay due to their increased earnings.

Leaving aside whether these numbers are robust (I doubt it, but assume they are for the sake of argument), what is the justification for using public benefit as the basis for public subsidy? The base funding review offers two possibilities.

One possibility is that without subsidy ‘private benefits might not be enough to motivate a student to pay full fees’. So the logic would be that through subsidies the private benefits are increased to a point where it is financially attractive for students to enrol in higher education, and then go on to the produce the claimed public benefits. Read more »

Does higher education reduce crime?

One argument made for higher education – at least when arguing for more funding – is that it helps reduce crime. A visiting OECD official recently made the reduced crime claim for higher education, citing Walter McMahon.

Graduates are likely to have quite low conviction rates – I have not been able to find precise statistics, but in 2009 only 14% of 25-34 year old prisoners had completed year 12, compared to 63% of the general population in 2006.

But it seems more plausible to me that graduates are people who were always at relatively low risk of offending, regardless of whether or not they pursued higher education. This low risk would be a function of better socialisation, and the ability to earn a reasonable income without breaking the law. Education is likely to have whatever preventive effects it is going to have well before higher education.

The broad historical trends would also seem to count against any straightforward link between higher education and crime. Australia’s crime statistics don’t lend themselves to easy long-term time series, but crime and education both escalated significantly from the 1970s. The figure below shows crime and higher education attainment increasing from the mid-1990s to around the turn of the century, before crime started trending down again (as also occurred in other countries).


Sources: Education and Work, Australian Institute of Criminology

My theory would be that a third factor at least partly explains both trends, though I think crime is a more multi-factor phenomenon than higher education. The collapsing labour market opportunities for men with little education over the last 30-40 years made both crime and higher education more profitable relative to the alternative of welfare/insecure jobs. So crime and higher education both increased.

But there is no direct relationship between crime and higher education, and increasing the latter will not decrease the former.