The greatest economic puzzle in the budget is Tony Abbott's intention to
"deregulate" university fees in 2016. There's a lot more to it than
many people imagine.
Punters who make no profession of understanding
economics think fees will skyrocket. Advocates of the change, who think
they know more than the punters, say increases will be constrained by
competitive pressure.
The more economics you know, the less
certain you can be about how things will turn out. But you can make a
pretty persuasive case that, for once, the punters may be closer to the
truth than the advocates.
Abbott and his Education Minister,
Christopher Pyne, plan two main changes: the deregulation of fees and
changes to the HECS loan scheme. I'll leave the loan changes for another
day and focus on the fee changes.
At the same time as it permits
unis to set their own fees for undergraduate courses, the government
will cut its contribution towards the cost of courses by an amount that
averages 20 per cent. It will then reduce the annual indexation of its
contribution, switching to the consumer price index, which doesn't rise
as fast as the unis' wages and other costs.
So the government's
primary motivation is clearly to shift more of the cost of universities
from itself and onto students. The 20 per cent cut will give the unis an
immediate and pressing reason to use their new freedom to increase the
fees they charge, and the less-generous indexation will maintain the
pressure for further increases.
Even so, the man who recommended
that unis be allowed to set their own fees, Andrew Norton, is confident
the initial increase will be no more than $6000 a year, taking annual
fees to between $12,000 and $16,000, depending on the course.
The
government is confident its changes will increase competition between
the unis, leading to greater diversity, innovation and quality, and
giving us "a world-leading higher education and resource system".
The
simple model of how markets work taught in introductory economics
courses leaves may people with excessive faith in the ability of market
competition to foster increased efficiency, constrain price increases
and ensure customers get high quality.
Its promises are based on a
host of limiting assumptions, which usually don't apply. It assumes a
very large number of small firms selling a homogeneous product to buyers
with "perfect knowledge" of the quality and other characteristics of
what they're buying.
In the tertiary education "market", however,
we have a relatively small number of large and larger organisations,
selling differentiated products of uncertain quality. We have oligopoly
rather than "perfect competition".
We know oligopolists compete,
but usually try to avoid competing on price rather than marketing. They
have a degree of pricing power and their competition takes the form of
"rivalry" - focusing on the behaviour of competitors rather than the
needs of customers.
It's misleading to describe giving unis
freedom to set their own fees as "deregulation". Indeed, it's silly to
imagine higher education is anything like a market. It's "firms" are
owned by the state governments and highly regulated by the federal
government. All its courses still have to be accredited by the feds
which, they claim, guarantees that quality standards won't fall.
Even
the unis' freedom to raise their fees - which the next government could
reverse - comes with a string attached: fees charged to local students
may not exceed those charged to overseas students.
There's no
profit motive. And, as any academic will tell you, unis are highly
inefficient, bureaucratic organisations dominated by administrators.
The safest prediction is that giving unis greater revenue-raising ability will lead to them employing more administrators.
How
can uni fees be regarded as a "price" in the textbook sense when people
are lent the money to pay the price under a concessional loan they
won't have to repay for years?
In effect, universities have a
government-regulated monopoly over a product that gives young people
access to the country's highly paid jobs. What will they do when the
price jumps - abandon all ambition? Demand seems highly "price
inelastic" - unresponsive to price changes.
Our unis are protected
from import competition by the high fees other countries charge foreign
students. Within Australia, unis enjoy a degree of geographic monopoly.
Sydney and Melbourne unis don't really compete for students. Living
costs can be high if you move to a regional uni.
The sandstone
unis will be able to charge a premium that reflects their higher status,
more central locations and lovely campuses. In a normal market, other
unis would charge less than the big boys.
The simple model assumes
consumers ensure prices reflect differences in quality. But where it's
hard to judge the quality of a product before you try it, many people
reverse the causation and assume the higher the price, the higher the
quality. This gives lower-quality producers an incentive to charge high
prices.
In the early noughties, the Howard government allowed unis
to raise their fees by 25 per cent. One small uni decided not to do so.
It found its applications from new students actually fell. So the
following year it put its fees up like all the others and its
applications recovered.
In Britain, the Cameron government allowed
unis to raise the 3000 pound annual fee they charged local students up to a
limit represented by the 9000 pound fee charged to foreign students. Almost
all of them took the opportunity to raise their fees to the maximum
allowed. Applications dropped by 9 per cent in the first year, but rose
in subsequent years.
On the basis of all this, my guess is the
sandstone unis will raise their fees a long way and the less reputed
unis won't be far behind them. Their notion of competition will be to
make sure no one imagines a lesser fee than the big boys is a sign of
their lesser quality.
