Top-up fees (crossposted at Crooked Timber)

I’m not clear enough on the workings of the British Parliament to know whether Blair’s 5-vote win on the second reading of his education bill means that the political fight is over, but I thought I’d have my say anyway. The core elements of the bill are a substantial increase in fees, the right of universities to charge variable “top-up fees” and the introduction of a HECS-style repayment mechanism using the tax system. Thus it’s like a combination of all the education financing changes in Australia from the late 1980s, when HECS came in, to the recent Nelson package. Not surprisingly, I like some parts of it, and dislike others.

First, I’ll respond to other CT bloggers who’ve discussed this issue. Chris primarily makes the argument that, given that money isn’t going to come from anywhere else, or on any other terms, it’s better to take what’s on offer than to refuse on the basis that the terms are bad ones. I suppose I agree with this, but it’s not a helpful basis on which to discuss policy. Assuming you don’t want the Tories back, the same argument could be used for acquiescence in whatever policy Blair chooses to propose. Chris also dismisses concerns about variable fees, and I’ll return to this.

Daniel argues on risk grounds against the repayment mechanism (borrowed from the Australian HECS scheme) and, in my view, gets the risk analysis wrong. For precisely the reasons he outlines for not using NPV rules in assessing the effects of fees, the insurance implicit in the provision that no repayment is required until/unless earnings exceed some percentage of average earnings is considerably more valuable than he suggests. Assuming the proportion is set to give a level higher than the average earnings of non-graduates, it makes education a one-way bet. If you win, by earning more than you would have expected otherwise, you pay back some of your winnings. If you lose, you pay nothing. I don’t know what the actual proportion is, so I should stress that my support for the repayment scheme depends critically on this variable – in the absence of a high threshold substantial insurance, Daniel’s analysis is correct.

The critical sticking point, though, is not the level of fees but the principle of variable fees. If this provision had been dropped, it seems clear that the rest of the package would have passed fairly easily. The claim that these are not the same variable fees that were specifically excluded in the manifesto is nonsense, and the determination with which Blair and Clarke have stuck to them shows this.

The variable fees proposal raises two main issues. The first, which I assume is dominant for Blair and Clarke, is the desirability of a market-based and profit-driven higher education system, in which prices determine the allocation of resources. I could go to great length on why this is a bad idea, but most of the arguments will be familiar to readers so I’ll raise one that I borrow from archetypal Chicago economist, George Stigler who formulated the ‘survivor principle’. Stigler argued that if you want to determine the optimal firm size and structure for a given industry, you shouldn’t rely on abstract theoretical arguments or engineering estimates of cost functions. Instead, you should look to see which firms have actually survived. In the case of education, for-profit providers have (almost) always and (almost) everywhere failed in competition with non-profit and state providers, even when competing on apparently level playing fields. The big exception is that of providing vocational training to adults (commercial trade schools and the University of Phoenix are examples) . But this is the exception that proves (tests) the rule, since most of the standard arguments against for-profit education don’t apply in this case.

Chris raises the framing issue of whether there would be similar objections to discounts from a set fee as to top-ups. In principle, my answer is “Yes”, but in practice there are two offsetting observations. On the one hand, discounting is very difficult to stop. On the other hand, unless the basic fee is set too high, relative to the cost of provision, discounting will be a marginal issue.

The other major issue is that of equity, and raises afresh a whole lot of issues which have been debated at length in relation to school education, notably with respect to selective education and the 11-plus examination. Supporters of the proposal take it for granted that some university students (for example, those going to Oxford and Cambridge) should receive a substantially better education than others, even when both are undertaking essentially the same course of study. If so, it seems only fair that those receiving the better education should pay more. And since the extra payments go to the university, the difference in quality can be maintained indefinitely.

The same case can be made for a user-pays system in almost any public service, once the principle of unequal provision is accepted. Long after the NHS was introduced, health services were better in rich areas than poor ones, and the same arguments could have been applied for user charges, which would then have perpetuated the inequalities.

The only way in which variable fees could be regarded as egalitarian would be if the grants to top universities were reduced in line with their capacity to charge higher fees. That is, in effect, Oxford and Cambridge would be taxed on the capital accumulated during centuries of state and church support.

An important difference that used to apply to higher education was that only a small proportion of the population, selected on the basis of competitive examination, went to university. In these circumstances, there was no obvious reason for trying to equalise provision within this group. But this difference has ceased to be relevant. In most developed countries, a majority of people can be expected to undertake some form of post-secondary education.

This means that the issues applying to the funding and organisation of post-secondary education are, in essence, the same as for school education (particularly for the post-compulsory age group). The primary objective of public policy ought to be the provision of a high standard of universal education, encouraging diversity in the type of education provided (traditional university, technical and so on) but not in quality. If there’s some extra money for a few flagships like Oxford and Cambridge, well and good, but they should not be allowed to set the pattern.

To the extent that there’s a case for “elite” universities, it relates primarily to research. But even here, the case for elite institutions is weak. There’s no particular reason why the best economics department and the best physics department should be located at the same place, and this is recognised in the Research Assessment procedure which focuses on disciplines rather than institutions. The link between top-quality research and undergraduate education is made much of, but is quite tenuous these days, The distance between research frontiers and undergraduate work now is as great as the distance between research and upper secondary school was thirty or forty years ago in many disciplines – certainly this is true in economics.

Moving on to the blue-sky department, I’d suggest that since post-secondary education is unlikely to become properly universal for a long time, we could think about providing every 18-year old with a capital loan which could either be traded for a post-secondary education or used for some purpose such as establishing a business, with the whole being repaid by a tax surcharge when (if) incomes exceed average earnings.

[Posted with ecto]

5 thoughts on “Top-up fees (crossposted at Crooked Timber)

  1. “assuming you don’t want the Tories back” – well – my response to this is that with a ‘Labour’ government like Blair’s, who needs Tories?

    more Thatcher than Thatcher.

    it’s a grim situation – and pretty much the same here, at ‘home’.

    Howard or Latham? what kind of choice is that?

  2. Quite persuasive. A couple of points though.

    Since American universities are widely considered the best in the world, don’t you think we (and Britain) should learn from that model?

    On the ‘survivor principle’: you seem to be advocating a system where it’s virtually impossible for any institution not to survive. It’s hardly surprising if they do then!

    Isn’t punishing higher-achieving universities, by taxing them and rewarding their lower-achieving counterparts a guaranteed road to mediocrity? Of course, it means everyone will survive, so your prophesy becomes self-fulfilling.

    Personally, I’d like to see more from our unis than mere survival.

    I think there are good reasons to put the best and brightest of many disciplines in close proximity. Exposure to excellence from other disciplines can only be good. Such cross-polination can only take a discipline higher. Or don’t you think economists can learn anything from others?

  3. PK is right. its a recipe for mediocrity.

    also, as he alludes to, your citing of the survivor principle misses the notion of local maxima.

    it might be, and probably is the case, that private institutions cant compete against public ones, given the current statespace, but this doesnt mean there couldnt be much better universities if the current system were reformed, or that private institutions would not survive (and be better) if they were in a market with no publicly subsidised institutions.

    (i know you mentioned level playing field but i fail to see how this is the case)

  4. US universities are only the “best in the world” in a positive way in respect of their incidental function of education. They don’t have the institutional structure to help them achieve their main purpose, which is learning and its transmission and to a lesser extent fresh research.

    However, this main purpose has also become neglected in the universities of the rest of the world (with the possible exception of Cairo University, which still has an emphasis on its own traditions but which hardly suits ours). So US universities may well be the world’s “best” in that area too, from not declining in that respect the way other universities have (even though their own research and transmission of learning is only precariously there because they contain scholars and not established in their structure).

  5. Looking at things from the students’ perspective, there are two main reasons for letting universities set their own fees.

    First, students ought to be able to determine what investment they make in their own human capital. It makes sense for someone with high intellectual ability and/ or a high labour market commitment to invest relatively large amounts in their human capital, since they will probably get a decent return from it.

    Students with modest ability, whose aim in going to university is to acquire some basic skill or even just to acquire the credential that will secure an interview, by contrast should get in and out of university as quickly and cheaply as possible.

    The second reason for letting fees be set by universities is to provide some incentives to improve teaching. This will never be an overwhelming force, since as the original post points out most universities are non-profit, and most academics want to do research as well, but I believe it can have a positive impact. Slowly improving levels of student satisfaction in Australian universities are, I think, due in part to improved practices designed to impress fee-paying overseas students.

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