On the creation of higher education cartels

Thursday 22 May 2014

The east side of the Advanced Manufacturing and Design Centre building captured during a sunset.

I love the free market. It means my morning cup of coffee costs roughly the same at almost all the coffee shops near campus.

The free market is however ruthlessly efficient, even if it is largely responsible for the high standard of living we share in Australia. It means fortunes are made and lost, and has Darwinian consequences for inefficient players. When monopolies exist, the profits can be obscene.

In the 2014 Australian federal budget, plans were announced to bring the full power of the free market to the Australian higher education sector. From 2016, universities will have their budgets reduced but be free to charge undergraduates literally whatever they like!

It is arguably the most radical reform of the sector since the abolition of fees in the 1970s and the introduction of the Higher Education Contribution Scheme (HECS) in the 1980s.

Prior to the federal budget there was a limit to the government assistance one received for educating a student and also a cap on what could be charged for normal undergraduate degrees.

This meant that a course’s true value could not be cashed in on by the host institution. Instead the only advantage were better students attending your university. For many academics, that sufficed.

There is good evidence that 17 and 18 year olds pay little attention to the HECS debt they will incur when selecting an undergraduate degree. The popularity of medicine and law was not diminished by a higher HECS debt than engineering or science for instance.

The Group of Eight (Go8)

Each of the major capital cities has one “established” university. Sydney and Melbourne contain a second large and established institution, namely UNSW and Monash University respectively. With the addition of the Australian National University, the mainland major institutions form the Group of Eight (Go8) who collectively lobby government on a range of common issues.

Indeed the Go8 are national leaders in many fields of research. They also have the highest tertiary entrance ranks for their undergraduate courses. Although many of us would like to believe otherwise, an increase in the price of a Go8 undergraduate course is unlikely to deter undergraduates from attending the Go8 institutions if their marks allow it.

In economic terms a Go8 degree has an inelastic demand curve, and since the federal budget these degrees are now a licence for the Go8 to print money.

Higher fees will enable the Go8 to attract better staff, conduct more research and it is possible the gap between the Go8 and more junior institutions will become a chasm. In the nightmare scenario for the second-tier institutions a positive feedback loop will drive the Go8 to glory at the expense of the others.

On the upside the budgets of at least some of our higher education institutions will rapidly expand but we shouldn’t be under any illusion as to who will be funding all of this. It will be the taxpayers of tomorrow with degrees. What the Federal government is doing is exchanging future government debt for massive student debts.

Compounding the debt

These debts could conceivably be very high. Buried in the details of the budget were some gotchas. One was that HECS debts will now incur compound interest.

Another was that PhD students will also incur additional HECS debt for each year of their PhD, and in the meantime have their undergraduate HECS compounding.

If, like me, they go overseas for a few years gaining international postdoctoral experience then they’ll have the option of staying there and remaining HECS free or returning to a large compounded HECS bill.

For women who take years off to have a family the effects will be especially severe. If they work part time while the kids are little they might not exceed the HECS threshold until they are well into middle age, and some might end up taking a HECS debt to the grave.

Is there really any difference between the government owing A$30 billion or our kids? Indeed this is not so much a brilliant taxation reform as a cost-shift similar to the one between the federal and state governments around schools and medicine. Some universities will get more money but the collective debt (personal and government) will be much greater than it was before when fees rise.

The temptation to see what the market will stand is an enormous one for the higher education sector. Once the Go8 hike their fees their increased revenue base will mean that others in the sector will have no choice but to follow or their ability to retain the best staff and compete in research will be minimal.

Competition or cartels?

The high cost of living in Australia means that only a small fraction of undergraduates leave their home cities to commence their first degrees. In fact many live at home.

For the Go8 this is a beautiful scenario.

  • The smartest kids will still want to attend the most prestigious institutions regardless of the HECS debt they will incur.

  • The economic necessity of the stay-at-home Aussie undergraduate means that there is no real competition interstate except for the very rich, and in Sydney and Melbourne there are enough kids for both Go8’s.

  • In order to compete the non-Go8 will be forced to either slash the cost of their degrees or reduce their investment in research or both.

One could argue that the Go8 has realised their monopoly on high value courses in each capital city, colluded with each other to lobby government to remove price caps, and now stand to exploit that monopoly to maximise their profits.

If they were in industry, their exclusive society and annual meetings would soon raise the ire of the Australia Consumer and Competition Commission.

Instead they’ll be cheered on by Education Minister Christopher Pyne as they surge up the international rankings, while our national debt is progressively transferred from our government to our children. Instead of politicians setting marginal tax rates, Vice Chancellors will.

The ConversationWritten by Matthew Bailes, Pro-Vice Chancellor (Research) , Swinburne University of Technology. This article was originally published on The Conversation. Read the original article.