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Student loans, the bleak future for higher education

Economics, Politics, , , , , , , , ,

Self financing has become the big principle that guides university education. Rather than the state funding higher education, it will be the students who will do so by paying fees. These fees to be financed by loans from the state. The constant background noise that accompanies these ‘new’ policies is that after years of overspending, the government has become so indebted that what has to be done is to cut government spending to balance the books. It has been stated so often and by so many authoritative people that it has been become one of the accepted truths of our culture. However it is not true, it just that a series of misapprehensions of the recent past have been manipulated by powerful groups in society to produce a climate of opinion that makes possible a remaking of the social order in their interest. They want a small state, whose relatives low cost will enable them to minimise their tax burden and use their huge tax free incomes to indulge in conspicuous over consumption.

Part of that remaking of society is the introduction of student loans. It is so familiar that it hardly needs repeating, but with increasing numbers of students attending university the old system of financing higher education was said to unaffordable. When Lord Browne in his report recommended increasing student fees to £9000 per annum, his understanding of the situation was never queried. Why did nobody see the fault in his analysis which implied that a system in which all tax payers contributed a small sum each to higher education was less affordable than a system in which a much smaller group (all current undergraduates) would each pay a much larger sum to finance higher education. Logic suggests that this policy might be fallacious, why can a few afford what the nation as a whole cannot?

Much was made of the fact that under this new system even these much larger monthly payments would be reasonable and easily affordable. Modest is one of these words which can mean many things to many people. Modest for an oil executive or well paid cabinet minister is not the same as modest for a young professional. Those I know repaying their loan would not use the word modest to describe their repayments.

The phrase ‘smoke and mirrors’ comes to mind when describing the governments student loan policy. It will be many years before student loan repayments make a substantial contribution to the funding of higher education. Total government spending on higher education will not decrease for many years as the increase in loan repayments will take a number of years to take effect. Will it be twenty or thirty years before we see student loan repayments making a substantial contribution to higher education funding? When will break even point be reached? Even the government recognises that there a problem and is increasing the interest payments made on new loans so as to increase the graduate contributions to funding education. What matters is not that it will take decades for the policy to become self funding, if ever, but that the government says it will happen. Appearance counts for everything, reality can be safely ignored. Particularly as an overwhelming right wing media are conveniently myopic when it comes to the implementation of their favourite policies.

With the increasing commercialisation of the university sector it is unlikely that £9000 pa will remain the maximum fees for university. Foreign students pay in excess of £20,000 per annum in fees. At this level of payment the universities earn a surplus/profit on each student; it cannot be long before the universities find some new reason to negotiate a further fees increase. Only the most naive can believe that fees will remain at this level for any length of time. Universities as they become increasingly commercialised will increasingly behave any other business. Can we expect the annual announcement of a fees rise as occurs in the rail industry?

There is another possibility and that is that the universities will cut costs to squeeze as much of a cash as they can out of each student. As the main costs faced by a university is staff costs, there is for the less scrupulous Vice Chancellor lots of opportunities to do this.They can reduce staff student contact time, increasingly using IT as a staff free teaching resource or increasing staff student ratios (given the possibilities offered by IT the 1000 plus lecture is feasible). For the enterprising Vice Chancellor the possibilities are endless. Less prestigious universities will possibly lower fees to attract students to keep up numbers so as to keep them viable. However the price to be paid for such low cost universities will be horrendous. Their financial viability will only be secured by economising on all those things that make university education desirable. Financial objectives will increasingly come to dominate in universities at the expense of educational objectives.

Of concern must be the fact that the new system of university finance will be managed by for-profit businesses. Already it is reported in the press that the government is considering selling off its student loans book to a private provider. These loans are at present interest free, to make them more attractive to a potential buyer the government is considering adding interest to these loans. The costs of administering the student loans system will be considerable. In the past the American health care system was considered as an example of how not to manage a health care system, as 40% of health care costs went into the management of the system. Now any cabinet minister would tell you that it was a price worth paying for the efficient delivery of health care at the point of delivery. What share of the proceeds of loan repayments will go to the managers of the student finances? Whatever it might be, it will diminish the contribution of loan repayments to the financing of higher education.

When the government sells student debt to for profit companies, it will have to do so in way that guarantees these companies a profit. The obvious way to do that will be to sell it at a discount. If the private company pays less than the market value of the student debt, it is guaranteed a profit in the event of a shortfall in repayments. Whatever deal the government has with private companies it can only diminish the contribution of loan repayments to the financing of higher education.

No mention has been made of the difficulties of collecting these loan repayments. Many graduates are highly mobile in terms of jobs and location. A maths graduate from Oxbridge might decide to work for a New York finance house, only returning to the UK at retirement age. Such a person would given the current rules avoid repaying any of their student loan. The commercial organisations managing the repayments system would be under an obligation not only to remain viable but to make a substantial return on their investment. The only way this could be achieved is to increase the costs of loan repayments on those who cannot avoid making repayments, that is those residing in the UK. The government has shown that it is not adverse to such an arrangement, as it is considering charging interest on what were formerly interest free loans.

The change in funding is claimed to be a revolution, as universities will now be independent of the government as they will depend in future from their income from their customers the students. What can be best described as the ‘free market fallacy’. With the universities no longer dependent on government funding, they will be free it is said from government dictates on curriculum and be able to set a curriculum that needs the needs of their students and the UK economy. There is the sting in the tail, they must meet the needs of the UK economy. Universities will be obliged to provide those courses that will guarantee the employability of their students. This explains why there is a large increase in business and business related courses and a decline in the humanities, the range of modern languages on offer is rapidly diminishing and subjects such as philosophy which have no business application are disappearing from the curriculum altogether. It is an attack on the enlightenment project, that of education for education’s sake.

The strings by which the government puppet masters control the universities will no longer be visible, but they will remain in place never the less.

This ‘realist’ government has said it is prepared to accept that universities may be allowed to go bankrupt, it wants the stiff winds of competition to weed out those weak universities that provide a poor quality education. One suspects that what the government means is those new universities that attract large numbers of non traditional lower income students which instead of teaching them useful vocational and employment skills teach subjects that fall within the ‘liberal education’ ethos. Government boasting about the opening of private universities that focus on providing vocational education at lower cost than traditional universities show the direction in which the coalition government want higher education move.

The change in the attitudes university education is reflected in the views of two contrasting philosophers. Michael Oakshott writing on education in the 1960′ s defined education as the initiation into new areas of experience and knowledge which was in contrast to Keith Joseph who 20 years later saw education as being limited to those subject areas that had economic utility. Rather than opening up young minds to new experiences Keith Joseph wanted to limit the experiences of young people to those that had economic utility. Fine arts to be replaced by accountancy etc. It is Keith Joseph thinking rather than that of Michael Oakshott that has dominated government policy towards the universities.

Government policy is characterised by naivety and ignorance of the world beyond the confines of Westminster and dining rooms of Notting Hill. They foresee an exciting future in which the universities freed from government control will compete against each other and that competition will drive up standards as the universities compete for students. Any cursory examination of the economy will demonstrate that free markets are dominated by a few big firms. There are not numerous suppliers engaged in fierce competition with each other. We speak of the ‘big four or five’ when speaking of the banks, supermarkets, energy suppliers etc. not the numberless independents. One of the economists claimed by the government to provide the evidence for their policy is J S Schumpeter, but one suspects that their reading of his books has not been very thorough. He writes that although markets start as competitive they end up as monopolistic, that is dominated by a few large suppliers. The most successful firms eliminate competition by either driving out of the market their less successful competitors or by absorbing them into their business. By freeing the university sector from government control and opening it up to market forces, there is no reason why the university market should not follow the pattern outlined by Schumpeter.

Already the government has unwittingly made moves to reducing competition in this sector. They have suggested that the most successful universities should set up an external degree system whereby their students study for their degrees in local outreach institutions, such as further education colleges. This outsourcing of degrees will undermine smaller local universities that lack the prestige and resources of the major universities resulting in a consolidation within the university sector as universities close.
The government has said it is prepared too see universities close. The assumption being that the high quality universities will prosper and expand. However this is to misunderstand the market system. One factor in attaining market dominance is quality of the product, others equally important factors such as cost efficiencies may have little to do with the quality of the product. What will happen is that the new private universities will be best placed to take advantage of the new opportunities. They are the most cost efficient, they offer the least cost degrees and have the marketing skills of a successful business institution. It could well be that they supplant Oxbridge and the Russell Group as the dominant players in the university market. What we are looking at to borrow an analogy from the grocery trade is a future dominated by the ALDI university.

If cost is to be the deciding factor university education for the majority of students will be changed. It will no longer be the three year course at some hallowed institution but a low cost course lacking most of the features associated with a high quality education. An out sourced degree course at an FE college will be considerably inferior to one undertaken at the well resourced home university.

Is ASDA another precursor of the future? It is planning to offer degree courses to its own staff. These degrees will be both vocational and low cost. The two criteria which the government believes are the two key criteria for university education.

What the government and its supporters fail to realise is that the market has its own logic. If the government is responsible for the direction of education that direction is open to debate and it is likely that university education will be directed towards achieving a variety of desirable goals, which at its best is education for education’s sake. However a market dominated system directed to maximising profit will focus on a narrow range of courses that maximise returns. If profit maximisation is to be attained by cost cutting all innovation will disappear as new ideas cost money and would be contrary to the least cost consensus that prevailed in universities. Already such changes can be seen in the university sector with the increasing proliferation of business studies courses, increasingly universities will teach ‘to do’ rather than ‘to think’. The uniform mediocrity imposed by the market will be a more successful suppressor of free thinking that any of the repressive institutions of the past. Cost is a far better censor than the Inquisition.

The Austerity Myth or the Great Lie

Economics, Politics,

The Austerity Myth or the Great Lie

I apologise for any typo’s as it was written in anger after George Osborne’s speech

There is a consensus amongst the governing classes and that the overriding crisis of our times is that of excessive government debt. No matter what the price to be paid in terms of rising unemployment, increasing poverty, there is not too a high price that can be paid for eliminating that debt. However unlike most myths which have some truth in them, this is one founded on the ‘Great Lie’. The real crisis that of over indebted banks and the high price that is paid to keep them in existence. In Europe and the UK that price is large scale unemployment amongst the young, in the UK 1 in 5 young people are unemployed and in Greece it is 1 in 2. Europe is sacrificing the futures of its young to preserve the wealth and status of a particularly unpleasant group of people, the bankers and the financial elite.

The media constantly reports on the growing national debt which had risen to 85.8% of GDP in March 2012. With an economically illiterate media, political elite and population it is easy to run scare stories about the dangers of such a large debt. The fact that this figure is not historically high, is temporary and the fact that high levels of such debt can coincide with periods of high growth as well as low growth is lost in a miasma of media untruths. What is never mentioned in the media is the high level of indebtedness of the UK banks. Paul Tucker in 2009 brought out a report suggesting that the debts of the banks equalled 5x the size of UK’s GDP, more recently Morgan Stanley suggested that figure was 6x the size of UK’s GDP. Critics have rubbished the latter figure suggesting its only 2x GDP. Since the banks have not ceased the reckless behaviour they indulged in before the crisis, I suspect a figure of 2x GDP is too low. What has happened is that the banks have successfully deflected the story from being one about the problem of massively over indebted banks to a focus of the less significant problem of government debt.

What is most surprising is that the best educated parliament in our history (a legislature dominated by graduates many with good degrees from the best universities) has never questioned this narrative, they have accepted the bankers story as the true one. There are interesting parallels with the past. Germany of the Weimar Republic had the best educated population, yet in fell prey to the follies of Nazism. What is interesting is the that intellectual elite in both countries fell for a brutualist philosophy, which derided the current morality of society as being a bar to progress. In Germany it was the philosophy of ‘sturm un drang’ and the moral scepticism of Nietzsche’s superman philosophy and in England the ‘Neo-liberalism of Hayek and Alyn Rand. What both taught was a contempt for the masses of humanity and a culture that pandered to their needs, a culture of weaklings. The superior beings who should dictate mankind’s future were Nietzsche’s superman, the ‘blond beast’ or Alyn Rand’s billionaires. Both of these types of super beings were denied their potential by a culture that denied them their place at the forefront of humanity. Rand even advocated the mass starvation and death of the millions of useless humanity. What these philosophies created was an ethical waste ground, where a mass murderer could become leader or one in which predatory financiers could thrive by looting businesses of their wealth, making thousands unemployed and yet be lauded as successful kings of finance. What the Nazis wanted was to remake their nation as a dynamic state which under the leadership of the Aryan supermen, would come first in the competition between nations. Neo-liberals similarly wanted to revitalise English culture by destroying the welfare state and the culture of dependency it engendered. For the Germans the superman was the SS Officer and for the Neo – Liberals it is the financier, both would remake society the first through violence and the second through financial muscle. Since the British Parliament is largely drawn from the intellectual elite, who see financiers as the saviours of British society they could not comprehend why the banking system failed, they were all too willing to put it down to a once in a life time crisis caused by events external to the UK and not the greed, incompetence or recklessness of bankers. Is this not why George Brown, despite all the evidence to the contrary, engaged bankers to direct the financial recovery?

The state cannot be absolved of all blame for the crisis as the government during the Chancellorship and Premiership of Gordon Brown did its utmost to encourage the speculative frenzy in the financial markets. Such frenzy provided a lucrative source of revenue through taxes such as s tamp duty and capital gains tax. Not the first government to become over dependent on tax revenue from such a volatile source as gambling. Economic history is the most neglected subject in the curriculum of our university educated elite.

What did the banker’s want most of all? To carry on as before and to avoid that what should happen in any crisis, the closure unsound businesses of which they were the most prominent example. What classical economists taught was that recessions were an economic Darwinism that weeded out all the weak businesses leaving only the strong surviving. In this crisis the weakest of the weak were the banks. What they had to avoid was paying the price of their recklessness, that is bankruptcy. Fortunately for them the government of UK would do all that was necessary to prevent that happening. The National Audit Office estimated that the government had paid £123.93 billion to bail out the banks and at the height of the crisis had stood guarantor for banks liabilities to the tune of £1.2 trillion. In 2009 the value of GDP was £139.26 trillion, so the UK had guaranteed debts equal to 86% of GDP or National Income. In the unlikely event that all those liabilities had to be met UK plc would have become bankrupt.

What was it that would enable the banks to remain solvent and continue as before? Low interest rates, what is called a cheap money policy. The many loans they had given out to borrowers to finance their speculative activities in the property or asset markets could only be financed by those borrowers if the interest they had to pay on these loans was small. As gambling on future speculative gains meant that what mattered, was not the current return on their investment, but the large sum to be made selling on the business at an inflated price. When the market stopped moving upwards such borrowers were in trouble, as they had borrowed far too much to buy these businesses and falling sales meant they had difficulty in financing their loans. In addition in a depressed market they were unlikely to find a buyer a d recoup their initial investment. One such example was Guy Hands who took over EMI hoping to reorganise it and sell it on at an inflated price. The market for EMI’s products collapsed and Guy Hands had difficulties in financing his borrowing. Eventually he disposed on the various parts of EMI to other private equity firms at a loss.

It was a similar situation in the property market, as there individuals and property developers had over borrowed on the anticipation of continually rising prices in the property market, as a large loan could easily be paid off by selling the property at an inflated price. since between 70 and 80% of bank loans are to the property market, financial catastrophe threatened.

Whether consciously or not Mervyn King was the saviour of the banks. He presided over a cheap money policy at the Bank of England, the Bank of England rate fell to an unheard level of 0.5%. Since the Bank of England rate was the base rate on which all lenders based their interest rates, all interest rates would fall in the market. The rationale for this policy was that low interest rates would make it cheap for businesses to borrow and this would encourage economic growth. Also low interest rates would enable over indebted British households to continue to pay their mortgages and avoid eviction. What he knew but did not say, was that a cheap money policy would be the saviour of our over indebted banks, who would not face a collapse of their loan books.

However it is not sufficient just to set the rate; there has to be a means by which all other financial institutions can be persuaded to follow that lead. The government did this by committing itself to end its spend thrift ways. A little digression is needed here bank rate is the rate of interest at which the government sells it borrows money and lenders will only lend money at low rates if they think it is a sound investment. As history shows when markets judge governments as unsound borrowing rates will be very high. Essentially they want to know that the government will have the wherewithal to repay its loans. Consequently the Labour government announced plans to cut its budget deficits. The market was satisfied and rates kept low.

This is a very simplistic account of the current situation, but it without parody summarises the thinking of the bankers. When the IMF or World Bank lent funds to countries, they inevitably only lent money to governments if they cut spending. In reality the cuts imposed on these countries invariably did little to help them out of the mess they were in, all these countries gained was the finance to pay off some of their foreign creditors. Surprisingly the cuts they imposed always seem to benefit foreign investors who could invest in the newly privatised state businesses. The blue print for aid was always drafted in a way to benefit rich foreign multi- national companies. What was always evident was has the self interest of the foreigner lenders motivated their actions.

Similarly with the City of London, they were able to have their cake and eat it. The banks and the city traders benefitted from low interest rates, as it meant that they had cheap money which made it easier that ever to speculate, as if money cost next to nothing to borrow, the costs of speculation were minimal. Those potentially rotten assets held by the banks would never be revealed as such, because the rates of interest were so low, that even the most indebted speculator could finance his borrowings. On top of that the government initiated a huge programme of quantitative easing which gave the banks vast amounts of practically free money, at present it totals £375 billion. In addition the programme of spending cuts have given them new opportunities to make money, as was accompanied by a programme of privatising state assets or services. One such example is the forthcoming privatisation of the probation service. There are fees for arranging privatisation and endless consultancy fees for advising on ever ingenious ways to scale back the size of government. Perhaps without too much exaggeration what Harold MacMillan’s said in 1959 about the UK applies to the banks, they ‘have never had it so good’.

There is a much darker side to the picture which is never discussed, except obliquely. If the economy picks up the demand for money will rise (money required for investment in new equipment, stocks etc.) and so interest rates will rise. Interest rates are low only if the demand for money is low, that is supply is greater than demand. Banks are continually claiming that there is no demand for loans from business, so the supply of money exceeds demand. While rates are low there is no chance of the insolvency of the banks being exposed, as borrowers won’t be forced to default on their loans. How conscious is the demand amongst bankers for demand in the economy to be suppressed is hard to tell. Certainly the wiser heads amongst them realise a depressed economy works in their interest. Bankers certainly represent an influential voice in government. What ever the self knowledge of bankers, they all know it is in their interest to continue the policy of cheap money, even if it means keeping the economy in a state of continual depression.

One of the wisest of the current generation warned of the dangers of growth. In a report published on the 27th June 2013, Mervyn King spoke of the dangers of increased growth even if his language was very guarded. He said increased economic growth would lead to an increase in interest rates, which require over indebted households to find additional sources of income to fund their mortgage repayments. What he did not say was that there would be the risk of increased insolvencies among indebted households and businesses. Depending on the level of insolvency this could have very serious consequences for the banks. His solution is to reduce the restrictions on banks so they would have more money at their disposal which could then be used to finance another speculative asset boom. Rising prices in the housing market would offset the rise in interest prices. He never spoke about the speculative boom but its safe to assume that this is what he meant.

Having written far more than I intended, what I have demonstrated is that the current policies of the government are of benefit to only the banks and the City of London. The whole country is paying the price for the follies of the super rich (aided by the naïveté of government). The banks can only remain solvent if the UK continues almost indefinitely in a state of semi depression or if the UK indulges in yet another frenzied housing and asset boom. The greatest losers are the young, years of depression means reduced job opportunities and lower incomes, continued job insecurity and for many long periods of unemployment. Another lost generation similar to that of the 1920 ‘s when the City of London demanded a policy of financial retrenchment which served its interests and those of nobody else. The alternative is hardly any better, economic growth generated by another speculative boom, which will lock millions out of the housing market and inevitably end in a speculative bust.

One final point should be made if banks had gone bankrupt had in 2009, the greatest losers would have been the super rich. It was they who had invested millions in speculation. There would have been a repeat of 1929, when in America failed financiers in despair threw themselves out of windows of Wall Street. The lesson of the years since 2009 is that there is never too high price that the super rich expect the rest of us to pay to protect their wealth.