The abuse of economic arguments in higher education policy

Since the Dearing Report successive UK governments have framed UK policy for higher education on a set of fallacious economic assumptions that do not make sense even on the principle that those who benefit from higher education should pay. Carried to its logical conclusion this means we should tax individual employers for the graduates they employ.

Of course no-one is suggesting this, but Dearing had to avoid this trap by assuming that employers got zero net benefit from employing graduates. This was an absurd conclusion based on faulty economic analysis which loaded even more of the implied burden of cost-sharing onto students/graduates, and one which is implicitly carried through by the present UK government.

But the crucial thing about the private/public returns to higher education debate is that it typically misses out one thing that is central to investment considerations, and that is the risk factor. There is clearly a risk to government (and “society”) in investing in higher education but like a good index tracking fund they can spread the risk of such investment over a large number of individuals and sectors.

An 18-year old looking at investing in his or her own higher education does not have that luxury. For them it is a highly risky investment with much of the costs front loaded and the returns highly uncertain and mostly distant. What school leaver knows what their employment prospects and returns will be in 3 years time let alone 40?

From the point of view of the individual 18-year old, this can be more like investing your life savings in speculative mining ventures than in the kind of public sector project funded by the Treasury. If you were being asked to commit your life savings to speculative mining ventures a rational person would demand a high risk premium for doing this and heavily discount any future projected benefits accordingly.

Dearing used the Treasury test rate of discount used for low risk public investments to measure the private rate of return to students/graduates. This grossly overestimated the private returns to them, and the share of the cost that should reasonably be borne by them. Most individuals and OECD governments know this instinctively, the UK government does not. If you use an appropriate discount rate that fairly reflected the true private risk factor it completely changes the analysis and conclusions, but such treatment has never been applied by UK governments since Dearing.

Economics is about incentives, expectations and the efficient allocation of resources. On these grounds, the UK government is now set on a course of action which will have significantly adverse effects for UK economy and society in decades to come.

Neil Kay

11th December 2010

See the links below for material I did on this before.