catallaxy files

catallaxy in technical exile

Shares in people 2

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Last September when Craig Emerson floated the idea of students selling shares in their future income streams I was sceptical, partly for similar reasons to Andrew Leigh recently: that there wasn’t likely to be much of a market for it. But Jason Potts and Joe Clark convinced me that there was more to the idea than I first thought, and I commissioned Joe to write an article for Policy – the full version is here (pdf), and the op-ed version here.

The main practical objection to the idea is that it won’t be competitive against the alternatives. If you are eligible for a HECS-HELP or FEE-HELP loan the taxpayer takes most of the financial risk: if you don’t earn enough in Australia to reach the threshold at which repayment starts, you don’t pay (though I have plans to recover some of this money), but if you are financially successful the lender does not share in the benefit beyond being repaid the initial loan plus CPI indexation. In the Emerson/Clark private alternative there is still the protection against low earnings, but the profit incentive for the lender is that they keep collecting a percentage of the graduates’ earnings for a fixed number of years, so some people will end up repaying much more than they received in the first place.

If Emerson/Clark scheme started now there would be problems with adverse selection. While Marx suggested the principle ‘From each according to his abilities, to each according to his needs’, our higher education system is based on the principle ‘To each according to his abilities, from each according to his needs’. Most of the very brightest students (who are generally those with the greatest earning potential) get a lot of government assistance through susbidies and cheap loans, while those who struggle with their schooling end up at full-fee feeder colleges, for which they may need to borrow money.

In this new book Vital Signs, Vital Society Emerson is mostly talking about using his scheme to expand the number of people at university, but he is rather confusing on how this is to be achieved. When discussing the loans scheme specifically, he seems to be saying that HECS places be reserved only for those students and courses the market it not likely to support (pp.124-25), which implies that true to Marx public support would be restricted to the needy, with growth provided by full-fee places funded in the private equity market. But a few pages earlier he insists that the number of HECS places be increased, complains about the existing full-fee places, and suggests that even existing, relatively low, prices are deterring prospective undergraduates. If HECS places increase, there won’t be much or a market for equity investment.

For the scheme to be viable in the current environment, it needs a way of attracting low-risk bright students. The main selling point for these students in Joe’s article is that HECS-HELP and FEE-HELP only lend for tuition fees, whereas the private version could lend for other university costs and living expenses as well. Also, for those in full-fee places at the sandstone universities the maximum $51,000 FEE-HELP loan is not likely to be enough, sending them off in search of alternative sources of finance. But these two factors are probably not enough to create a market of a viable size.

I can see two possibilities for this scheme to reach a critical mass of potential customers. The first is that globalised financial institutions could fund one large group of people who are not eligible for generous government assistance, ie overseas students. With their international reach, they could collect what is owed them in most places the students were likely to end up working after graduation. The second is that some universities withdraw from the government financing system, rather than forever follow all the absurd rules and regulations coming from Canberra. Admittedly, the culture of capitulation is so entrenched at the public universities that it’s hard to imagine that after decades of saying ‘yes’ to any and every request they might finally say ‘no’. But I live in hope that one day they will find a principle that is not for sale.

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Written by Admin

April 15, 2006 at 11:34 am

Posted in Uncategorized

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