The ongoing saga of British expenditure reform

by on October 16, 2010 at 7:37 am in Economics, Education | Permalink

Prof. Steve Smith, president of Universities U.K., which represents Britain’s higher-learning institutions, said the government was likely to cut about 80 percent of the current $6.2 billion it pays annually for university teaching, and about $1.6 billion from the $6.4 billion it provides for research.

To make up for the shortfall, universities would have to raise tuition to an average of more than $11,000, Professor Smith said, and doing so would require Parliament to lift the cap on such fees, now set at $5,260.

Here is the full story.

Leo October 16, 2010 at 4:13 am

The proposals include the government financing of loans for students that do not have to be paid back until and unless the student is earning more than £21000 (about the median income)

Adrian Ratnapala October 16, 2010 at 5:31 am

@Mario? Why are you puzzled, $11000 is a lot of money.

@Leo, thank you for pointing out the elephant in the room that the NYT missed. The government loans money to students under very attractive terms. No repayments or interest for people on lower incomes. Australia has a similar scheme (but there, the universities don't set prices). At least in Australia, the debate tends to go like this:

Right Wing: Free university is a subsidy for the upper middle classes.

Left Wing: No tuition fees favour rich kids over poor kids.

Right Wing: Not when the loan scheme means don't pay anything until they are rich.

Left Wing: But kids still know that they are going to be in debt, and that puts them off.

Does anyone here have thoughts about that last point? Can loans like this really put rich on poor on an equal footing. If such loans do work at least for economic "rational actors"? If the poor are in fact put off, but only for irrational reasons then should we care? I don't have firm answers for any of those questions.

Bill October 16, 2010 at 6:06 am

The one area that concerns me, and is not addressed in the British proposal, is the state subsidy for private research and development that has been developing in public education.

Corporations have found that if they contribute a little to research, and have pull in the state legislature, they can have the state fund their R&D through collaborative programs. They also get cheap grad student labor, and, if they are smart (which they are) get a royalty free license for the research results. Also, the faculty generally gets a payment, an investment in a side company, or a consulting contract.

So, what has happened is that tuition and state funding have been subsidizing corporate R&D.

If the state wants to subidize corporate R&D, they should have it (and its administrative overhead) segregated from teaching costs.

Otherwise, its just another corporate pig at the trough.

Andrew October 16, 2010 at 6:31 am

The tradeoff of subsidizing corporate R&D is how useless (or worse, DoD for example) is the research funds subsidizing state R&D.

It's not clear to me that more corporate R&D is a bad tradeoff. Obviously, I prefer separation of research and state, but noone has offered me that yet.

Of course, what the government will do is cut faster than the finance alternatives can get up and running, when they absolutely can't ignore their own finances, jamming everyone up due to their incompetence. Clusterfoible as usual.

Larry Rothfield October 16, 2010 at 7:53 am

Willingness to pay is the best way to get only serious people in the universities? That makes no sense. When universities were only for wealthy aristocrats, they were all willing to pay because they risked nothing in paying, but many of them were very unserious.

Adrian Ratnapala October 16, 2010 at 8:10 am

@Dan Weber: I don't know about the plans in Britain, but I think in Australia, the rate of repayment is also tapered according to income. This is still a marginal (quasi) tax hike, but it's not a sharp "bump".

@Mario: I *think* I agree with you. Some kinds of education might benefit the public, but it benefits the individual much more. Nonetheless, it costs a lot ($11000 is a lot, even if it's fair), and this is why I would like to know that loan schemes really are a way of helping the poor.

So Bill, thanks for the info. You'll be glad to know that in Australia, everyone knows about the HECS scheme which funds university students. It's not even optional The government pays for your uni place, and then you pay back the government. I am not sure that's the best way of doing things, but at least it seems to address your concerns.

Richard October 16, 2010 at 8:15 am

Here is the Browne report. To see student loans as debt is as nonsensical as seeing my lifetime food budget as debt.
http://www.bis.gov.uk/assets/biscore/corporate/do

The Browne report estimates 'that only the top 40% of earners on average will pay back all the charges paid on their behalf by the Government upfront; and the 20% of lowest earners will pay less than today. For all
students, studying for a degree will be a risk free activity. The return to graduates for studying will
be on average around 400%. '

Andrew October 16, 2010 at 8:20 am

Bill, you are way off base. It's nearly all corporate subsidies. The whole thing. And that's the good news because what isn't is mostly waste.

If you eliminated all corporate subsidies, the handwriting department is still closing down, and probably all the sooner.

Bill October 16, 2010 at 9:20 am

Adrian, Your observation about the average student at these institutions is based on the current system of funding. The issue is what happens when it changes. What you might see is subsidized bright folks (like in the US) at Ivy Leagues mixed with the well off children of alumni, such as George Bush at Yale. Do you want public education to look like private.

Bill October 16, 2010 at 10:41 am

Another unintended consequence of reducing public funding of higher education is this: The end of subsidy will affect women more than men, since men view their lives in the workforce, and some women view it as a short term or an interupted term event. fewer women will be attending college, unless they plan to have a lifelong career and not stop for children.

This will make college an even hornier place.

A better approach to all of this is to have a tax deduction or credit for college loans, scaled to income (ie, incomes over x have a reduced deduction or credit). Then, a husband and a wife filing jointly could deduct the non-working spouses education interest from the return.

People should think through how even marginal changes result in differential responses by different groups. But they don't.

Dan H. October 16, 2010 at 11:02 am

I have to believe there are major improvements in efficiency to be found in higher education. These institutions have existed for a long time in a soup of government money, with fuzzy controls over how the money is used. Plus they are often the beneficiaries of trusts and receive alumni donations with few strings attached.

When I did my undergrad program, it involved 15 hours per week of lecture time, usually in a room of 50-250 people. My interaction with staff was rarely with the professors – they shuffled most of their work off onto low-paid teaching assistants.

In addition, textbook prices were out of control, the residence I stayed in was overpriced compared to local rent, and the food we were required to buy to stay in residence was way overpriced and of low quality.

The whole thing was suffused of the feeling of a state enterprise – low efficiency, low attention to detail and quality, and graft everywhere.

In contrast, I earlier did a two year program in electronic engineering at a local junior college. It cost 1/4 as much, the staff were professional and always available, the classes were no more than 30 students, We had 30 hours of instruction a week instead of fifteen, and every student had his own workbench with several thousands of dollars of test equipment. Tuition there cost about one half of what I paid for university.

If the government cutting off funds to higher education forced competition or forces them to seriously look at their cost structures and efficiency, that a good thing.

David Wright October 16, 2010 at 3:39 pm

Adrian: Those are indeed good comments. I would answer the last by saying "yes, the poor student is more put off than the rich student, but that is the case under free tuition also".

Suppose a poor and a rich student are deciding whether to go to college. College will increase the limetime earnings of each by $1M. The rich student's parents are willing to pay $100K toward his education; the poor student's parents will contribute nothing.

Now suppose college costs $100K. Then the rich student goes on his parents dime and enjoys a full $1M of extra lifetime utility for his trouble. The poor student has to take out and then pay back $100K loan, so he only gets to enjoy $900K of extra lifetime utility for the trouble. He is $100K less incentivized to go to college.

Now suppose college is free. Both now pay no tuition, but the rich student's parents now have $100K to contribute to their child's living expenses, books, tutoring, enriching vacations, etc. The rich student effectively gets $1.1M of extra lifetime utility out of going to college, the poor student $1.0M. Again, the poor student is $100K less incentivized to go to college.

Short of taking away all children from the parents at birth, you will never level the playing field. The point is not to level the playing field, but to make utility-enhancing choices possible.

David Wright October 16, 2010 at 7:19 pm

Bill, I appreciate your response.

Yes, under some purely theoretical supposition of equality, free university education would also mean free room and board and supplies. But having both attended and taught at universities in various European countries, I can say that although free (or nearly free) tuition is common, I have never seen the state cover those ancilary costs for all students. (Subsidized loans for living expenses, yes, but then we are back in the loan category.) So that isn't the change under debate here.

And while I did chuckle at the "pot & parties" comment, it shouldn't be dismissed out of hand. Pot and parties are an important draw for college students, and the poorer student is going to get less of them, regardless of who is paying his tuition. So you should consider that a real example of how a poorer student will have less utility out of college, even under free tuition.

I agree that a real data would be helpful here. Inter-country comparisons are fraught, because of cultural and other differences. For example, comparing the two countries I know best, the U.S. and Germany, I can already tell you that the chance for a poor child to attend univeristy is much higher in the U.S., although tuition in Germany is so low as to be effectively free in comparison. (Class identity and class segregation is much stronger in Europe. The school system in Germany seperates children into college-bound and non-college-bound tracks starting at 4th grade, and rich parents are much more vocal about wanting their children on the college-bound track than poor parents.) The real test will be inter-temporal comparisons before and after policy changes like the one under consideration here. I look forward to being able to make them.

Bill October 17, 2010 at 4:05 am

I was thinking a little more about the last point: is a scholarship for a year in college (contingent on graduating with a certain gradepoint) in ninth grade too much, and would a better choice be a $1000 scholarship in 9th grade. The behaviourlist in me says that the fear of loss would still make someone continue to get good grades, and, in the eyes of a poor person, $1000 looms big. This would be an interesting experiment.

So, maybe some of you academic economists can get your institution to set up an experiment for you, donating some scholarships to test which programs are just as effective. You can write it up, and the school can get the kudos.

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