Economics

Higher Education Market & Fundamental Economic Concepts

ABSTRACT: This research paper analyses the fundamental economic concepts that apply to higher education. Drawing upon international comparisons in the higher education market, while being written from an Australian standpoint and amid events such as the COVID-19 pandemic. Addressing recent policy changes and their impact upon academic freedoms and the widening opportunity gaps between different socio-economic groups. Both studies and findings present issues such as how price controls distort market price signals and how bureaucracy causes excludability within academic admissions and loan requirements.

I. INTRODUCTION

The identification and measurement of public and private goods in higher education, presents challenges for government agencies and private suppliers to overcome the free rider problem and encourage positive externalities. This research paper will analyse the extent of market failure and consider the costs of not accounting for the non-market private and social benefits, to prevent poor investment and policy decisions. Covering the pitfalls associated with bureaucratic subsidised higher education and the freedom associated with market competition for student funding. Providing a global analysis of government policy and its impact upon students’ opportunities and immigration, including but not limited to the Australian 2020-2021 Budget Research Package to Chinas’ Article 38.

II. HIGHER EDUCATION AND THE SOCIAL OPTIMUM

The more education a person receives the greater economic value they are assumed to bring to their community, this is called a positive externality. A “positive externality: the unintended benefit enjoyed by a third party to an exchange.” (Heyne, Boettke, and Prychitko, 2014, p.416) For instance, A pays for a university degree, B provides education, as an unintended consequence C benefits from improved overall literacy. Where private value associate with graduate earnings, specialization, and income differentials, social value associate with social equity, civic engagement, and internationalisation. John Stuart Mill wrote extensively that an educated population allowed both public and private interests to meet, as it places more individual accountability on the political powers. (Mill in Teixeira, 2006, p.4) “Highly skilled people [volunteer, and] see themselves as actors rather than as objects of political processes.” (Organisation for Economic Co-operation and Development [OECD], 2013, p.3) The main argument for meeting the social optimum level of higher education is shown in figure one, as optimal quantity exceeds equilibrium quantity, it results in market inefficiency.

Figure one Education and the Social Optimum

highereducation

Source: (Mankiw, 2015, p.199).

III. PRIVATE PROPERTY RIGHTS AND TRANSACTION COSTS

“[A case for market failure is that markets do not always produce the optimal outcome for society] challenging the self-regulating capacity that economists usually associate with a market mechanism, i.e., the capacity to adjust to situations of excessive or insufficient supply (or demand).” (Teixeira, 2006, p.10) This example of market failure, provides a traditional rationale for government intervention. (Wolf in Teixeira, 2006, p.11) Government agencies can use command-and-control policies (regulation) that regulate behaviour directly or market-based policies (corrective taxes and subsidies) to provide private suppliers incentives to act. Where market-based policies are a less direct form of regulation; with less direct repercussions. Therefore, government agencies would rather use a subsidization policy to increase consumption. (Azam, n.d.) When appropriating funds an ideal corrective subsidy should equal the external benefit and consider quantity and quality. “[While,] effectively assessing the design and impact of market-based reforms requires analysts to be precise about exactly which [higher education] market they are evaluating.” (Teixeira, 2006, p.12)

IV. SUBJECTIVE VALUATION, OPPORTUNITY COSTS AND FREE GOODS

Governments don’t have the monopoly on learning. (Henderson, 2001) Due to subjective value, people value things including higher education differently and this information can never be fully known or controlled by governments. Education especially can be obtained in numerous ways, from books to life experiences. In addition, to the vastly non-centralised information openly available online. The Internet allows someone to learn the answer to a question automatically, whatever it maybe, there will be a YouTube video explaining the how and why, maybe there will be a few videos to sort through until finding one with a high level explanation; the fact is that it has been done, with a little monetization in a running advertisement, but mostly it can be reasonably to suggest it as an altruistic gesture. (Peterson, 2020) John Dewey in a similar manner suggests the students’ social growth should be one where the learner progresses to become a better citizen. (Fairfield, 2009) However, in economic theory values are subjective and cannot be measurable; therefore the social value is often compared to the opportunity cost, represented as consumers’ willingness to pay minus the actual payment. “[That is,] the next-best alternative that is sacrificed when a choice or action is undertaken.” (Heyne, Boettke and Prychito, 2014, p.416) The opportunity cost of studying could be leisure or work, in which only the individual can make that judgement.

Due to imperfect information and differences in types of competition, the more efficient market-based policy would be private property rights. “[Private Property Rights are] Legal rights assigned to a particular person that allow him to use, depreciate, or exchange his title with somebody else.” (Heyne, Boettke and Prychito, 2014, p.417) A person’s right to private property is fundamental to a working economy. “Extension of property rights [and regulation] may effectively internalize [externalities]” (Cheung, 1973, p.32). To provide proper incentives for market transactions to occur, a basic framework of laws are required, that provide boundaries and enforce contracts. (Teixeira, 2006, p.12) Equally, private suppliers would devote few resources with high transaction costs and absent property rights.

Unclear property rights for online courses can result in the free rider problem, allowing individuals to avoid associated marginal costs. For instance, A creates a theorem which B uses without charge. “According to the Coase theorem, if private parties can bargain over the allocation of resources at no cost, then the private market will always solve the problem of externalities and allocate resources efficiently.” (Mankiw, 2015, p.209-210) This can be best understood from the classical parable called the Tragedy of the Commons “that illustrates why common resources are used more than is desirable from the standpoint of society as a whole.” (Mankiw, 2015, p.822-833) Private markets overuse the resource, while governments regulate behaviour and impose fees to combat overuse. Applying public good terminology to an essentially private good would be counterproductive; since societal pressures can prevent free riders through moral injunction. In theory, higher education is not a public good, considering it non-rival and non-excludable in consumption. (Teixeira, 2006, p.10)

As free goods (free degrees) have no price signals, the distribution of resources results in the socialist calculation problem. Suggesting that governments allocate factors of production with imperfect information, without individual values (otherwise represented in market prices). “[While, a free market ensures] that goods are produced at minimum costs and are sold at proper marginal costs, with all factors receiving their proper marginal productivities; [in contrast a social economy could reveal the peoples] preferences by signalling in response to price parameters or Lagrangean multipliers, to questionnaires, or to other devices.” (Samuelson, 1954, p.388-389) Paul Samuelsons’s idea of revealed preference should not be confused with Rothbards’s view of demonstrated preference. Due to the difference that Rothbard places no assumption on the constancy of a person’s value scale over time, meaning a given actor valued A over B at the time they made a choice (which can differ over time). Due to Rothbards’s theory of demonstrated preference any proposed remedy to an externality would result in unlimited charges, therefore the social optimum theory for higher education is pure fallacy.

At worst, however, it can be considered “bloody cheek,” in the British expression. For, armed with the idea, I can approach you with the following claim: “You, gentle reader, have never hired me as an economic consultant. You have not taken advantage of this [marvellous] opportunity open to you. However, whether you know it or not, whether you realize it or not, whether you appreciate it or not, you actually benefit from my economic analysis. You are thus a selfish, [chiselling] free-rider on these multifaceted benefits I have long provided for you, gratis. But now it is time to stop you from exploiting me regarding these spillover gains you have long enjoyed for free. It is time for you to pay your fair share! Accordingly, I am hereby presenting you with this bill for $100,000, a bargain at the price. If you refuse to pay, I will then initiate violence against you.” Not only is this “bloody cheek,” but you could reply in the same vein to me. All of us could bill each other for services rendered to any extent we wished. Once we have left the Rothbardian world of demonstrated preference, anyone can make whatever claim he wishes. We are at sea without a rudder. (Hoppe, 2003, p.310)

V. PRIVATE VALUE AND MORAL INJUNCTION PREVENTING FREE RIDERS

It can be argued, “[Melbourne Institute of Technology] provides free access to its courseware on the Internet, without impairing the private value of an enrolled MIT degree, which provides more than knowledge.” (Marginson, 2012, p.5) Technology property rights (e.g. patents and assigned contracts between parties) lower transaction costs, determine the good’s beneficiaries and encourage entrepreneurial incentives. (Katz, 1992, p.19) Determining the goods’ beneficiaries, can exclude free riders. “Contemporary economists tend to regard a market as a powerful mechanism of social choice that, through rational utility-maximizing behaviour of individuals, as if by an invisible hand, will distribute goods in such a way that no one could be better-off without making anyone else worse-off.” (Teixeira, 2006, p.10) The invisible hand maximises the sum of consumer and producer surplus. As a private good, [scarce places in elite university programs], internalise the benefits providing private suppliers proper incentives. (Frischmann and Lemley, 2007, p.266) Free markets have a fair process that allocates goods to the consumers’ willingness to pay. Despite free education in German public universities, private universities compete by offering internal benefits such as smaller class sizes, flexible schedules and specialized courses.

VI. LAW OF DIMINISHING MARGINAL UTILITY AND HIGHER EDUCATION LOAN SCHEME (HECS) LOAN LIMIT

When looking at the argument alongside the theory of opportunity costs, we can argue that the more education a person receives may not always continue to produce positive externalities at the same rate – referring to the Law of Diminishing Marginal Utility. Each additional degree will either have no externalities or produce negative externalities for the economy and the student. As students forgo other opportunities, there would be a decline in additional student happiness and learning. However, special interests in higher education often have political incentives to promote increasing subsidies for more education to be provided. In this way we can explain why student loans provide a limit on the amount a student can borrow toward obtaining a degree, placing a cap somewhere (not necessarily accurately) along the graph of diminishing returns. “Imperfect information also shows up in the student loans market, where information asymmetries exist between students taking up loans, on the one hand, and banks (or government agencies) that supply loans, on the other.” (Teixeira, 2006, p.11) “For 2020, the [Australian] HELP loan limit is $106,319.” (The Department of Education, Skills and Employment, 2020, Para. 7) Here the Australian government is adding a way to judge the costs and benefits of borrowing, placing that valuation at $106,319. Which can be equal to obtaining an undergraduate bachelor, a postgraduate masters degree and a doctoral degree; alternatively it will support the average student throughout their professional career path.

VII. MARKET FAILURE AND THE SOCIALIST CALCULATION PROBLEM

Due to market failures in higher education, in the twentieth century, economics as a discipline resisted to apply a market framework despite individual economic rationality being central to economic analysis, resulting in tensions and the welfare state crisis. (Teixeira, 2006, p.8) An unseen consequence of subsidies can be that they distort degree prices, this can refute the idea that markets fail due to their own accord. (Teixeira, 2006, p.13) “So we fix our eyes not on what is seen, but on what is unseen, since what is seen is temporary, but what is unseen is eternal.” (Corinthians, 4 : 16-18) A markets long run functionality depends upon undistorted market price signals. “Thus, while the market may fail, there is a possibility that [the] government may fail as well.” (Wolf in Teixeira, 2006, p.9). “The difference between the socialist and the student of liberty is a difference of opinion as to what others should be prohibited from doing.” (Read, 1964, p.124) Taking away the willingness to pay, may take away a democratic process (our ability to vote against higher education policy changes, through valuation). “Socialism attempted to replace billions of individual decisions made by sovereign consumers in the market with “rational economic planning” by a few vested with the power to determine the who, what, how, and when of production and consumption.” (Hayek and Clifton, 1975, p.8). Socialism has failed in every country in which it has been tried, from the Soviet Union to three countries that tried but ultimately rejected socialism, that is Israel, India and the United Kingdom. In each, Socialism worked – for a while.

VIII. DIVERSIFICATION OF HIGHER EDUCATION IN ISRAEL EQUALIZES EDUCATIONAL OPPORTUNITIES AMONG UNDER REPRESENTED AND LOW SOCIO-ECONOMIC GROUPS

“When an educational system expands, new opportunities are opened for all social groups.” (Ayalon and Yogev, 2005, p.228) For Israel to compete in international markets, it must produce goods and services that compete on quality and price, therefore privatisation is recognised as a system of compensating efficiency and performance; and without political influences within management. (Dean, 1989) After many free market recommendations by Nobel Prize winner Milton Friedman, Israel eventually in the 1980s accepted the advice, after many failed attempts such as the 1977 program due to a lack of fiscal discipline. Diversification and expansion of educational choice came from the free market restructuring and economic growth after the war periods. “[A 1999 study, shows how the diversification of higher education is expected to equalize educational opportunities as Israel] often include a variety of institutions that differ in selectivity, curriculum, administration, cost, academic versus practical orientation, and prestige.” (Meek in Ayalon and Yogev, 2005, p.227). “The Israeli political system as well as educational practitioners and researchers expressed the belief that the colleges would increase the educational opportunities of groups that were under-represented in the traditional universities: lower socio-economic strata, disadvantaged ethnic groups (Jews of North African or Middle-Eastern origin, the disadvantage Jewish ethnic group, and Arabs), and residents of the geographic periphery.” (Guri-Rosenblit in Ayalon and Yogev, 2005, p.229).

IX. LOWER RATES OF RETURN OF HIGHER EDUCATION IN INDIA DUE TO STUDENT MIGRATION; FROM HALF-BAKED SOCIALISM TO HALF-BAKED CAPITALISM

Privatization in India works out of an over-regulated state system, while increasing elites move from public institutions to the private sector or abroad; private philanthropy has increasingly withdrawn support for Indias’ higher education. (Kapur and Mehta, 2004, p.3) Resulting in sub-optimal outcomes for higher education structures in India. “This realization, coupled with the severe limitations of publicly funded higher education institutions and the greater purchasing power of the middle class, means that Indians are prepared to pay rather than be denied.” (Kapur and Mehta, 2004, p.5) Despite this there is prohibition in Indian against differentiation of university fees; that no one should buy their place in an institution of education. “If you have money, you can spend it on education abroad, you can come to a private arrangement, or even waste it on any form of consumption, but the one thing you will not be allowed to do is to spend it at public institutions or on getting an education in India.” (Kapur and Mehta, 2004, p.13) In addition, private universities and innovation can be hindered by curricular guidelines, admission criteria and rubrics set by the government. “This means that Indians are spending between Rs 3-5000 crores (roughly $700 million to $1 billion) on higher education abroad, a staggering amount for a poor country whose own educational institutions are starved of resources.” (Kapur and Mehta, 2004, p.8) Another important factor impacting enrollments, is that Indian parents discriminate most against a female child (Kapur and Mehta, 2004, p.11), while India also has lower social status groups that are also discriminated against. “In order to also protect the interests of future generations, it is in the interest of society that no talents are wasted and that people wishing to develop their talents are not restricted by factors such as parental income.” (Teixeira, 2006, p.11)

As students seek education abroad or private education, the government has less pressure to reform public university quality. India is the second largest country for student migration after China, “migration of such magnitude has become a major source of capital and brain drain for India while hugely benefitting the economies of the advanced countries, having 95 percent concentration in just five countries; America being the largest recipient. (Pande, n.d, Para. 1) There can be little doubt that the large migration of students is influenced by the Indian government’s prohibition and unconditional job market. “For instance, unless an institution is declared a deemed university (there are only sixty such institutions), the formal degree that is granted through these colleges is actually given by one of the existing state universities.” (Kapur and Mehta, 2004, p.14) Once the signaling effect of quality education breaks down, education will not be taken seriously. “For instance, in order to be eligible to teach at a public university, candidates with even a PhD have to take another qualifying test; this test was introduced to remedy the fact that the candidate’s PhD in and of itself did not indicate anything about her/his abilities.” (Kapur and Mehta, 2004, p.12) 

X. CASE STUDY: NORDIC AND SCANDIANVIAN POLITICAL HISTORY AND OPPORTUNITY GAPS IN FINISH UNIVERSITY ADMISSIONS

There is a belief that education policy within Nordic/Scandianvian countries has both the best quality and equality in quantity, that free higher education provides economic benefits. However, the economic history within these countries tells another story, they are not Socialist like Venezuela as the government doesn’t own the means of production. They are in fact built out of capitalism, only the period in the 1970s-1980s resembled Socialism in Sweden, with high taxes despite not being enough to cover the welfare state. Now Sweden has become a more free market in comparison to other countries’ regulations (e.g. America), privatisation owing to its recent economic success. 

“Adam Smith clearly favoured the role of private initiative over public ones in the provision of education, by relying on the effectiveness of competition, which, by stimulating rivalry and emulation, promoted excellence in terms of educational provision.” (Smith in Teixeira, 2006, p.3) Government monopolies only hinder market competition and innovation. Free higher education often has a limited number of places due to limited funding. Finnish students must go through a tough admission process and sit an entrance exam for a place at university – often causing less than ten percent of applicants to gain admission. (Isopahkala-Bouret, et. al., 2018, p.144). “[This] opportunity gap refers to an unequal distribution of resources, such as educational access.” (Isopahkala-Bouret, et. al., 2018, p.144)

“New types of vocationally-orientated degree programmes offer socially diminished credentials and narrower returns in the labour market, and in many cases, forecloses possibilities of graduate study and membership in many professions.” (Isopahkala-Bouret, et. al., 2018, p.146) Finland has seen drastic cuts in public financing within the last two years. “The working conditions of the academic staff and conditions for high quality teaching have been affected, and there are more obligations to raise external grant money.” (Isopahkala-Bouret, et. al., 2018, p.149) “The employment conditions and salaries of institutions and faculties in a “non-elite” sector may have worsened more than in elite programmes, resulting in more obvious changes, such as larger class sizes, more mass lecturing, group advisement, peer advisement and less personal supervision.” (Isopahkala-Bouret, et. al. 2018, p.149) Quality problems are not exclusive to private institutions, illustrated by the high variation in dropout rates in public and highly regulated European universities. (Teixeira, 2006, p.14)

XI. ANALYSIS OF FREE HIGHER EDUCATION IN VENEZUELA

“[Free education and/or a state monopoly on education] would be very problematic, especially because it would reduce the diversity in education (and consequently among people, since all would be subject to the same influences), creating a sort of despotism over the mind.” (Teixeira, 2006, p.5) Nicolás Maduro Moros is the president of Venezuela, and his illegitimate regime threatens the independence and curricula of Venezuelan higher education. “Sosa [President of Central University of Venezuela (UCV)] and Marquez [head of the UCV association of professors] said that because the UCV did not support the government, authorities applied financial “asphyxia” by limiting its budget.” (Sequera, 2020, Para. 12) In 1999 higher education in Venezuela was made free, despite this required extreme monetary policy. “Bureaucratic management, as distinguished from profit management, is the method applied in the conduct of administration affairs, the result of which has no cash value on the market. (Mises, 1998, p.305) Free higher education is limited by its ability to provide efficiency and equity, therefore, the main beneficiary of a degree should rather be the ones to bear the majority of/or all of the cost. (Teixeira, 2006, p.15)

The economic conditions in Venezuela, such as hyperinflation and corruption, can explain the poor working/study conditions on campus, high course drop out rates, theft of school property, and long weight times for professor salaries (up to 6 months). “As the number of students declines, some professors make just $1.50 a month, Garcia said.” (Sequera, 2020, Para. 7) Venezuelan Ministry of Higher Education has in place currency control restrictions on prospective international students, preventing students of psychology, law, sociology, biology, international studies and the humanities, among others, from accessing foreign currency through CADIVI (National Center for Foreign Commerce). Often students turn to the black market for currency exchange, and domestic students move to study in mostly the USA and Cuba. “The institution’s troubles signal that Venezuela risks losing a generation of college graduates, potentially leaving it without the human resources to rebuild a nation where most of the professionals are now in the diaspora.” (Sequera, 2020, Para. 4)

XII. AUSTRALIAN PUBLIC UNIVERSITIES CHARITY STATUS AND QUESTIONABLE ACTIONS DURING COVID-19

Philanthropy can be an efficient way to measure the relationship between public and private institutions. “All philanthropic activities, or non-profit organizations claiming tax benefits, for instance, must pass the following two tests: 1. The public purpose test: The organization that claims tax exemption must operate primarily for some purpose other than private gain. […] 2. Non-Distribution of Surplus: Such organizations are barred from distributing its net earnings, if any, to individuals who exercise control over it, such as members, officers, directors, or trustees. This is known as the “non-distribution constraint.” (Kapur and Mehta, 2004, p.24) Meanwhile, Australian public universities are registered as charities and have paid no tax for society, which also internalizes any public benefit from higher education. Questioning the significance for public higher educations to classify as charities, due to revenue being derived from students and government agencies rather than market donations. 

In turn, Australian sandstone universities have multimillion dollar vice chancellor salaries, see table one, and vast real estate portfolios of which students pay amenities fees toward. “It is understood RMIT appointed a new deputy vice-chancellor on an estimated salary of about $500,000 [on 15/09/2020].” (Duffy, 2020b, Para. 28) With courses now being online, Australia overinvested in too many new buildings and are making the students pay for upkeep on empty and unused classrooms. If universities were instead competing on price or service then they would not have invested so much into new buildings. In a university study conducted by the ABC, seventy eight percent of respondents claimed underpayment for outside marketing hours, while thirty nine percent alleged underpayment for tutorials described as “information sessions, seminars, practice classes or workshops” that attract a lower pay rate. (Duffy, 2020c, Para. 33) 

“Tutors at some of Australia’s sandstone universities are being told to do a “poor job” and “skim read” student essays to meet impossible marking pay rates, as an ABC investigation reveals at least 10 tertiary institutions are involved in an underpayment scandal.” (Duffy, 2020a, Para. 1) This is unacceptable as this causes marking rates to become inaccurate (allocated just 10 minutes to mark a paper). Due to the amount of costs incurred, students may take this case to the Ombudsman for further review. The recent admission to underpayment of staff, and actions uncovered such as reduced grading time and quality of teaching, has negatively impacted upon each student’s overall course experience. Students forgoing over $5,000 per unit would expect greater transparency of the teaching quality before enrolling in a unit/course. The mismanagement of a unit would be directly related to the underpayment of staff.

Meanwhile, the university is doing nothing to remedy this, after admitting to the underpayment of staff amounting to almost $9 million. Studies and students would suggest this caused a diminished quality of education. “[Even John Stuart Mill] considered that “the fees of pupils would always be a part, and should generally be the greatest part, of [a lecturers] remuneration” (Mill in Teixeira, 2006, p.6) Considering that professors and lecturers, who are doing so much to accommodate for the challenges that students are currently facing during COVID-19, they are being drastically underpaid and overworked.

Source: Sainsbury. (2020). Figure 2. 

XIII. UNIVERSITIES AUSTRALIA AND GROUP OF EIGHT (Go8) TRADE OFF STUDENTS FREEDOM OF EDUCATIONAL CHOICE

“[While] natural monopolies may not exist in the case of higher education, market power may be concentrated in a selected number of [public] providers, causing them to behave like a cartel and to erect barriers to entry for potential new providers.” (Teixeira, 2006, p.11) Considering that the market for research is different to the market for degrees, Universities Australia and Group of Eight (Go8) can be said to have traded off students’ freedom of education choice for a $1.2 billion grant to the research sector. “[Go8] look forward to the details of the funding commitment from [Prime Minister Scott Morrison and Treasurer Josh Frydenberg] to support research in our universities – 70 percent of which is undertaken across the Go8” (Thompson in Group of Eight, 2020, p.1) Because public universities profit from favorable legislation and their incentive to seek it will be diminished by the amount of the payoff to the employees (collective bargaining), which may be considerable. This action by the universities can be classified as rent seeking behaviour, in which its time, effort and money used to lobby has the opportunity cost of improving education quality, therefore improvershing the enter society. Legislation favorable to the industry, by raising prices (in certain degrees), will reduce output and hence the industry’s demand for inputs, including labor (also impacted by immigration restrictions of international students). The reduction in demand will harm not only the employees who are laid off but the remaining employees as well. The moderately concentrated industry (such as higher education) would seem to have the optimal structure in terms of the costs of obtaining legislation and the benefits to be derived from it.

XIV. AUSTRALIAN UNIVERSITIES AND JOB KEEPER

Go8 and the 39 public universities did not expect the last minute changes to the Jop Keeper subsidy eligibility, granted to universities with under $1 billion in annual revenue. “New rules for the program, released late on Friday, specify universities must count six months of revenue when calculating their projected downturn, a tweak that puts $1,500 fortnightly payments per worker out of their reach.” (Karp, 2020a, Para. 2) Warning the federal government that funding would not prevent twenty one thousand job cuts in the coming months, due to cuts in international student revenue. (Karp, 2020b, Para. 1) “In May, private universities such as Notre Dame University, Bond University, Torrens University and the University of Divinity were granted an exemption to the existing JobKeeper eligibility criteria placed on all other universities.” (Duffy, 2020b, Para. 4) Meanwhile New York University with $16.5 billion in annual revenue is eligible for jobkeeper. (Duffy, 2020b, Para. 2) “[…] Josh Frydenberg defended the arrangements and said Australian universities received about $18 billion [taxpayer funded support] for the education of domestic students.” (Chang, 2020, Para. 10) 

XV. POLICY CONSIDERATIONS FOR THE AUSTRALIAN 2020-2021 BUDGET RESEARCH PACKAGE (BRP) AND HECS

“The Treasurer, the Hon Josh Frydenberg MP, announced the Research Package on 6 October 2020, as part of the 2020-21 Budget.” (Department of Education, Skills and Employment, 2020, p.1) The private benefit of students as shown in figure two for collective income differentials, ignores variables in individual financial outcomes and social impacts. Student loans must act as a hedge against risk and uncertainty; a compulsory debt repayment threshold works as an insurance system to protect students’ credit reputations. (Chapman, 2020) In direct contrast to Bruce Chapman’s

intentions for HECS, proposed BRP amendments ignore social factors impacting grades and threaten to cancel student loan access. “Once an institution is hooked on federal financing, it’s virtually impossible to stop bureaucratic regulations and mandates that routinely follow subsidies.” (Paul, 2011, p.45) 

Figure two Private Benefit of Higher Education

highereducationwage

Source: (Kena, et. al. 2014, p.11).

XVI. BRP PRICE CONTROL AND DISTORTIONS IN THE MARKET EQUILIBRIUM FOR DEGREES

The BRP adds an abusive price control mechanism (considering higher education is a normal good with positive income elasticity) that will distort the market equilibrium for certain degrees. The BRP targets nursing degrees to increase the number of graduates, arguing toward a lack of students in the current COVID environment. However, skill shortages are rather caused by uncompetitive wages and expected working conditions especially true within the public sector (limited by a budgetary constraint). John Stuart Mill argues that fixed salaries account for the failure of educational endowments, while Adam Smith viewed this as a reason for less public intervention. (Mill in Teixeira, 2006, p.4) Adding a price ceiling on degrees would usually result in a lower price causing more consumers wanting to buy degrees (increasing quantity demanded) however the quantity supply is going to fall with lesser price the universities wont to produce as much (creating a shortage and a misallocation of resources). 

The desired effect on nursing students wont change due to the fact that the student contribution amount will drop from an average of thirty percent to eighteen percent. Suggesting that universities will be very careful when taking on new nursing students that they won’t be fully funded for. This may cause increased course requirements to prevent such new entrants and targets/discriminates against potential students that may have had external factors affecting their final school grades or potential international entrants with differences in qualifications. The BRP presents a flawed proposal due to the moral intuition being based upon an unsound ‘fairness argument’. “[Humanities] students may spend their entire careers repaying debt, whereas for a nursing student it may take just a few years — there are very big discrepancies.” (Norton in Khadem, 2020, para. 31) 

XVII. NETHERLANDS DEGREE CHOICE AND ITS REPRESENTATIONS IN SOCIAL STATUS

However, in considering the amount of students who choose an economics degree over a nursing degree should not be considered as absolute. Alfred Marshall argued that educational choice is a combination of individual investment and consumption motivations. (Marshall in Teixeira, 2006, p.8) As these students way up the additional marginal costs and additional marginal benefits to themselves, all action involves the employment of scarce means to attain the most valued ends. Price controls do not legislate value they prevent market price signals. As such, there are many psychological rewards from jobs that help people in addition to easier increased job security when compared to other career choices. Advocates of a supply-driven system propose students are immature consumers, in which there is an “absence of sufficient and reliable information about services on offer”. (Teixeira, 2006, p.16)

“[A study conducted in the Netherlands found that] children with a lower-class background were overrepresented in engineering and economics, which carry favourable market opportunities, whereas children of the economic and cultural elite preferred fields where they could reproduce their family capital.” (Werfhorst in Ayalon and Yogev, 2005, p.229) For degrees such as economics, statistics show that people choose economics more for interest than expected work at the end of the degree, therefore lower income households will become more affected by the reform due to changes in price/equity. “The differentiation between fields regarding the expected rewards in the labour market is well documented: engineering, computer sciences, business, and health professions are usually economically rewarding, while education, social sciences, and the humanities produce lower returns.” (Gerber and Schaefer in Ayalon and Yogev, 2005, p.229) 

XVIII. HECS EXCLUDABILITY AND DEBT

Unquantified social benefits are a weak case for subsidies, while government action helps to break up monopolies of supply or to provide equal access loans. (Engel, 1984, p.24) “When it comes to the higher education market, one of the major goals of government intervention is to provide equal opportunities to all qualified individuals who wish to participate in a higher education course.” (Teixeira, 2006, p.11) In contrast, in Australia the New South Wales Permanent Resident Visa holder is ineligible for HECS student loans for non bridging courses, forcing them to pay the overvalued cost upfront, where many students have not got sufficient funds to compete. This is in direct contrast to equal access and discriminates against Permanent Resident students. “Ms Plibersek has previously slammed “cowardly” university bosses who had “allowed themselves to be bullied by the government” into accepting reforms that she said would make it harder and more expensive for many Australians to attend university.” (Chang, 2020, Para.18) Even a summer job doesn’t have the purchasing power it used to have in relation to tuition fees, as a result of the leniency on repayment and ease of obtaining loans. “The Commission distinguished between prices and costs, and found that prices (what students pay) had been increasing faster than inflation in both the public and private not-for-profit sectors.” (National Center for Education Statistics [NCES], 2003, p.3) In contrast, it can be clear that paying upfront for university directly correlates to student decisions which represents a private benefit. (Teixeira, 2006, p.15)

The bottom line shows the total outstanding Higher Education Loan Program (HELP) debt of $66.6 billion for the 2018–19 financial year. (Australian Taxation Office, 2019, Table 6) While subsidies are increasing the total cost of a degree additional to HECS interest of an additional twenty five percent fee (set cost of borrowing). “Professor McKibbin, a former RBA board member, said “zero” interest government loans could be drawn on by people, capped at a specified monetary limit determined by Treasury advice.” (McKibbin in Kehoe, 2020, Para. 6) Milton Friedman a critic of Keynes, contributed to the establishment of the monetarist school of thought, focused on the role money supply has on inflation rather than aggregate demand. “The recognition that substantial inflation is always and everywhere a monetary phenomenon is only the beginning of an understanding of the cause and cure of inflation.” (Friedman and Friedman, 1980, p.254) 

XIX. VARIABLES THAT REDUCE THE BURDEN OF TAXATION 

“Interestingly, the federal tax structure [takes] the additional incomes (internal benefits) accruing to individuals, by taking an average of probably 25 percent of the additional income generated by more schooling.” (Hansen, 1974, p.4) Other variables can include transfer payments, self education expenses and income taxation generated by more schooling. “Students with low personal or family incomes are also entitled to student income support, through Youth Allowance, Austudy or Abstudy.” (Norton, 2012, p.32) “Income-contingent loans can be applied in a range of ways, including areas as diverse as drought relief, solar energy, business [research and development], or extended paid parental leave [a good replacement for transfer payments].” (Chapman, 2020, Para. 8)

Deductible self education expenses and transfer payments (negative taxes) substantially change the distribution of the tax burden. “Money flows not only from households to the government [agencies] in the form of taxes but also from the government [agencies] back to households in the form of transfer payments.” (Mankiw, 2015, p.248) Relevant Australian cases include: Federal Court of Australia v Highfield (1982), FCT v Wilkinson (1983), FCT v Studdert (1991). “The Court allowed the deduction on the basis that the taxpayer had undertaken the studies with the intention of expanding his periodontics work in his existing practice.” (Sadiq, 2019, p.204) “If the facts in Wilkinson were to arise today, the taxpayer would most likely be allowed to deduct the cost of flying lessons provided he or she was able to prove on the evidence that the lessons would make the taxpayer a more efficient air traffic controller and was likely to lead to promotion and a higher salary.” (Sadiq, 2019, p.205) “Studdert may be cited as an authority for the proposition that expenses incurred to learn a new skill can be deductible if the taxpayer can show the skill will be used in his current income-earning activities and can assist in obtaining promotion in those activities.” (Sadiq, 2019, p.205) This offsets the external benefit and taxing both society and students would be counterproductive due to inability to accurately trace all payments and all external benefits, considering these possible factors. “Charging for higher education does not, on the evidence to date, create unfair social background differences in [socio-economic status] SES attendance.” (Norton, 2012, p.33)

XX. CHINESE GOVERNMENT VIOLATION OF SINO-BRITISH JOINT DECLARATION, IMPACTS STUDENTS GLOBALLY

Moreover, government policies that try to control higher education cause more extreme outcomes for all students. Hong Kong is known as an international financial center characterized by free trade, less federal government interference, and low tax rates. Since the Sino-British Joint Declaration agreement between the UK and China clarified that Hong Kong’s high-degree of autonomy, rights and freedoms would remain unchanged for 50 years. Now violated by the Chinese Federal Government, it has ended the fifty year freedom from Chinese laws, Article 38 will end opportunities for higher education in Hong Kong, due to policy uncertainty.

“The academics say article 38 raises the unsettling prospect that students travelling through Hong Kong and China face being handed lengthy prison sentences on the basis of academic work deemed to be subversive by Chinese authorities.” (Wintour, 2020, Para. 5) Subversive academic work is an ambiguous term and the law directly threatens academic freedom worldwide – including research papers such as this one. “British Foreign Secretary Jeremy Hunt on Tuesday warned that China would face serious consequences if it failed to honour the Sino-British Joint Declaration which was signed in 1984 [between former prime minister Marget Thatcher and then-premier Zhao Ziyang].” (Cheung, 2019, Para. 1) The United States also strongly condemns the arrest and detention of student democracy activists and calls on Hong Kong authorities to release those that remain detained immediately. An outpouring of solidarity between Hong Kong, Thailand and Taiwan student activists have come together in similar protests (jointly called the Milk Tea Alliance) not specifically anti-Chinese government rule, but anti-authoritarian rule everywhere, in pursuit of a liberal democracy and human rights in Southeast Asia. 

XXI. MARKET PRICING AND UNIVERSITY FUNDING IN AMERICA, CANADA AND JAPAN

Government spending can crowd out investment and spending by private businesses, with less money available in the market for private borrowing. “[Public] institutions, namely Universities, were not only frequently ineffective in their teaching, but also highly resistant to the introduction of new advances in knowledge[, the] privileges being awarded to public institutions [is harmful to both public and private institutions] since it [promotes] inefficiency and idleness in the former, and obstructed the development of the latter.” (Mill in Teixeira, 2006, p.3). 

“In most developing countries (as well as in countries like Japan, Korea and Taiwan), private higher education thrives because governments cannot or will not supply higher education in sufficient quantity to meet demand.” (Usher, 2016, Para. 7) A unique example in private market funding comes from Japan. “The University of Tokyo said Thursday it will issue ¥20 billion ($190 million) worth of bonds next week to finance projects to address social issues following the coronavirus pandemic, becoming the first national university to do so.” (Kyodo, 2020, Para. 1) 

The private market may have a comparative advantage in funding, as they demand human capital for production, they choose to donate and provide scholarships; “colleges and universities receive gifts from alumni, corporations, and foundations in part because education has positive externalities for society.” (Mankiw, 2015, p.208) Supported by governments allowing charitable donations to be tax deductible. (Mankiw, 2015, p.208) Having decentralised decision making for universities allows them to tap into new trends and innovation immediately without slow bureaucratic decision making or a limited budgetary allocation slowing down (e.g. blockchain center at RMIT University).

“In the U.S., all universities charge tuition, ranging from $20,000 to $80,000 per year, though scholarships and loans are available to high percentages of students.” (Isopahkala-Bouret, et. al. 2018, p.149) However, amid the newly elected party proposed the changes in government policy on higher education hinders prior progress. “Joe Biden’s apparent election as president could pave the way for a dramatic shift in higher education policies, possibly making tuition free for many seeking a college education and wiping away the debt of millions of people paying back student loans” (Murakami, 2020, Para 1) By wiping away debt and making education free essentially transfers the debt onto taxpayers and savers, through higher taxes and currency inflation. Without the market price signals, education will slowly decline in quality and quantity supplied.

“The Canadian case is somewhat unique in that there is no federal ministry or agency in charge of education, unlike in other federal countries.” (Capano, 2014, p.331) There are both public and private universities in Canada, though private universities have smaller class sizes and no residency-based tuition differential and tend to have more financial aid for international applicants. In contrast, public universities loans provide limited access for international students with high-interest, many turn to private bank loans instead. “[A market based idea called] MICC Financial [is] an app based on the concept of rotational savings [which pools] money into a common fund between a group of individuals like close friends.” (Study International, 2020, Para. 2) 

XXII. CONCLUSION

In conclusion, the identification and measurement of public and private goods in higher education, continues to prevent an ideal corrective subsidy that equals the external benefit. Considering market failure for government agencies and private suppliers to overcome the free rider problem and encourage positive externalities through government market-based policies. Arguing that the abolishment of subsidies and the promotion of market based competition can lower the overall cost to the student and society taxes. Protection of low socio-economic students can be provided for through a full fee system which includes open access to a market contingent loan system with competition in interest rates and other innovative market funding solutions. Due to the extent of government policy failures from around the world, the market provides the only suitable option for offering a competitive higher education market.

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