Tuesday, 6 July 2010

Kerr's assessment of Kiwi tertiary ed

Education Directions points to Roger Kerr's op ed on problems in the Kiwi tertiary system.
But there is no argument for taxpayer subsidisation of the loans scheme. This encourages over-borrowing and slow or non-repayment of loans.

As the 2025 Taskforce recommended, the terms of loans should be as close to market-based interest rates as possible.

Moreover, fee subsidies and the loans scheme should not be regarded as the sole means of student support. Personal savings, part-time work, vacation employment and parental support all have a role to play.

Fees and loans are connected and the government faces a diabolical problem: simply cutting fee subsidies would lead to more taxpayer subsidised borrowing.

Policy should recognise that most, though not all, university students come from better-off backgrounds and enjoy higher than average incomes in later life. Excessive taxpayer funding of higher education is a subsidy from poorer to richer people.
I'd be surprised if Roger weren't familiar with Director's Law.

Cutting fee subsidies or removing the cap on tuition winds up costing the government money through its zero interest loans policy. When Labour announced the policy in '05, most folks in the intermediate micro class I was then teaching understood the incentives pretty well: max out your borrowing at zero percent, invest it in RaboBank term deposits, consume the interest. Continuing the zero interest loan policy is nonsense.

The bigger problem seems to be that too many folks finishing high school see university as their best option. While the average returns to a university degree are high, those aren't the returns that the marginal student will enjoy. The marginal student would do better to spend the time in a trade apprenticeship and start earning money.


  1. Okay, silly question, but if we aren't going to have government funded tertiary education then why should we have government funded secondary education? Why not charge students for their secondary education and make them take out loans to cover the fees?

  2. Umm, perhaps because parents are already paying for this through their taxes? Subsidised by tax paying non-parents like me for sure, but it is an investment in the future of the country. Plus of course there is legislation on the books enforcing attendance at secondary school, whereas tertiary education is completely voluntary.
    Comments anyone?

  3. @kiwipollguy: Good question, actually. The main reason, I'd reckon, that secondary education is funded and tertiary less so, at least internationally, is that secondary education is viewed as more of a merit good: something that, regardless of efficiency, ought to be consumed more than it would be in a free market.

    A decent argument against loans for secondary school would center around credit constraints, although we might well expect those markets to thicken up in the counterfactual.

    A worse argument would be that secondary education's returns are more strongly external than are tertiary education's returns: I just don't buy it. The best argument along those lines would be that an informed citizenry makes for better voters, but the evidence for secondary school actually teaching anything useful on those lines is pretty slim.

    A better tack might mix equity and paternalism to argue that a straight cash transfer to the poor to cover schooling costs would be wasted and so the in-kind transfer achieves the desired merit good outcome.

    My preferred bottom-line policy would have vouchers to school aged kids, worth the average cost of educating kids in the current system (maybe with top ups for special needs), with the parents then able to send the kids to whatever kind of schooling makes most sense for them. For some, it'll be normal schools; for others, trade school from maybe age 12-13. Let the schools compete for students and a thousand pedagogies bloom.

  4. @Lats: we mandate all kinds of stuff without providing subsidy for it. Warrant of fitness checks on cars, building codes, pool fencing requirements - why would a reg making school mandatory make a better argument for subsidization than a reg making car warrants mandatory?

    I'm not much for the "future of the country" arguments: folks with more human capital earn more money, so they have reasonable incentive to invest privately in whatever training best improves their human capital. You need some other market failure to drive the case for both compulsion and funding.

  5. Assuming the merit good argument is correct (and that I understand it,) would it not make sense to subsidise some "meritorious" tertiary degrees at a higher rate than others? For example, the government could subsidise 90% of a B.Sc. in genetics, but only 10% of a B.A. in Nordic poetry? If so, why don't we do that now? Is it an egalitarianism thing?

    With regards to credit constraints for secondary students, I sort of anticipated the answer. The question I really wanted to ask is what kind of legal enforcement would there be to make somebody pay back a loan that they took out at 13 years old? Can 13 year olds make legally binding contracts? If so, would banks be willing to loan to a 13 year old to buy a house? I guess it's more of a legal question than an economics question though.

  6. @kiwipollguy - Hmm, given the current distrust in genetic science by the great unwashed (and the Greens) I'd be very surprised if a BSc in genetics was ever subsidised, but your point is taken :) I also think that there is an underlying belief that any tertiary education is worth getting for its own sake, not because of the subject matter it teaches, but because during the process of gaining a degree the student learns how to think and to reason for him/herself. Of course the jury is still out on that one, but it sounds good in theory.

    @Eric - I'm a little uncomfortable with a more "market forces" approach to education. As paternalistic as it makes me sound, I do favour certain basic outcomes of education at secondary level. Kids ought to possess a reasonable level of literacy and numeracy before they leave school. In this regard setting of such "national standards" (forgive me) is sound policy to me. So, what bigger stick to wave to ensure compliance than to be able to threaten funding cuts? I'm also not entirely sure how it would benefit me to not fund secondary school through my taxes, the potential pitfalls to such a system frightens me a little.

    As far as the mandating, I hadn't really thought that side of the argument through to its logical conclusion, but you're right. I want Key to start paying for my car warrant/registration dammit. If I have to do what they say, they CAN bl**dy well cover the cost of it!!!

  7. @Eric - one more comment re your human capital argument. The personal incentive to invest in education obviously doesn't work for a lot of people, and some parents see little or no value in their kids getting a decent education. For whatever reason it seems to me that a lot of people would make bad choices about education if left to their own devices. I guess this is a case where it is more palatable for the state to step in and try to save dumb people from themselves rather than suffer the consequences later in the form of crime, unemployment, etc.
    I'm not necessarily saying I feel 100% comfortable with this, but it may be a lesser of 2 evils scenario. I do quite like your voucher idea, with the proviso that certain core competencies are taught by every education provider. But not every kid needs to know science, economics, art, or whatever.

  8. @Kiwi: "Merit goods" is economist shorthand for saying "things people think other folks ought to buy more of and ought to be helped to buy more of for reasons entirely outside of economics" - in other words, there's no economic justification for government providing merit goods.

    Given that merit goods depend entirely on whatever the whims of the median voter might be rather than being based in principle or economic argument, there's no reason we couldn't reckon that different courses couldn't have more merit attached to them. It's an argument about preferences, and I'm not about to start explaining folks' preferences.

    @Lats: paternalism with respect to kids isn't crazy; paternalism with respect to the parents I'm a bit more skeptical about. But I'm not sure that the voucher scheme is much less paternalistic than the current system.

  9. Apologies for my original comment, it was somewhat less rational than normal, but in my defense I am still subject to a nasty virus, and I haven't been sleeping well of late.
    Anyhow, if I may rehash my original comment, my take on state funding of secondary schools is that the perceived cost of not funding secondary education is greater than the cost to govt of funding it. There is a general voter expectation that one of the core roles of central govt is to fund and oversee basic primary and secondary education, and it would be political suicide for any govt that proposed ditching secondary funding in my opinion.

  10. @Lats: I don't disagree that it would be suicide for a government to stop funding secondary ed.

    But I do think that there's useful room to move towards vouchers. Sweden's done it.