Fees must fall — some economics

As I type, the #feesMustFall movement is gaining momentum every day. Like most protests in South Africa this one has not been without property damage and intimidation but of late the character of the protest seems to be taking on a focused spirit of informed rebellion against the waste that is state expenditure. Students are uniting across racial and political divides and opportunistic politicians on all sides are being barred from exploiting a movement which has no place for politicians. Whether you agree with the sentiment that tertiary education should be subsidized or not, everyone can agree that money diverted from SAA bailouts and fire pools to education is a vast improvement over the status-quo. I don’t want to get into the morality of it all. That’s a check-your-privilege minefield. But I do want to touch on the economics of tertiary education. The gift of economic analysis isn’t to crunch data (that’s for statisticians) nor to forecast (that’s for charlatans and prophets). Instead it is to peal back what is seen and known to everyone so that we may inspect what is unseen and not considered.

Important assumptions

  1. Before I continue I do want to make clear one axiom of morality implied in the following analysis: if there is an outcome that is beneficial to society then it is preferable that the outcome be funded through voluntary and private means than through non-voluntary taxation. For example, for a given actuarial science major, we prefer that either the student’s family, Old Mutual or some alumnus-donated scholarship fund pays for the student’s tuition over the state. While society might benefit as a whole from a tax subsidy, the benefit is unevenly dispersed and not everyone values the addition of another actuary to the economy. In the case of tuition made voluntarily, the parties paying expect the outcome to benefit them (either through future profit or just through a sense of goodwill) or they wouldn’t have made the payment.
  2. When I talk about benefit to society I’m talking about productivity added to the workforce in a way that raises living standards above what they otherwise would have been. I’m not talking about the subjective happiness and utility society receives from well written poetry or a splendid piece of art.

What I am not saying

Point 1 above says nothing about overall subsidization of education in South Africa. It says nothing about whether the state should pay. It just says that for any student, fewer people are harmed when the tuition is made through voluntary means. In the terms of welfare economics, the outcome is Pareto Superior.

Let’s take every high school leaver in the country and put them into 4 quadrants according to income and academic ability:

Explanation

The more north on the quadrant, the higher the income level of the student and their family. Students in the northern quadrants can afford university education without any assistance. Students in the southern quadrant need assistance from either the state, charity, scholarships or bursaries. Students in the western quadrants can not cope with the rigors of tertiary education while those in the eastern quadrants are capable of attaining degrees that attract very good job opportunities. Just to be clear I’m keeping it simple here: students in the western quadrants unambiguously have no hope in university. Students who, with a little extra tuition and more hard work can make it through, are considered to be in the eastern quadrants.

Who should we pay to study?

Subsidizing a student in the top right quadrant with tax money is as valuable to society as building a presidential retreat. It simply displaces money that was already there with money that could be spent on higher priorities. Subsidizing students in the top left corner is even worse than subsidizing students in the top right. It is more akin to bailing out Telkom. Not only is private money available, after all the tax money has been spent, there is nothing to show for it. For similar reasons, the lower left quadrant is a dead-weight loss to society if tax funded. The lower right quadrant is the pot of gold. This is the only group — can cope with university but can’t afford it — for which extra funding increases the total productivity of society. So if we want to maximize the net effect of money spent on tuition, it should be targeted only at students who fall into the lower right quadrant. Everywhere else, it is wasted.

The true cost of tertiary education

The tuition fees of the various universities in South Africa are all over the news and in social media (and highly inaccurate by the way). That is the cost that is seen, the accounting cost. What are some of the unseen costs in lost opportunities? Returning to the above chart, students in the western quadrants might better spend those 4 years acquiring work experience in jobs that do not require tertiary qualifications. The true cost to society then is whatever that student might have earned during that period + the actual tuition fees. Students in the right quadrant also have the opportunity of working in jobs that don’t require tertiary education. Society loses that when they study as well. However, the higher long run incomes they can expect after studying eventually more than compensate for this loss. Nonetheless the cost to society is similar for all students. It’s only the students with academic ability who can economically justify this short term loss to society.

The paradox of letting fees rise and bursaries

Suppose that university fees were set in such a way that degrees that confer the greatest net benefits on society through higher future productivity such as in the STEM fields were low and degrees which were more for the personal enrichment of students such as development economics (*cough cough*) were set high. All else equal, we would expect the academic choices of the students to more closely reflect the needs of society. Let’s call this scenario the fees-must-call society because the fees reflect the needs of the economy.

Now let’s imagine a scenario where fees were eliminated. We’ll call this the fees-must-fall society. In the absence of price signals, students would either study what they wanted or would have to try to assess the labour market as accurately as they could to anticipate future employment opportunities. Clearly the analytical overhead of anticipating employment combined with the anxiety that comes with uncertainty in the fees-must-fall society is undesirable and almost absent in the fees-must-call society.

For a vibrant, fast growing economy with minimal wastage of human potential, rather than having free tertiary education, we should desire tuition fees to reflect the surpluses and shortages in the economy. How do we get there? Well South Africa already has a vibrant and well developed bursary infrastructure with a surplus of funds and a shortage of talented students. And before you jump onto the privilege train, remember that bursaries prioritize black students with their “non-racial” checkboxes of race categories. In the absence of any state funding, the bursary funds bear the full cost and risk of educating students. They must to the best of their ability seek to fund the lower right quadrant. They face the pressures of competitive markets and so have to be extra vigilant in their screening. In a society where bursaries act to lower the relative cost of important degrees, state subsidies only cloud this process. Not only do they reduce the relative differences in tuition fees but when they subsidize engineering and science majors, they displace private money that would have been eagerly provided through bursaries.

No matter how you look at it, unless the state can carefully mimic the resource allocation of bursaries, the net outcome to state financing of public tuition is negative (especially in South Africa). But even if the state can perfectly mimic the allocation of funds such that the skills shortages are plugged with all the available students, what’s the point? Private profit-oriented companies would have done that anyway. The state is just saving companies money at the expense of taxpayers. State subsidies of tertiary education are actually corporate subsidies in disguise!

Is there a role for the state?

Not in tertiary education. The bottleneck that is killing South Africa is in primary and secondary education. If the students leaving high school are university ready and competent enough to cruise through university then profit motivated industries will more than eagerly pick up the university tab.