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Slugging Match

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There are several things wrong with the government’s plans to pay for higher education with a hypothecated graduate tax – sorry, ‘contribution’. For a start, it will be relatively more expensive for less well paid graduates, such as teachers and nurses. But more fundamentally, the entire debate about higher education funding – which seems to have been reduced to an unappealing slugging match between tuition fees in one corner and some kind of graduate tax in the other – now takes it for granted that individual students ought, one way or another, sooner or later, to pay for their own university courses. They get the benefit, so they should pay, right?

But if we’re following that logic, why stop at making doctors, for example, pay for their degrees? Why not charge each patient a small fee – sorry, contribution – carefully calculated according to the proportion of the doctor’s training that goes towards their diagnosis and treatment? Presumably because even Vince Cable and David Willetts would think that was crazy and unworkable.

Here’s another crazy idea. Since, generally speaking, society as a whole benefits from a skilled graduate workforce, why not split the difference and spread the cost of higher education across society as a whole, with everyone paying what they can afford? You could do this using an arcane system that involves levying higher income taxes – sorry, contributions – from higher earners (most of whom, so we’re told, are graduates anyway). And just think how much red tape could be cut that way, too.

Comments on “Slugging Match”

  1. Joe Morison says:

    I don’t see why a graduate tax has to be regressive, doesn’t it depend on how it’s set up? For example, you could have it not having to be paid on incomes less than 40k.

    • Thomas Jones says:

      You’re right, a graduate tax is more progressive than tuition fees, and a reasonable starting threshold would make an important difference. What worries me though is the individualist assumption that students ought to pay for their own university education. Why stop there? What about a special tax for sixth-formers? And while we’re about it, why should people who aren’t ill pay for hospitals, or people who haven’t been burgled pay for the police?

  2. pinhut says:

    A tentative counterargument:

    It should be those who do not go to university who pay more, it could be called the Ignorance Tax.

    For example, what percentage of the prison population have a degree?

    What percentage of those who are long-term unemployed have a degree?

    What percentage of those who smoke and drink to excess have a degree?

    What percentage of those claiming child benefit have a degree?

    What percentage of those arrested for violent crimes, petty theft, etc, have a degree?

    What percentage of those requiring social services intervention have a degree?

    Any metric that reveals an underrepresentation of graduates in using public services should be counted against the cost of their education, in lieu of this myopic focus on totting up tuition fees. It may be found that each graduate effectively saves the state money over the course of their lifetime, above and beyond the extra that they may pay in taxes.

    Hopefully, the above underscores the fact that while an uneducated person may, in contrast to being ‘rewarded’ be ‘penalised’ by a lifetime of low wages, such persons also penalise society with a greater propensity to break the law, neglect their health, mistreat their families, be addicted to drugs, claim benefits, populate the prison system, etc.

    • A.J.P. Crown says:

      A tentative counterargument
      Don’t you mean A Modest Proposal?

      • pinhut says:

        I’m of the left, but I do believe that when saying, for example, that university tuition costs “X” that it must be compared to something, and that the statistical consequences for society at large be taken into account. If it is the case that graduates are better behaved, largely, and consume less public services, then this is an argument to try and increase the numbers still further.

        I also tried to find a figure for how much a typical criminal court case costs to process, seeing as the accused does not have to pay for the proceedings. Does a one-week trial cost the public more than a term at Oxbridge? etc. After all, I am sure that if the Graduate Tax can be deemed sensible, so could a Convicted Criminal Tax, to be disbursed from a central fund to victims of crime over the course of an offender’s life.

        In fact, with the above policy in place, maybe the Tories wouldn’t have needed a coalition!

        • Phil says:

          I’m assuming at least some of that was meant seriously; if it was all a massive wind-up or some form of art action, you have my apologies.

          If it is the case that graduates are better behaved, largely, and consume less public services, then this is an argument to try and increase the numbers still further.

          It’s certainly the case that children who are read to every night reach a higher level of education, largely. This presumably is an argument to try and increase their numbers further. (This may be a bad example of a fallacious argument, as the Labour government actually endorsed it.)

          My point is that, while “statistical consequences” are notoriously hard to isolate (xkcd), it’s always a good idea to consider the possibility that the correlation you’re looking for is spurious and hence can’t be given any causal weight.

          As for the criminal tax, a charge is already levied on all convicted criminals and paid into a fund for victims of crime; it was a New Labour initiative. I think the best that can be said of it is that it’s not as bad an idea as yours. (The argument in favour of taxing graduates is that they benefit from the money spent on their education and indeed (on aggregate) become higher earners as a result; it might be hard to stand this one up with regard to convicted criminals.)

  3. pinhut says:

    I’m an arts graduate, permit me my little joke.

    I was highlighting the point that there are potential savings from a society producing more graduates. Society certainly benefits from my knowledge of the 20th century literary avant-garde, even it is only when I quote Raymond Queneau to my friends.

    “The argument in favour of taxing graduates is that they benefit from the money spent on their education and indeed (on aggregate) become higher earners as a result;”

    But is this a valid argument? People also benefit from money spent on the highways, but we don’t directly tax people who don’t own a car. In like manner, people without a university education are benefiting constantly from those who do. The direction of this argument wishes to somehow separate the benefits that accrue to society from the presence of graduates from some ‘personal/private’ benefit that they themselves derive, possibly, by earning more. To me, it just seems to begin from an incorrect premise and then continue in its folly.

    Also, taking your argument, what is so wrong with reversing it?

    “The argument in favour of taxing the long-term unemployed is that they benefit from the money spent on their unemployment and indeed (definitely) become higher “earners” as a result (ie: being penniless otherwise);”

    At the very least, we could agree that the long-term unemployed should pay an extra tax when they go back into employment, should they earn above a certain threshold (not that it is likely to ever occur).

    Thomas Jones is right in his original post, that the issue is why should one group of recipients of support from the state be expected to repay that support throughout their lives on top of other tax contributions (and, if they earn more they pay more tax anyway), while other groups are not expected to.

  4. A.J.P. Crown says:

    A tax on people who vote for the winning party in a general election might really help the Lib-Dems.

    If you want to take the statistical consequences for society at large into account, how about getting a few billion from the defence budget? Then nobody would have to worry about the twenty-five quid they’d borrowed to pay for their prison sentence or their education or anything else. When I went there in the ’70s, university education was free and you got a grant and we were the baby boom. If Britain could pay for us, the baby-boomer tax base certainly ought to be able to cover everyone at university now.

    • pinhut says:

      I don’t really want to take the statistical consequences into account at all, my point was that the ‘cost’ of university education is presented without taking into account the savings it may engender.

      I would prefer people to receive grants, etc, but what I would really like to see, and can’t belive doesn’t exist, is at least one free university, funded by donations, favouring the working classes and employing retired academics and bright young things. Because, as a working class graduate, the thing for me is that there is no separation between education and social class in the UK, so that the two effectively become synonymous, making academic life, for me at least, one long exercise in balancing my passion for learning with the feeling of being excluded (particularly from any chance of an academic career).

      That is why I love academic life in Guatemala, where the professors are just as brainy but without the middle-class mores (for the greater part) – it means a person can learn without being subject to a total ideological makeover (that the middle-classes will attribute generally to one’s own overactive imagination!)

      Amen.

      • A.J.P. Crown says:

        Ruskin College was set up for the working class, although it only ever covered the social sciences as far as I know. Art schools in Britain were good at encouraging applications from people without academic qualifications, and that consequently included a large proportion of people from working class backgrounds. I think it’s one reason why so many musicians went to art school. All that changed in the mid-eighties, under Thatcher.

        I don’t think that what you’re criticising is a particularly British thing. Yes, places like Oxbridge are very class conscious; but many countries have an elitist equivalent and its resulting disdain for everyone else, that’s similar. I’d say Guatemala was the exception, if that’s the case. Norway, where I live, has all the criteria in place for a life-style separation between people with an education and people without one even though they all earn roughly the same money. That would be a result of the education rather than of snobbery, though, wouldn’t it?

        • Joe Morison says:

          Are you sure Oxbridge is class conscious? You might have to look and sound what i suppose we might call ‘respectable’, but does background matter? Malcolm Bowie described his origins to me as ‘extremely lower middle class’ and he rose about as high there as it’s possible to go (and there was nothing affected or artificial in his manner).

          • pinhut says:

            Me: “it means a person can learn without being subject to a total ideological makeover (that the middle-classes will attribute generally to one’s own overactive imagination!)”

            Joe: “Are you sure Oxbridge is class conscious?”

            It’s always the way, the first step is to try and push the idea that the issue does not exist. Why this is any different to somebody choosing to deny racism ‘really’ exists, or sexism etc, I’ve no idea, but apparently the personal experiences don’t count if the Joe’s of the world can provide a single counterfactual, in this instance, Malcolm Bowie.

            By Joe’s ‘logic’ racism does not exist in the US because they have a black president.

          • Joe Morison says:

            Pinhut (for some reason there’s no reply button under your post of 3.47), please, i’m certainly not trying to suggest that social snobbery in not a huge and pernicious force in this country, just that i’m ‘not sure’ (and it’s no more than that) that it’s a big thing in academia – but ideology definitely is. Oxbridge is very establishment, and i’ve no doubt that ‘is he/she one of us?’ is a big consideration when it comes to the doling out of their glittering prizes; it’s just that i don’t think being one of them is a matter of who your parents were, it’s about attitude and style.
            I’d never say a single counter example disproves anything more than a universal ascription. Bowie is a good example because he rose so high; but of the Oxbridge dons i’ve met, none have seemed that posh.

          • Thomas Jones says:

            Statistics: Around 45 per cent of undergraduates at Oxford went to private schools; 7 per cent of children are privately educated.

            Anecdote: A girl from a Manchester comprehensive being interviewed for a place at Oxford was told by the don interviewing her that he didn’t like northerners. (She ended up going to UCL.) And this was in the 1990s.

          • Phil says:

            Another anecdote: my wife and I met at Cambridge, where I’d gone from a fee-paying school in Croydon & she from a sixth-form college in Preston. Entry in those days was by college entrance exam first, interview second and projected A Levels third (or possibly third & second respectively – by an oversight I was never called for interview, but still got in). She sat next to our Director of Studies at a formal dinner to welcome the new undergraduates (a dreadful evening, although the food was pretty good); he congratulated her on her A Level results, which had since come out, and said something to the effect that they’d been glad to see that they’d made the right choice in offering her a place. (She got four A’s, which was pretty good going in 1978. I got three B’s.) It was a bit of a double-edged comment – we wondered if he would have said the same to someone from Cheltenham Ladies’ College.

          • Joe Morison says:

            I’d have thought the explanation for the preponderance of privately educated Oxbridge undergraduates is much more to do with the quality of their schooling and the aspiration instilled into them (we’ve all seen The History Boys) than the social snobbery of Oxbridge colleges.
            As for TJ’s anecdote, my guess is that if she’d replied ‘And i don’t like stuck up southern wankers’, she’d have been offered a scholarship.

          • Phil says:

            The History Boys was set at a grammar school, or was that your point?

            If you go to an open day at a fee-paying secondary school, teachers will regularly ask which school your child is currently attending – and they’re not collecting data on the different state primaries. Passing an entrance exam to a good public school is very difficult, but it’s that much easier if you’ve been practising on test papers for the last couple of terms. Something similar applies to the Oxbridge hurdle, although less so since the abolition of college entrance exams.

          • Joe Morison says:

            Yes, Phil, that was my point. The boys in Bennett’s play all got to Oxbridge from their state school because they had an inspiring teacher. True of Bennett, Denis Potter, and many many more who have helped to light up this country and do something to whittle away at the class system.

          • Phil says:

            But Alan Bennett has said himself that he would never have gone to university – let alone Oxford – if he hadn’t had a full grant. THB’s evasion of the funding issue is one of the things that make it ring more like fairytale than social realism.

  5. James Alexander says:

    Is education a public or a private good? Difficult, because both are usually consequent and inseparable. It clarifies to consider not just the consequences, but also the originating intentions that drive the big educational provisions. Take free universal compulsory schooling – immeasurable amounts of private good ensue from it, certainly, but it is principally motivated and maintained as a project of public good, paid for (through the nose) collectively, with commensurate public good in mind. Then take private school education – lots of public good ensues (so it is argued) but it is marketed, sold and bought as something of private advantage, at a steep price paid out of private pocket – a private good in primary intention and consumers’ perception.

    Now consider post-compulsory (post-16) education. It’s sought out voluntarily by the individual, voluntarily, and so looks principally like a sought-after private good. Yet when it follows straight on from age 16 in a free state school, in a 6th form, it continues free, apparently accepted as part of the free system. Government micro-manages it and its curriculum and its participants without a second thought – definitely not a consumer led market. We seem to pay for it collectively out of taxation without thinking about it much – but (as said in the lead post above), there are logical questions to ask about that. Then there’s FE – we pay for that collectively, so it seems to have the status of a public good, and would be vigorously defended as such for all sorts of reasons – but it’s questionable in the terms of this discussion – training and qualification for private advancement is offered and sought, to and by only those who want and seek it – in this sector, private business interests expect to be heard and have their needs served, and are and do.

    Then there’s HE. Originating in ideas of public good in a distant past, then long and clearly a predominantly private good with canny vigorous PR pretentions to be thought of as predominantly a public good. More recently there has come along some ill-thought-through encouragement of participation in HE by the products of the free 6th forms, necessarily at collective expense, pursued and promoted as a public good in the sphere of social policy – though the outcome for participating individuals continued to be an educational private good, as it was in their 6th forms. Then came the steady expansion of HE provision into now 100 universities, and the ambition to have them attended by half the school-leaving population – 50% of us encouraged to pursue private educational good, as part of a social policy pusued as a public good. Getting a bit ambiguous, this, and certainly feeling very iffy when the bill appears (it’s enormous). The public, it begins to be thought. should no longer be asked for the sort of taxes that would sustain this intended public good that pans out as a private good. Government starts to say it’s a really a private good, lets it be known that the beneficiaries get richer than the rest of us through their lifetime (a naughty statistical generalisation), and goes to work on ingenious schemes for enabling half the 18 year-old population to make a horribly expensive purchase on the never-never in the uncertain hope of selling it at a profit years later.

    Alternatively, a future government might insist that it’s predominantly a public good by taking measures to ensure that it is, under public management and accountability suffcient to that end, and pay for it collectively from a progressive taxation that collects enough, and proportionately more from higher earners – among whom are those who have been successful in turning the public good to private financial advantage (as said in the opening post). Dream on. Pinhut’s idea for a free university could be developed into a big free public sector and a small private, but then you are reinforcing the really big problem – entrenched class. And it would still need a level of tax we don’t seem to want.

  6. A.J.P. Crown says:

    Am I sure Oxbridge is class conscious? Yes. The science park at Cambridge is probably a whole lot less class conscious than Christ Church at Oxford is, but the universities themselves have all the exclusionary phony names of a public school: Hilary term, college scouts, encaenia and so on — it’s just the same as “Big School” and “the beaks”. (I didn’t go there.)

    • pinhut says:

      To even ask the question is disingenuous, as if the atmosphere of an Oxford college is not closer to Eton than a state school, considering there are likely to be more Etonians there than Bash Street kids.

      All of the working class people I met during my term at St Cats were 1) the sons and daughters of teachers, 2) studying unfashionable subjects – modern languages, 3) prodigies in a hard science.

      The rest were a mixture of the truly able and the fabulously educated.

      The great myth was that all of their success was down to their own hard work (with the useful implicature that anybody not at Oxbridge is lazy and/or stupid), and was in no way related to going to having wealthy parents and attending the best schools. If this was truly the case, then why do we need any private schools at all? And why are the class sizes at the private schools of three or four pupils rather than 30? Surely one of these hard-working geniuses could learn with a crap teacher in a state school with a class of 50 and simply save mater and pater a fortune.

      • alex says:

        It’s a good comment. But the real scandal is not the class sizes in public schools, but those in Oxbridge. People – I mean people you’d expect more of, like Mary Beard – claim the one-to-one tutorial system is sacrosanct, and demand special funding to sustain this anachronistic mode, which in many cases wastes both tutors’ and students’ time; it’s quite obvious that a good discussion – which can surmount the “I don’t like northerners” type of stand-off situation – needs 6-15 people at least – cheaper and more fun.

    • Joe Morison says:

      I’m not talking about whether life in Oxbridge feels posh: it obviously does and to the extent that puts off working class kids it’s bad; but on the other hand, it equips those who survive it with the tools to prosper in this class obsessed land. In saying it’s not class conscious, i’m saying that generally Oxbridge is a progressive force. Only 55% of Oxbridge undergraduates come from state schools, bad, but in a country where 95% of the power and money is in the hands of the privately educated, it’s not so bad. Are dons promoted because their fathers went to the right school? No. Is it an institution that is trying to open itself up socially? From what i can see, yes. Was it, in the days of properly state funded higher education, a way for bright state-educated kids to join the social elites, definitely. It’s the public schools that do the damage not the universities.
      I’m sorry pinhut had a bad time at Oxford, but was the fault Oxford’s or our class ridden society? (I went to St. Andrews where they taught a better class of philosophy.)

  7. Oliver Rivers says:

    I think it would be quite helpful to support this debate with some analysis.

    Let the proportion of the costs of attending university that an individual pays be P. Then the proportion that the state pays is (1 – P).

    For social welfare to be maximised, P has to be greater than 0 (individuals pay some proportion of their tuition fees); it is possible that P should be quite high (individuals pay a lot of their tuition fees). Social welfare outcomes also turn out to be highly sensitive to the value of P.

    Social welfare in this context means: Incremental cash benefits to individuals from attending university + Incremental cash benefits to society from individuals attending university + Other, less easy to quantify benefits (an increase in social mobility, more dinner party conversations about Queneau).

    A rational Chancellor would set P at a rate such that social welfare was maximised, subject to the constraint that (1 – P) * An individual’s cost of attending university < = The present value of the future incremental cash benefits accruing to the Treasury from that individual’s attending university. That's to say, the Treasury musn’t lose money on sending people to university.

    If the Chancellor doesn't enforce that constraint, then higher education becomes a drain on the Treasury, and you get into debates about "how many nurseries or hospitals or orchestras or schools… would you like to cut to pay for university tuition?".

    Future incremental cash benefits to the Treasury are: the difference between the personal tax revenues the Treasury gets from a graduate, and what those tax revenues would be, were that person not a graduate; and the difference in corporate tax revenues, calculated on the same basis. Their present value is each year’s incremental benefit, discounted back to the present at an appropriate rate, and summed.

    One has to assume that firms are rational and profit-maximising; specifically, that they wish to preserve constant profit margins. If a firm is willing to pay graduates on average, say, 1+x times what they pay non-graduates, then, in order to preserve profitability, they must believe that taking on a graduate will lead to an incremental rise in turnover and profit of 1+x times, which means corporate taxes must increase by the same proportion. One can use that assumption to calculate the increase in corporate taxes that arise from taking on graduates.

    (When I was thinking about this I used quite a high discount rate, since it seems to me that the risks the Treasury is exposed to when it funds undergraduates are in fact those of the economy as a whole, and therefore the appropriate discount rate ought to be quite close to the long-run average rate of return on UK equities, i.e. about 7%. It would certainly be wrong to discount at the government’s cost of debt).

    An individual will make education and career choices that maximise his personal welfare, achieved through some combination of personal wealth, leisure, finely honed aesthetic sensibility, and so on.

    The individual also faces a constraint, similar in form to that faced by the Treasury; he would be willing to go to university if P * The cost of university tuition < = Present value of the future incremental cash benefits he'll get having attended university.

    Those future incremental benefits are the difference between what the graduate earns thanks to his degree, and what he would have earned without his degree. If their present value is greater than the cost to the individual of attending university, then he’ll attend; if not, then he won’t.

    At a minimum, those future earnings have to compensate the prospective graduate for the three years’ of wages foregone, the opportunity cost, of attending university. If you assume that the salary of a non-graduate in his late teens/early twenties is £20k, then the opportunity cost of doing a three-year degree is £60k, £53k in present value terms at a discount rate of 7%.

    For university to be worthwhile, the present value of the difference between a lifetime of graduate and non-graduate earnings has to be equal to £53k. Say that a graduate in the first year out earns the same as a non-graduate, and then sees his wages rise at 3% annually in real terms, vs. 1.5% for a non-graduate.

    At retirement the graduate’s on £72k, the non-graduate on £40k, and the lifetime cash difference is £437k. Which sounds pretty good; hey, a university education’s worth getting on for half a million quid! But discounting each year’s difference back at 7% turns that difference in present value terms to just £53k; exactly what our prospective graduate needs in order to make it worth his going to university at all, before we’ve taken into account tuition fees.

    But here’s the rub. If P is 0%, then the cost to the individual of attending university is nothing, and the state is picking up all the tab. Except, given the assumptions I’ve made, it’s not worthwhile for the state to do so. Over the individual’s lifetime, the incremental difference in tax revenues is almost £200k. Hurrah! The gross value to the state of an individual going to university is £200k! Unfortunately, most of the difference arises far in the future, and discounting means that the further off a cash flow is, the less its value today. Discounting at 7%, the present value of the incremental tax revenues is just £14k. (The present value of lifetime difference in corporate tax revenues is negligible). If you reckon that the cost of three years’ university is £30k, then clearly 100% state funding makes no sense; £14k – £30k is (£16k); the state’s losing money.

    If you raise P to 50%, so half the costs are borne by the individual, half by the state, then the picture’s transformed. Our individual needs a job which pays slightly better on graduation than in the previous scenario, and which rises as before at 3%. Over a lifetime, this produces earnings £517k greater than a non-graduate's. The present value of those incremental cash flows (including the opportunity cost of three years’ wages foregone) is £15k, which is the graduate’s cost of attending university.

    For the Treasury, the present value of the incremental personal and corporate tax revenues is £23k. That gives a net benefit of £8k (= £23k tax revenues – 15k university costs), money that could be spent perhaps on bursaries.

    With an individual paying 100% of the costs of attending university one only has to assume a graduate starting salary of £22k, and as before a 3% annual wage increase, to make university a worthwhile proposition. In that scenario, the net benefit to the Treasury is £29k, almost exactly equal to the £30k which I’m assuming is the cost of three years of university.

    Put another way; for every person paying 100% costs, the Treasury could afford, out of the present value of future tax revenues that the full-fee-paying individual will generate, to pay for one additional person to attend university. That wouldn't be a bad outcome.

    However, I have not factored in my hard to quantify benefits. As P rises, one ought to assume that social mobility (the poor attending university) will be decline, a social cost that should be included. Culture would suffer; there'd be fewer arts and humanities graduates, also a bad outcome.

    I’ve done this analysis at exhaustive length because I wanted to demonstrate two things:

    Firstly, it’s essential to conduct the debate in present value terms. Talk of the lifetime value of a degree is meaningless if the incremental cash flows are not discounted back to the present.

    Secondly, everyone can be better off if students pay something, possibly a high proportion, of the costs of tuition.

    • Oliver Rivers says:

      God, I really didn’t mean that first sentence to sound so snotty.

      • pinhut says:

        Oliver. A very interesting post.

        Some questions / observations

        “If you assume that the salary of a non-graduate in his late teens/early twenties is £20k, then the opportunity cost of doing a three-year degree is £60k”

        Two words – mummy, daddy. Some people have no opportunity cost.

        Secondly, related to the above. If we are talking about rational choices regarding the finite supply of places at the elite universities, then what is to stop people wanting to pay more, perhaps much more, than the potential financial reward, firstly, because they have the resources, and secondly because every extra pound is driving somebody with less means out of the market, so is actually making it easier to win a place, and secondly, because the aim is not necessarily just financial, but for particular socio-economic classes to reproduce themselves, come what may.

        I see the above scenario, astronomical fees, as being the fairly like result of a ‘free market’ that allowed the elite institutions to charge what they wish.

        I believe your analysis should also include:

        1 – the fact that people who attend elite universities receive a better deal, in that they are going to (generally) receive a far better return on their tuition costs than somebody at a lesser institution.

        2 – Oxbridge graduates are often extremely successful by the time they are 30, which makes a major difference to lifetime earnings.

        3 – Oxbridge degrees are often more transferable, so that a graduate may penetrate into a greater range of sectors.

        4 – The networking value for finding opportunities (possibly a major factor in #2)

        5 – The fact that it appears that any Oxbridge graduate has the safety net of writing for the broadsheets when they are bored or hungry (or, if Cambridge, becoming a spy).

        These points, taken together, make an extremely large difference to the scenario you set out.

        • Oliver Rivers says:

          You can’t say no-one has an opportunity cost! Everyone making a choice faces some kind of opportunity cost. Even a rich kid on a generous allowance ought to compare that allowance to what he could be earning were he not at university; the difference between the two is the opportunity cost.

          My fag packet calculations suggest that, with (some) people paying fees, possibly high fees, the Treasury can afford bursaries. Investment in cheap tuition for those otherwise unable to afford it would go some way to dealing with the social mobility question.

          Your reasons 1 – 5 sound like quite a compelling argument for raising tuition fees, and allowing different institutions to charge different rates. If you plug higher numbers into my discounted cash flow, particularly higher numbers in the early years, then going to university, even if its expensive in cash terms, becomes a better deal.

          We’re going to charge more for tuition; we can’t afford not to (and if it’s done right, everyone will end up better off).

          A consequence of that which hasn’t been given much thought that I’m aware of is that the structure of degrees will have to change.

          Imagine I’m a teenager, the first generation of my family to consider going to university, and that fees have gone up, as I’ve suggested. What, actually, would deter me from going?

          It shouldn’t be the expense per se; going to university for the individual is a net positive investment decision.

          But in advance, I’m not sure of that. Specifically, in a fee-paying system, I’m being asked to commit upfront to a big, lumpy capital + opportunity cost investment, of whose true value I’m unsure. There are considerable unpleasant consequences–personal, financial–of deciding, one year in, that university, or at least my chosen degree, aren’t for me.

          Given my uncertainty, I baulk. Everyone–the individual, society–is worse off as a result of that decision. How to avoid it?

          Flexibility. If there are a short (one term, or semester, or year) modular courses, which can be paid for in isolation, and which provide individual qualifications whose value employers understand, then the risk ( measured by financial commitment) to the individual is lowered.

          Perhaps, in my vision, there will come to be a large number of higher education institutions specialising in such flexible, modular courses; introduction to analytic and statistical methods in the social sciences, basic logic, various forms of business studies, media production courses… Maybe we could give such institutions a name. In Germany they’d be called Technische Hochschulen. I think there used to be a name for something similar over here?

          • pinhut says:

            “You can’t say no-one has an opportunity cost! Everyone making a choice faces some kind of opportunity cost. Even a rich kid on a generous allowance ought to compare that allowance to what he could be earning were he not at university; the difference between the two is the opportunity cost.”

            Well done. You state:

            “Everyone making a choice faces some kind of opportunity cost.”

            Firstly, for some people going to university is not a choice, a fact you miss. Likewise, not all opportunity costs are equal.

            The bottom line is that your line of thought fails because nobody sits down and calculates whether to attend university or not in the rational manner you describe.

            Finally, your analysis is hopelessly wrong as you didn’t factor the enormous costs of education in the private sector into your calculations, and yet, even with this additional expense, people attend university. Explain.

      • Thomas Jones says:

        I couldn’t begin to argue with your economic analysis. However, two points about two of your starting assumptions:

        1. The average salary in the UK is around £23,000. Most workers in their late teens/early twenties earn nothing like £20,000 a year. The minimum wage for 18-20 year olds is £4.83. If they’re working a 35-hour week for 52 weeks a year (which assumes they get holiday pay etc) they’re on £8790.60 a year.

        2. No one, when deciding whether or not to apply to university, makes a rational cost-benefit analysis of whether it’ll make them better off over their lifetimes. But they may well – especially if they’re from poorer families – be put off by having to pay to go. So even though they’d be better off in the long run if they got into debt to go to university, they opt instead for £4.83 an hour.

        • Oliver Rivers says:

          Thomas thanks for that. Feeding in your correct late teen/early twenties salary figures doesn’t changes the conclusions that much: they make a slight improvement from the state’s perspective in the university-is-free-to-individuals scenario, because the difference in tax revenues the state loses in the first three years is lower, but not enough to make 100% state funding a good economic decision.

          Re your second point–I’ve sort of touched on it just above (maybe we cross-posted). Obviously, I’d prefer to believe that everyone always applies rational cost-benefit analysis, with correct discounting of future cash flows. I live in a state of permanent, mild disappointment.

          One way to think of what happens is that when faced with a risk today, and future benefits, individuals with little prior information apply a too high discount rate; they attach less value than they should to the future benefits of going to university.

          There are lots of ways one could deal with this, on each side of the equation. Peer-led university outreach programmes, where schools are visited by students from similar backgrounds, are designed to convince teenagers of the value of what they’ll get from university. Since the information comes from sources they can trust, perhaps the teenagers don’t discount it quite so aggressively.

          And increasing flexibility in the way I’ve suggested would minimise the risk side.

          There is a lot more analysis (which no-one would thank me for) that I could show on this point. But it’s axiomatic in corporate finance that investments where the investment can be staged, and there’s the option at each stage to abandon rather than proceed, are much more valuable than investments with identical future cash flows, but where all of the investment has to be committed (gambled) up front.

          At the moment university education is an investment decision much more of the latter kind; it would be of greater valuable to individuals if it were structured to be more like the former.

  8. James Alexander says:

    Benthamite utilitarianism pops up alive and kicking, usefully thought provoking as ever, still a fallacious over-simplification that only works if you agree the unreal terms and conditions. Apposite is Tony Judt, summarised here (LRB Bookshop page).

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