Free markets in higher education promote inequality

(Provisional thoughts)

There are two factors that determine participation in higher education: The level of fees charged for the service and the high school entry scores (ATARs) that determine eligibility to join particular programs – this is a price even if the price is funded by HECs.  Education, at least in elite G8 universities, is in excess demand at present  with more people wanting to go to university than there are positions. With current fees, excess demands are accommodated in such elite institutions by setting minimum ATAR scores which “ration” entry to those with the highest ATARs.   With higher fees being charged as a consequence of liberalisation the numbers applying to enter universities will fall but numbers actually achieving entry will increase because of the higher price being offered to the university suppliers. This must mean that admission standards will decline.  Academic institutions, particularly elite institutions, will be happy to accommodate more students because they are offered a higher price but entry standards must fall as entry becomes determined more by price than it is by academic standards. Elite institutions will be dumbed down.

How pronounced will these trends be?  That depends on how close domestic fees are to fees that charged to international students  which, in turn, will reflect international education costs.  In addition it matters how  these international fees are to the level that would maximise returns to Australian universities.   With a straightforward profit-maximisation agenda local fees can treble to about the level that universities can extract from foreign students.  The only question then is how large these international prices are to levels that would maximise returns to local universities?

Given that Australia is a significant exporter of higher education services it seems likely that Australian higher education costs are lower than those prevailing in comparable institutions internationally.   In this case, fees with liberalisation will overall meet demands locally for education entirely on the basis of price with no need at all to rely on entry scores.  Local universities will be willing to supply more positions than local students demand with any gap being filled by international students.  Adjustments towards this outcome are likely to involve fewer local students going to university and those who do gain entry doing solely on the basis of their ability to pay higher fees.  The quality of student intake into courses will decline and those who do gain entry will be the sons-and-daughters of the well-to-do.  Any excess supply of positions will be taken up by foreign students.  This is a slight exaggeration since the universities will mask these efforts by offering a raft of scholarships to conceal their intent but the general thrust will be in the direction of maximising returns.

Non-elite universities currently experience lower demands for their offerings and often currently set lower ATAR admission standards.  Following price liberalisation there are likely to be two effects on non-elite institutions.  These non-elite institutions will experience increased demands for entry by able students who simply cannot afford the high prices charged by the elite institutions.  This will be a positive effect on the institution as a whole since having high ATAR students will provide positive external benefits for other students.  On the other hand with fee increases there will be fewer low ATAR students who can afford entry into these non-elite institutions, a negative effect. The negative effects here are likely to exceed the positive effects if it is this case that low-ATAR students come from low income backgrounds. In addition high ATAR students from poorer backgrounds will tend to concentrate in non-elite universities – they will provide external benefits but at a private cost.

The upshot of the Kemp-Norton-Pine reforms seems to me to be a university system that places greater emphasis on parental wealth and less on student abilities.  Overall it is profoundly regressive. It takes Australia backwards. Earning a good income on the basis on your skills and hard work is a good thing. Doing the same because your parents could fund you through elite institutions with lower academic standards is less socially desirable.


Emissions Reduction Fund is now definitely revealed to be a bad joke

I saw this morning that total planned funding for the government’s ERF of $2-55b will not be increased after 4 years. This is to be TOTAL funding through to 2023/2024.

This pathetically weak scheme is now revealed to be more than weak – it is a bad joke. There is no way targets of 5% reductions in emissions over year 2000 levels will be met by 2020.

In terms of the overall budget this is a “small potatoes” issue. But the Abbott Government is clearly walking away from any serious attempt to reduce carbon emissions. (723)

Reforming economics teaching

I have a fair bit of sympathy with some of the complaints in this The Guardian article about economics teaching. We do need to teach more about institutions and we do need to be more pluralist. Economics is much more than a quantitative methods “hurdle-jumping” contest though, to be clear, quantitative methods are very important.

But I have far stronger complaints about the role of untrained administrators “dumbing-down” business curricula by leaving out virtually all economics and statistical training and replacing such with courses involving low level, non-analytical nonsense and psycho-babble. This is a crime that will take years to undo and will lead to many students ending up with poor business educations and making poor business decisions. A business curriculum which doesn’t teach how consumers and firms make their decisions, how public goods should be supplied, how levels of employment, economic activity and interest rates are determined, what determines international trade  and how externality issues should be addressed is inevitably of low usefulness.  Finance courses which teach people investment analysis without teaching the basic consumption-smoothing rationale for lending and borrowing is likewise of limited worth.   Finance grew out of microeconomics and indeed is inter-temporal microeconomics.  Separating finance from microeconomics and teaching finance to students who don’t understand government budgeting and interest rate/exchange rate determination is a waste of intellectual endeavour.  Students who study marketing without knowing some consumer demand theory know only a fragment of what determines consumer behaviour. Students who study “human resource management” without having a basic course in labour economics likewise know very little.

Finally, it is ironical that those administrators and business academics who so vehemently detest economics training often themselves need of a sound economics education.  Their poor decision making skills that downgrade curricula and worsen the financial position of universities are often the result of poor economic decision making.


Cairns bleg

I am thinking about buying a home unit in Cairns north Queensland.  I like the tropic climate – particularly as an escape from the Melbourne winter but also because I like the mix of natural habitats that lie in and around Cairns – from Port Douglas and the Daintree to the Atherton Tablelands.  I probably would want to live in Cairns rather than an outlying area though I might consider Mareeba, Mossman or Port Douglas.  I probably would want to live in reasonable proximity to urban facilities, restaurants and so on and particularly the airport.  I want a unit as I want to be able to lock up and leave. Cheap air tickets to Cairns from Melbourne – around $256 return – along with relatively inexpensive real estate are an attraction.  I’d probably continue to spend the summer and spring in Melbourne.

I’ve spent a few days checking out the options via the web and will probably visit the area in June to have a careful look around.

I’d be interested to hear views of any people with experience of Cairns as a place to live in. What’s it like to live there for extended periods?  Any problems? What are good parts of Cairns to live in? Why does the real estate there seem so inexpensive?

If you don’t want to post a comment online you can email me or use the FB message service.

Many thanks. (885)

A case for increasing (or at least indexing) the petrol excise

There never was any strong reason for John Howard pegging the petrol excise at 38 cents per litre and plenty of sound reasons for at least indexing it with respect to inflation.  The tax provides a rough (and admittedly imperfect) tax on congestion and fuel-induced air pollution and provides quite a reasonable application of the benefits (or “user pays”) principle of taxation in relation to funding of new roads and the maintenance of existing roads – those who use lots of petrol, particularly heavy vehicles, should pay much of these costs.  An excise also provides motorists to think forward and shift away from liquid fuels which will inevitably become more expensive. Finally, in terms of deadweight losses (or “excess burdens”) a tax on fuels has only moderate inefficiency costs because the demand for fuel is relatively price inelastic.   To achieve these desired features in a growing economy subject to inflation the tax should grow with the economy and not be set in stone.

I therefore support moves to revisit the setting off the excise. The tax yield from the fuel excise has fallen by about 40% which costs the government around $5b.  Increasing the tax by 20 cents and then indexing it to inflation would recoup much of the revenue lost because of the Howard decision to reindex the tax and would cut the size of the underlying structural deficit facing the economy by about 1/3.

Longer term one would hope that road use charges related directly to congestion, pollution and road damages would be introduced.  These are better ways of taxing externalities than a rough fuel excise. But still I think the fuel excise should be retained.  It is a broad-based tax that still would have the desirable properties mentioned of generating relatively low efficiency costs and of forcing us all to shift our allegiance away from fossil fuel-based energy sources.

The inevitable cry will be that such a tax is regressive and that it falls on the poor.  The Grattan Institute have begun this very standard sort of moan that is raised whenever any efficiency-based reform (e.g. congestion pricing) is proposed. What matters is the overall incidence of the tax-transfer system not the equity character of a small part of the tax base.  Of course the level of excise in Australia is low relative to excises in most European countries.

Update: 8/5/14. It seems that a 3 cent increase in the levy will happen.  I don’t think, however, this would raise $1b as this article suggests.  More like $500m. (977)

Water provides a source of comparative advantage

The problem of water shortages around the world is not due to the fact that the total volume of water available is inadequate. The problem is that the world’s water supplies are distributed very unevenly. Moreover it is difficult to directly trade water internationally because it is bulky and heavy.  Products which are relatively water intensive can, however, be traded.  This helps to indirectly allocate water resources to where they are most needed and improves the global efficiency of water use.

This paper by Peter Debare shows that water is a source of comparative advantage in the sense that relatively water abundant countries do tend to export water-intensive goods.  Thus water is indirectly traded internationally through trade in goods which are more=or-less water intensive. Comparative advantage in water therefore undoes some of the effects of an uneven distribution of water globally. But water contributes much less to the pattern of international trade than other productive factors such as labour and capital.  Hence changing water supplies due to climate change should cause only moderate disruptions to international trade.  For example,  if Australia experienced a 10% drop in precipitation due to climate change, Debare calculates that overall Australian exports would fall by 5.2%. Not negligible from Australia’s perspective but not catastrophic either.

It is a fine paper. I’d suggest that the failure generally to price water at its scarcity value limits the comparative advantage role that water plays in world trade and also limits the ameliorative role that such comparative advantage might play in mitigating the effects of climate change. Of course we also want water priced efficiently to achieve sound patterns of water use and prompt adaptations to climate change even in the absence of international trade. (738)

The Sunset Limited

Watched a movie version of Cormac McCarthy’s play “The Sunset Limited”  featuring Tommy Lee Jones (also director) and Samuel L. Jackson.   An born-again Christian black ex con (SLJ) argues with a white professor  (TLJ) about the case for despair or going on.   SLJ has saved TLJ from an attempt to throw himself under a train (“The Sunset Limited”). Gripping drama – as much poetry as drama.  In my view despair wins in one of the bleakest of bleak McCarthy conclusions.  Salvation into an post-”world gone wrong” afterlife would be “Kafka on wheels” for TLJ – the “ultimate horror”, “the ultimate despair”.

McCarthy was involved in the direction of this movie version of the play. Superb performances .  It was originally produced for HBO television in 2011. (397)

Levying a tax

I liked the article (unfortunately paywalled) by Jacob Greber in the AFR today on the proposed income tax hike.  The motivation is to avoid a decade of widening fiscal deficits.  The government promised no new taxes but promised also not to spend less on pensions, education, health and defence while, at the same time, reducing the fiscal deficit. It almost must break a promise. The underlying (ignoring temporary factors) budget deficit is around $15b and this will grow if unaddressed.  The temporary income tax hikes would reduce that by one third but, if they are temporary, their effects will last only while the increases are in place, supposedly around 4 years.  Again either the government will then be forced to retain these temporary measures or get more serious about cutting spending.  2/3 of the current deficit already needs to be addressed by spending cuts.

My own preference would be to state now that the income tax increases would be retained permanently and that the governments foolish direct action plan to address climate change (that will cost it $4-5b) be replaced by the carbon pricing scheme that bLabor would introduce that would yield it $10b annually as revenues.

Tony Abbott achieved power by lying about Coalition policy intentions and by abandoning environmentally responsible and economically beneficial carbon pricing policies.  If he keeps lying he will end up in the same situation as the Labor Government and will be replaced. (590)

Piketty on inequality

Economics has a best seller. Thomas Piketty’s, “Capital in the 21st Century”. I couldn’t get a copy locally (the book is not available even at such is the demand) but have read a few reviews and watched a video where Piketty presents his ideas that are then analyzed by Paul Krugman, Joseph Stiglitz and Stephen Durlauf.

One can see this book becoming part of an intellectual fashion.  The core thesis – that inequality is exploding, is non-new but the claim that this reflects trends in inherited wealth and “patrimonial capitalism” is distinctive.   Several commentators have recognized the role of the book in synthesizing various contributions.  Several too have simply acknowledged the skills of the translation from French into English. Continue reading Piketty on inequality (1100)

Abandoning the US alliance

Malcolm Fraser argues that Australia should pursue an independent foreign policy so that it does not get dragged into unwanted wars between, for example, China and Japan.  I found this discussion (with Robert Manne) fascinating.  US military installations at Pine Gap and in Darwin are portrayed as a chain around our neck.  ANZUS ineffective.  And finally a return to the “populate or perish” ideas of 1945. Now we would need a population of 45 million to be a viable independent country.  Fascinating discussion. (415)

Chinese agriculture

Nearly 1/5th of Chinese agricultural land is toxic.  Forget about measured economic growth targets – this is a madness. (621)

Privatising universities & finally killing them off

Non-academics Andrew Norton and David Kemp recommend privatisation of the university system with subsidies paid to private as well as government suppliers. Universities don’t only supply private goods so I am unclear of the motivation here though libertarian thrill seekers will get a jolt of blood through their arteries when they read this proposal. Of course the profit-motive may not drive good outcomes if students cannot easily assess the quality of a supplier and an asymmetric information externality (AEI) arises. That’s typically the case and indeed the rationale for education – people come to learn because they are otherwise ignorant. The AEI is built into the idea of an education – the idea that there are teachers and those taught with the teachers assessing a field and informing those interested in but otherwise ignorant of that field. That’s why academics not K-mart dog food salespeople (or  propagandists from the Liberal Party) should manage university programs. If asymmetric information issues are ignored then “lemons” problems emerge and universities enjoy a competitive race to the bottom that will maximise profitable output at the expense of any semblance of quality.

On the other hand the mock entrepreneurs who dominate the current university system and who rattle on about KPIs and market-determined outcomes are so awful and incompetent that I doubt full privatisation would do much worse in terms of delivering bad outcomes. Maybe quality dog food salespeople will outperform the current pretenders who couldn’t organise a riot! The latter cretinous lot have already substantially damaged the Australian universities so, from here on in, further damage may add little to social costs. When the river is full of shit an extra defecation or two adds little to social cost.


Redundancy bleg

The meaning of an employment redundancy is, I assume, that a position is either no longer required or if an employer is bankrupt. I’ll ignore the second possible reason for “redundancy”.

I assume that a “redundancy” does not arise if a worker on a high salary is replaced by one on a lower salary and the previous work activities continue since, in this case, the position is still required. It is only that it is now being argued that the work can be carried out more cheaply by a less costly worker – for example, by employing a casual or on a lower salary.

Does anyone know if there are laws limiting redundancies from occurring in this latter situation?


Technological unemployment

This thoughtful piece in the Economist examines the prospects for technological unemployment and a continuation of the trend by which income gains go to owners of capital.  Economists have conventionally rejected this idea but recent trends in developed countries – the failure of US wages to grow for 4 decades – suggest that economic theory needs to consider some of the secular unemplyment possibilities considered by Keynes.This signals to me a case for increased investment in education, a redistribution of ownership claims on capital, a much more comprehensive social welfare system that offers a guaranteed minimum wage and shorter working hours for the workers who do choose to work and earlier retirement ages. Society should not be worse off as improved technological options become available. (1987)

Sophie Mirabella

SM is to join the University of Melbourne as an instructor in politics – the practicalities of public policy.  I’d like to write something smart-arsed and cutting about this appointment but I am lost for words.  ”Disgraceful” will do. (802)

Powerful university people

Important administrative people in universities  (Vice Chancellors, Deans and their lackeys) often don’t need to argue sensibly.  Their authority gives every remark they make significance no matter how banal, wrong or tautological (“we will do what is appropriate” etc.).  Their inability to connect with those over whom they rule suggests an aura of power, authority and wisdom. But the arguments administrators provide would often be dismissed as nonsensical verbiage if a first-year student presented them at a tutorial.   Administrative authority provides a means of escaping from normal laws of logic.  To some extent the same criticism applies to senior theologians, politicians and those corporate high-flyers with their fingers up their arse.  They all breathe power but  deliver little. Indeed delivering little that is useful, but taking a lot of time to do this, is a reflection of their power.

Academics are a patient lot. They gulp down horse shit from their senior administrators for quite a while (they ARE busy teaching and doing research) before eventually suffering indigestion. They then get angry and exasperated. Eventually resignation to the deep-seated administrative irrationality sets in and alienation,  as well as a “what the f—“ attitude, takes over. Not a good outcome since the core areas of the university, where productivity does matter, deteriorate.

Those who conduct teaching and research should primarily run universities through university senates and councils that should consist almost entirely of practising academics.   The current grey flannelled-suit brigade can strut around like geriatric peacocks and talk about “market-determined” programs and KPIs but please, don’t ask academics to listen. We already suffer from indigestion.

Those in central administration should be paid high salaries, given generous expense accounts, provided with huge staffs of administrative assistants and encouraged to fly business class to exotic holiday destinations and other important international meetings in order to recharge their batteries.  Separation of them from the real concerns of a university is important. But when on campus they should otherwise remain rather quiet and, as a wildly optimist might hope, learn to listen. (3758)

Innocent Bystander Syrah 2012

I am always a bit put off when Aussi shiraz producers call their wines “syrah” but in this case the description is accurate.  The wine has a lot in common with those of France.  It is soft, slightly peppery, with an immaculately perfect shiraz finish.  It won’t rip the tartar off your teeth and at 13% alcohol is at the low end of the alcohol scale – at least compared to the Barossa and McClaren Vale monsters that often get given to me.  It is from the Yarra Valley a region not known for producing great shiraz.  I really enjoyed this perfect shiraz – the best I have had for months.  Yes Australian shiraz can be produced which has a bit of subtlety and sophistication.  Yummy.  I bought it from vineyard post free for $25 per bottle. A bargain. (2999)

EPA rejects review of WA shark cull

There has been much uninformed criticism of the WA cull. Similar culling practices already occur in NSW and Queensland.  But the EPA also gets it wrong. The EPA boss says that public opinion is irrelevant to issues of environmental protection a statement that is entirely false.  In fact the way most environmental protection measures are conducted is to use an approach such as “contingent valuation” to find out by how much the community values the object of the protection. Maybe the EPA boss was quoted out of context but even so this language is most misleading.

The EPA justify the view that the cull causes no environmental harm because it claims no shark species is threatened with extinction as a result of the cull.  That in itself is an extremely narrow basis for making such environmental valuations.  I find the idea of a cull morally abhorrent because it supports the idea of killing sentient beings in their wild state purely because they exist and may prove an inconvenience to people.  It would be hypocritical to criticise tiger hunts in India or rhino hunts in Africa on the grounds that the continued existence of such species might cause harm to humans.  These concerns arise even if the resulting hunting does not lead species to be endangered.  It is just morally wrong.

It is also inconsistent with the views of the 23,000 people who signed a petition objecting to the cull. The EPA’s boss view that the views of such people are irrelevant to public policy decision making is a total outrage.  Who wants civil servants with such attitudes?  He didn’t have to agree with the petitioners – there may be other arguments – but their viewpoints were decidedly not irrelevant.




A carbon capture & storage (CCS) success story

This New Scientist article is worth thinking about.  A CCS plant in Canada (Boundary Dam) is about to become a working coal-fired power station with 90% of its CO2 emissions captured.  It will be the first commercial scale CCS power station.  A second plant in Mississippi that utilises coal gasification will test another energy source.  Finally a CCS plant is being designed in the UK that is gas-fired.

Saline aquifers in the US are being judged as capable of storing 100 years CO2 emissions.  The North Sea has the capacity for 100 years European CO2 emissions.

The hurdle for CCS is cost. The chemical scrubbers on a CCS power plant absorb 20% of power so the cost of CCS is relatively high. CCS costs are about that of wind energy.  Research is continuing on ways to reduce such costs.

CCS can vanish gigatonnes of CO2 emissions annually.  No other technology can do this in a world where we know coal use will continue to be important. (1434)

Trolley Problem

I have been reading Thomas Cathcart’s, “The Trolley Problem or Would You Throw the Fat Guy Off the Bridge”.  This is one of two popular book length accounts of this well-known problem in ethics.  It’s a fun read that taught me a lot about utilitarianism and its problems.  Many books on moral philosophy are dull and dense – this isn’t that.

Philosophy asks unanswerable questions (the answerable questions become science) but in this moral mine-field progress can be made in understanding issues even if the final analysis falls short of definitively answering them. One of the nice things about philosophical discussions is that no-one need win! Continue reading Trolley Problem (1419)