Home > Budget, Uncategorized, University Quality > Why is a third-level education useful? And why is underfunding the sector counter-productive? Answer: because it reduces the future potential growth of the economy and depresses future earnings.

Why is a third-level education useful? And why is underfunding the sector counter-productive? Answer: because it reduces the future potential growth of the economy and depresses future earnings.

There are lots of reasons why a third-level education is useful to the recipient as well as society at large. Here is one good reason: education future-proofs the receipient against unemployment (the data are a time-series from the USA). In other words, probablility of unemployment is stratified by educational attainment, and the more educated you are, the less likely you are to be unemployed.

Which make you ask: why cut university spending?

Chris Dillow writes on his blog about the cuts in university spending in the UK (blog post reproduced in full):

Why is the government cutting university funding? I ask, because if you believe conventional economics, and the justification for expanding universities in the first place, the cuts might be counter-productive. This is because lower investment in human capital means that people will earn less in future – either because they were denied a university place or because they got a worse education at university. This will mean lower future tax revenues. It could be, therefore, that cutting university spending would merely reduce public borrowing this year, at the expense of higher borrowing in future years. With real interest rates  low – which means future cash flows should be valued highly – this danger is especially great now.
So, what’s the justification for the cuts? There are four possibilities.
1. Diminishing returns to human capital have set in,  so spending on some university courses is not cost-effective. However, it’s unclear that this is really the case, and unclearer still whether the cost cuts will be focused upon those areas where returns to degrees are low – mostly, lower-ability men on arts courses. I have not heard a government minister use this as a justification for its cuts.
2. The cuts will reduce waste, rather than genuine investment in education; this seems to be the view of Baron Mandelson, of Foy in the County Of Herefordshire and of Hartlepool in the County of Durham. This, though, seems rather naïve. How likely is it that the cuts will increase efficiency when they’ll be implemented by the same people responsible for overseeing wasteful spending in the first place? So far, there are more reports of genuine cuts in teaching rather than of reductions in vice-chancellors’ salaries. Strange that, huh?
3. This is an example of deficit fetishism. The government is focusing on short-term deficits, without paying any heed to longer-term revenues. This is just economically illiterate.
4. The human capital argument was always wrong. Graduates earn more than non-graduates not because universities have given them skills, but because possession of a degree signals that they have higher ability. The justification for expanding higher education was that it was a backdoor form of egalitarianism. In giving more people degrees, the signal sent by a degree would be weakened  and so the graduate premium would be reduced, at least relative to what it would otherwise have been. However, now that public opinion is more supportive of more explicitly egalitarian policies – hence its support for the 50p tax rate – this policy can be quietly abandoned.
I would like to think that cuts are motivated by this fourth possibility. I fear, though, that the third motivation is in fact stronger.

February 13, 2010 | Permalink

Update: the somewhat ungrammatical title has been repaired.

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