Category Archives: economic rationalism

Education in the Classics: An All-singing, All-dancing Discussion of Student Debt and Higher Learning

“And I’m Javert! Do not forget my name. Do not forget me, 24601.”

Inspector Javert introducing himself in the Prologue to the musical version of Les Miserables

Much like the brooding Inspector in Victor Hugo’s classic story, Andrew Norton – Higher Education Program Director at public policy think tank the Grattan Institute – is deeply concerned about people paying their debt to society. Where Javert’s focus is the reform of paroled prisoners however, and in particular the story’s central protagonist Jean Valjean – the prisoner 24601 of the opening line above – Norton’s issue in the 21st century is the financial debt of University graduates.

The ballooning level of ‘bad debt’ in the Australian student loan system – and particularly the projected increase in this figure if the Federal government’s plans for ‘de-regulated University funding’ finally pass the Senate – has Norton thoroughly exercised. The key problem, he would have us believe, is the earnings threshold to repayments. Under the Australian student loan system, debtors don’t have to start paying back their loans until after they graduate and are earning more than $54,000 – not exactly a high bar, given the average national wage, according to 2014 Australian Bureau of Statistics figures, is $58,000. Norton though would have it that this threshold is actually too high – with those darned freeloading students apparently racking up education debts like nobody’s business, safe in the knowledge that they’ll never beat the criterion to trigger their loan repayments. To give the man his own voice on this point:

“If we keep the current [repayment] threshold, increasing numbers of students will not repay their debt and the taxpayers will have to pay the cost of their education. It ends up being a very generous scheme for people who have gone to university compared to other people from the social security system”

Andrew Norton quoted by Higher Education Editor Julie Hare in The Australian.

Well, obviously I for one am completely behind Mr Norton on this one, and stand shocked that…wait…what’s that you say? Actually, now that you mention it, yes, I do seem to recall that Norton is also on record in his 2012 report ‘Graduate Winners: Assessing the public and private benefits of higher education’ as advocating increased University fees on the basis that graduates enjoy a substantial advantage in earnings over their non-matriculating counterparts.

Now, to be fair, if you read between the lines, what Norton seems to actually be saying – with admirable consistency – is that he believes in market deregulation, and that the Government should minimize its involvement in higher education funding. Unfortunately, if you read what is actually ON the lines, his attempts to stitch economic statistics into two opposing arguments do leave him looking a bit exposed to accusations of doublespeak.

Even if your underlying philosophy is consistent, it pays to consider the compatibility of the messages you put out. Reproduced from Scott Adams' Dilbert cartoon, first published 1995.

Even if your underlying philosophy is consistent, it pays to consider the compatibility of the messages you put out. Reproduced from Scott Adams’ Dilbert cartoon, first published 1995.

But back to those freeloading students and their persistent attempts to get out of paying their dues. Not satisfied with pushing down the repayment threshold, Norton would also like to see student debt passed on to next of kin in the event of a debtor’s premature (by which he means “while the little scallywag still owes us for their education”) death.

This would seem a bit over the top in an unpleasant workhouse overseer springing from the pen of Dickens. To hear it coming from a seriously regarded 21st century social policy advocate is, to my mind, stunning.

Indeed, returning to the musical reflection on debt and forgiveness with which I started this essay, Norton’s suggestion might not look out of place in an updated Les Mis. Picture it – as the plaintive refrains of Fantine’s show-stopping death fade and the audience mop their tears, Javert and Valjean begin their baritone confrontation, mano-a-mano, hope against despair, redemption juxtaposed against punishment. After he sneers that “Monsieur le Mayor” – the former convict 24601 – can never change his innate criminality, the French policeman could throw in that the good mayor’s new adopted daughter Cosette owes the state 1000 Francs for the night courses in accountancy her mother had been taking to work her way out of the life of prostitution she’d been forced into by an uncaring society.

Okay, I may be paraphrasing Norton slightly on that one, but I think it basically works.

“Look Javert – I think the study debt thing is way out of line. Isn’t it enough that our society’s uncaring Economic Rationalist policies pushed her into prostitution and a pitiful early death?”
Still image taken from Tom Hooper’s 2012 cinematic adaptation of Les Miserables.

What the headline-catching issue of fees and loans is all about though is how we pay for our University system, and ultimately – although this point seems to be sadly neglected on the intellectual battlefield of the moment – what purpose Universities serve in our society. The fundamental policy dilemma Norton and others are seeking to address is that our public Universities – which are both a substantial industry bringing in foreign exchange to Australia and, we are told, the engines of our own future national economic prosperity – are significantly under funded, and the current political landscape is very much against changing that any time soon.

According to the national peak industry body Universities Australia, our wide and sunburned land ranks a not-so-proud 30th out of the 31 OECD countries for public investment in higher education as a percentage of GDP. Taking that figure as their inspiration, Universities Australia – led by the ‘Group of 8’ coalition of Australia’s top Tertiary institutions – has spent the past couple of years demanding fee deregulation as a way of raising more funding to support their activities.

The response to this from Education Minister Christopher Pyne was to say “Absolutely, let’s bring on the Free Market.”

Yes, said Mr Pyne, university fees should absolutely be de-regulated, with institutions free to charge what they considered appropriate for the education they provided. Fees could go up, or they could go down. Entirely up to the Universities.

Oh, and by the way, we’re also going to cut 20% from the Government’s bulk funding for student places.

This is pretty much a policy equivalent of James Wan’s cult classic 2004 horror movie Saw: Yes, Vice Chancellor, you can get your institution out of the funding bind I have trapped you in, but only if you use the sharpened blade of deregulated fees we’ll leave in the room with you to carve an extra pound of flesh from your students.

As you might have gathered, I’m not a fan of user-pays in higher education. I can accept though that there is a need for debate, and ultimately a new social contract around how our society can support the education system we need.

Loans, unfortunately, skew this debate by softening the intellectual battle ground. “Sure your education will cost you,” says the Government “But we’ll loan you the money, so even the most under-privileged can afford it.”

The essential problem with this premise that tends to get skipped over is that in the Australian education system, most matriculating students still come straight to University from high school. In essence we’re talking about a demographic group which is barely, if at all, old enough to legally consume alcohol. And Pyne expects them to do a cost-benefit analysis and long term financial modeling on the value proposition of a loan? Was he ever 18?

Yes, of course it would be eminently wise for any young (or even middle-aged) scholar contemplating taking on education debt to carefully consider the benefits they will accrue from that education, and whether they are worth the opportunity cost of the discounted future income – sacrificing three, or four, or five years of wages now (and taking on that debt) for the promise of higher wages and greater career opportunity in the future.

It would also – in my admittedly out-of-touch estimations – be smart for my 17 year old daughter to finish her Psychology homework before she turns on Facebook and starts watching YouTube clips of amusing animals. Curiously, she seems resistant to the logic of this position. And yet Norton, Pyne, and others like them would have us believe she is ready to accept the reality of taking on $100,000 of debt before she’s even encountered the reality of significant work and managing a household budget.

Sure, there are some incredibly clued up young people out there with vision and drive who have their lives together and their futures mapped out, and see a carefully targeted education loan as a key step toward realizing their strategic career plan. But if you’re engaging your joined-up-policy-thinking and pushing this down to the government’s target of 40% participation in higher education, you’re crossing deep into a cohort whose idea of financial planning is likely to be more along the lines of “Daddy, can I borrow $400 to get a tattoo of Grumpy Cat? It would be so funny and I’d never get tired of it.”

Basically, I’m not convinced young adults sit down and complete a full cost-benefit analysis before lining up tequila shots in Bali or hooking up on schoolies week.

Or taking on a student loan.

The money changes hands above your head and out of your sight, with the actual amounts vastly out of proportion to the everyday experience of most applicants. For the prospective student, ticking a box to take on a debt of more money than they’ve earned, handled, or even seen in their entire life is typically so abstracted from everyday reality as to be essentially meaningless. More damagingly too, the temporal distance of the loans – exciting education today for money in the distant future – like all offers of seductive credit – is all about lowering your mental barriers to the true cost of what you’re buying.

In effect, student loans are the gateway drug to excessive charges and a privatized education system.

Indeed, I’m falling into another little trap of Pyne’s rhetoric myself here – I’ve spent this entire essay so far countering the mechanics of the proposed loan system, when my fundamental problem with student debt (as you may have gathered if you’ve gotten this far) is a philosophical one. Student loans and education debt undermine the effectiveness of education as a tool of social mobility – the opposite of what we need to do to work against the natural tendency of wealth disparity to increase.

As explained by economist Thomas Piketty in his 2013 book ‘Capital in the Twenty-first century’ – it is the natural order of the capitalist economic system for wealth inequality to grow. Capital makes money. If you have money, it can be made to work for you and bring in more money. That is the simple brilliance of the system – you do not need breeding, or training, or other exclusionary characteristics – all you need is money. But the flip side of that, as unionists and youthful agitators have been protesting since the day Adam Smith’s first treatise rolled off the printing press, is that those who do not have access to capital are excluded – the rich will get richer, the poor will not. A rising tide may float all boats, as they say, but if you’re not one of the lucky few to own a yacht, things get increasingly uncomfortable as the water rises.

It’s hard to swim against the flow of capital, and education stands almost alone as a non-disruptive engine for social mobility to counter that trend – providing a means for motivated and gifted individuals to access careers, networks, and opportunities that allow them to change their place in the social and economic order.

In this context, the expectation of debt becomes highly regressive – substantially reducing the redistributive potential of education. Loans simply do not work as a way of equalising social access to the benefits of education. A student who can pay (or whose family will pay) fees up-front leaves the education system with no debt – affording them an immediate advantage in wealth accrual over a student who takes on debt to fund their education, so that there is still a widening gap between rich and poor built into that system.

So, on to act three of our education song-and-dance. If I’m so dead set against the concept of increased student fees and loans, how are we supposed to fix the looming funding hole in our education system? I suspect the keen eyed among you may already have identified an alternative solution framed by the discussion up to this point – as a society, we could simply choose to spend MORE on higher education.

There is no sense in which the Australian taxpayer is being milked by the national University system. 30th place in terms of relative funding, let’s remember, out of the 31 nations in the OECD – and “well at least we aren’t last” is hardly a point of national pride to cling to. It’s like turning up at your child’s school swim carnival and watching them touch the wall just ahead of the asthmatic foreign exchange student who had never been in a body of water deeper than their knees until they arrived in the country this term. Yes, it could still be worse, but you’re not exactly going to raise the achievement around the water cooler at work the next day bursting with parental pride.

As Steven Parker – Vice Chancellor of the University of Canberra – observes, we don’t even need to be world leaders in the progressive funding stakes here. If, instead of manufacturing a funding crisis by imposing an arbitrary 20% cut on an already strained system, we instead upped our funding input to the OECD average, all projected funding issues for Universities in this country go away, and the strength of the sector would be assured for a generation. Parker, sadly, is pretty much a lone voice against de-regulation among Australian Vice Chancellors, speaking out stridently and consistently against the Pyne proposal.

His willingness to buck the consensus of his peers and put his counter-arguments on record though does give me hope for the continued intellectual relevance of the University sector. If there was a Council of Elrond to decide who should carry the Ring of Power to Canberra and toss it in the Captain Cook Water Spout to end the hold of Economic Rationalism over higher education in this country (if only it were that easy!), Parker would have my vote.

All well and good then, I hear you say, but where does the money come from to pay for such largesse? Well, if Norton was anywhere close to correct in his ‘Graduate Winners’ report and there is actually a link between University education and career financial success, then a mechanism that could cover the cost of the higher education system already exists. The positive news for the Government on this score gets even better too – because this funding mechanism operates on a sliding scale finely tuned to the success of an individual – so those who benefit most from their education will pay the most. Hoorah – the Liberal ideal! Christopher Pyne must be dancing in his office to hear such news.

So what is this magical financial saviour? It’s called income tax.

If Norton is right and graduates obtain an earnings advantage from their degree – money they would not otherwise have made without that degree – then it follows absolutely and immediately from this that they will also pay more tax – tax they would not otherwise have paid – over the course of their working life.

Let’s just assume for a second that the Grattan institute calculations are valid and that the average University graduate enjoys something like a lifetime $600,000 earnings advantage over their compatriots without degrees – with Norton’s dodgy extension from here being that 90% ($540,000) of this is attributable to the University education our graduate received. As I’ve discussed before, the assumptions behind these numbers actually make them fairly unreliable – but as they’re Norton’s figures I think it’s intellectually reasonable to turn them back on him here. Okay – so lets assume this $540,000 is at the top marginal tax rate of 47% – and throw in the 2% medicare levy as well. That would come out as the government collecting up to $265,000 in extra tax from that individual that they wouldn’t otherwise have received. By Norton’s logic, the government could eliminate fees, bring back student grants, and STILL come out ahead of the game.

And hey, if you want to look at the large scale implications of this kind of policy, having fully state funded University education doesn’t exactly seem to have crippled the German economy.

So, as we come to the finale of our theatrical review and the music rises to its triumphant crescendo, how do you in the audience want things to finish up for our student protagonist? Would you have them meekly accept Javert’s label as loan account number 24601 and get back to work? Or are you rooting for them to stand up, bare their chest, and declaim to the world:

“Who am I? Who am I? I am Jean Valjean!”

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Of Cats and Cashflow: Human sentimentality and the flaw in economic rationalism

Last Christmas, I paid $5000 for a cat.

$5000.

For a cat.

“Cat” here, in case you should be wondering, is not the title of an avant garde piece of sculpture by some breaking new artist, or a colloquial reference to a rare wine or other exclusive gift for a loved one. Nor indeed, anything special in the feline department.

Just an ordinary cat that my 9 year old daughter had saved her pocket money to rescue from the Animal Shelter. Yes, okay, it’s accepted family lore that he is actually a pedigree animal who somehow found himself down on his luck on kitty skid row – but I can accept there may be a degree of parental self-delusion in that particular idea.

Whatever his back story though, as the warm summer evenings of 2013 began to lengthen, heralding the winding down of business and arrival of the holiday season, all thoughts of casual beachside barbecues and Christmas relaxation were rudely dashed for me one Saturday morning as young Pedro – having manfully picked a fight with a passing car – dragged his sorry frame into the house and collapsed theatrically in the middle of the living room floor.

After a quick cat scan at the local veterinary hospital (no, not a moment of levity playing on my feline friend’s biological order there – a real actual honest-to-goodness “cash up front please sir” CAT scan cat scan) showed up the incontrovertible evidence of a clean and comprehensive break right through the young street fighter’s pelvis, the therapeutic choices came to a quick fork in the road. One path led to major surgery, emptying of savings accounts (“kids – hands up who’s going to University. Not so fast there you two”), and having a half-shaved grumpy convalescing cat locked in a cage in our cosy house through the warmest weeks of summer. The other, to a quiet, calm, fully funded holiday season. Even a couple of weeks of really nice vacation. As well as the sticky point of explaining to my daughter why her precious kitty wouldn’t be joining us for Christmas dinner.

The path we chose (and I say “we” here entirely in the blame-shifting and shared responsibility sense – my wife’s version of this story may differ on the precise extent to which each of us couldn’t stomach the tough decision making) probably tells you everything you need to know about why I’m never likely to make the annual list of Australia’s 10 hardest hearts. And why you shouldn’t take my advice on anything to do with finance.

The point is, this doesn’t qualify as an investment decision. It’s not like I had some brilliant plan to parlay this $5000 outlay into a major stream of retirement income. Even if the cat in question is possessed of the kind of dashing good looks that could make him a major star in pet food commercials…if he could at some point stop trying to take a chunk out of any hand with the temerity to pat him without explicit permission.

No, it just turns out that little tiny titanium screws are really expensive. If you want them put somewhere useful by a veterinary surgeon, anyway.

The much pampered and perhaps overly tolerated Pedro - a few lives down from his initial quota of 9 perhaps, but still going strong as an extended metaphor for social relativism. And definitely not just a shameless attempt to elevate my viewing stats through use of a cute cat picture.

The much pampered and perhaps overly tolerated Pedro – a few lives down from his initial quota of 9, but still going strong as an extended metaphor for social relativism. And definitely not just a shameless attempt to elevate my viewing stats through use of a cute cat picture.

And there, laid bare for the world to see, lies the fundamental flaw with economic rationalism. People are not reliably rational actors on the world stage – we all bring our personal values, idiosyncrasies and biases to economic decision making.

For those of you who might not be fully familiar with the concept, economic rationalism (market liberalism, for readers from outside Australia) is the dogmatic view that markets and money can always do everything better than governments, bureaucracies and the law.

In the more prosaic words of Michael Pusey – Professor of Sociology at the University of New South Wales: “Forget about history and forget about national identity, culture and ‘society’…Don’t even think about public policy, national goals or nation-building. It’s all futile. Just get out of the way and let prices and market forces deliver their own economically rational solution.”

This philosophy underpinned a sharp step to the right across much of the Western political sphere in the 1980s and 90s – think the Hawke-Keating-Howard years in Australia, Thatcherism and its correlatives in Europe – and has more recently been used as the basis for a strict balance sheet approach to management in many areas of wider society – education, housing, the arts, even environmental policy.

This deference to accounting undeniably has a certain elegance to it – a simple coherent narrative that can easily be painted on a placard, or broadcast in a 6 second sound bite. Like Creationism re-packaged for a political audience though (and with many of the same elements of true belief and ideological fervor), the sneaky trick here is that while this is dressed up as analytical economics, really it is all about political philosophy – the ideology of unfettered personal freedom. Don’t get me wrong – it is entirely proper for economic rationalists (or anybody else) to allow value judgments about freedom to define their policy prescriptions. It is improper and, more importantly, incorrect, however, to claim that these ideas flow simply from the laws of economics, and possess some sort of inescapable mathematical truth.

The beauty of mathematics, of course – the reason political and social movements have long sought to co-opt it to their crusades – is that it gives defined, absolute solutions. Put your numbers into an equation, and you get an answer at the end. To as many significant figures as you like. This allows us to do amazing things – like build giant flying machines from aluminium and carbon fibre that can carry hundreds of passengers around the world in a matter of hours. Or land a spacecraft on the surface of Comet 67P/Churyumov-Gerasimenko hurtling through space 510 million kilometres from Earth.

Real world problems though – especially anything touched by the inordinate complexity of human social psychology – commonly fail to lend themselves to mathematical solution. The real world simply has too many possibilities and undefined variables – such that equations have no solid foundations they can be anchored to.

To make problems tractable – to allow mathematics to give us that pure, crystalline answer – we usually make certain assumptions to tie down the open ended possibilities and give us a solvable domain to work within. The danger here though is of ending up with what the great 20th Century physicist and public champion of science Richard Feynman used to call a spherical cow argument (readers of my earlier posting on University fees “More Pennies for Your Thoughts” will have seen a longer explanation of this concept) – an assumption that, while making your equation solvable, also removes any meaningful relationship to the physical system it purports to represent – and when that happens the clean precision of a mathematical solution can be misleading. Or worse.

The NASA engineers plotting the journey of the Mars Climate Orbiter to the Red Planet in 1999 produced incredibly precise solutions. They also assumed the output of one of the key pieces of navigation software on the Orbiter was in metric Newtons of force…when it was actually in pounds of thrust. Oops. This rendered their solutions elegant, precise…and dead wrong, with the $USD 125 million satellite coming in too close to the planet and breaking up in the Martian atmosphere.

Perhaps more than such elementary cases of error, however, the important thing to grasp in a social context is that you can use framing assumptions to distort the result in any direction you might desire. Want to argue against the opening of a new coal mine? Include some cost assumptions about externalities like atmospheric pollution, environmental risk, and increased traffic to show the economics don’t stack up. Or as I showed in an earlier blog, want to argue in favour of higher University fees? Make some helpful assumptions about the financial advantage accruing to a graduate while discounting the societal benefits and increased tax revenue from a more educated population.

Even in the best of circumstances though – if we assume (at the risk of vanishing into the never ending hall of mirrors that is self-referential logic) all our assumptions are correct and appropriate – the critical point to remember is that economics cannot tell you what is the right choice. Morality and values do not drop out of financial equations like wisdom paying out from a philosophical poker machine. Any investment decision comes down to a balance of short term sacrifice against long term gain. Instead of spending your money on something now, you invest it in the expectation of gaining greater reward at some future point.

When it comes to quantifying outcomes – basic economics – that can be a pretty straightforward calculation. “If I have $1000 now, would it be better to stuff it in my mattress or invest it in government bonds for 10 years”. Okay, there are still some assumptions to make about yields and the potential of unexpected events like your significant other throwing your mattress in a skip while you’re at work. Or a plunge in the commodity price on which a government had based all its economic projections, driving it to default on its debts (Hmmmmm…so how is the iron ore market going, by the way?)

By and large though, you can produce a pretty robust solution to that kind of question and say which one is likely to give you the higher return over a 10 year period.

Defining what the sensible decision is based on those results though – now there’s the challenge – with a crack arising in the logic around defining how great a long-term premium is required to make the short term sacrifice worthwhile.

Let’s say that Mike believes that the pleasure he derives from eating a custard slice is an appropriate trade for the 30 seconds it might shave off his life (or the hour in the gym it will take to work off all that delicious vanilla flavoured excess), whereas Susan doesn’t think the momentary pleasure of the creamy mouthful is worth the sacrifice. Who is right? Both are, of course. It’s a question of values and opinion, it has no absolute solution – no single true answer that trumps or invalidates all others.

Orthodox economics is very clear that policy recommendations must rest on both economic analysis AND a set of values. There is no objective adamantine economic ‘truth’ – the social implications of financial modeling depend on your personal beliefs and values.

Even Milton Friedman – often held up as the philosophical father of Economic Rationalism – understood this qualification, stating:

“As Liberals, we take freedom of the individual, or perhaps the family, as our ultimate goal in judging social arrangements.”

No special pleadings or claims of incontrovertible quantitative support there – Friedman is perfectly comfortable acknowledging that his social policy ideas (a fountainhead that fed both Reagan and Thatcher in their glory days of social engineering and reform, let us remember) are based on an ideology. And that’s fine. On that basis, you can assess and debate his arguments, and decide for yourself whether that’s the model you would like to see underpinning the society you live in. Friedman, unlike the hardline Economic Rationalists who have followed in his intellectual wake, allows that alternative social models may be equally valid if you don’t happen to share his values.

Like, for example, valuing a deeply ungrateful cat (and the happiness of a small child) more than a new sofa or a week in Paris.

And hey – at the end of the day, even if we were all perfectly rational actors making our life decisions on the basis of pure logic and mathematics, that might not actually be the lasting social panacea the Economic Rationalists hope for. You’ve seen what happens to the planet Vulcan in J. J. Abrams’ 2009 Star Trek re-boot, right?