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Have universities become the latest casualty of the Covid-19 pandemic?

October 11, 2020
Editor(s): Thomas Sinclair
Writer(s): Qi Rui Soh, Aleisha Jiang, Oliver Soo

Universities, like the monarchy, are institutions. They are symbols of reassurance when the going gets tough and a sign of hope when all hope seems lost. However, institutions rely on public support to exist – financially and literally. Regardless of its capabilities, it simply cannot survive without.

At the moment, universities all over the world are in a dire situation. With various factors, (such as the Covid-19 pandemic) contributing to the economic downturn, universities have been starved of funds and are decreasing the amount of staff in a bid to stay afloat.

Economic instability nowadays poses more of a threat to institutions around the world than it did in the past. Back in 1918 when the Spanish flu outbreak caused immeasurable global damage, both economically and physically, Australia was able to remain relatively unscathed. However, approximately 100 years later, the Covid-19 pandemic has hit Australia as hard as it has hit its European counterparts, and Australian universities have joined the chorus of universities around the world in their fight for survival.

Apart from time, what has changed?

The opening of borders and the unique bond of people and countries all over the world have caused most economies to be more reliant on the movement of people, goods and services around the world.

However, this can be a double-edged sword when we allow ourselves to become overly reliant.

Accompanying border closures, the inflow of international students has also stalled. This unfortunate event has hurt the revenue for Australian universities especially hard, as international education has become our third largest export earner and it is seen to be on an upward trend.

How have we landed ourselves in this sticky position?

Why have universities resorted to reducing staff but have been unable to cut student fees?

How can the government raise more funds to support universities?

And, where would this lead to in the future if we do not respond on time?

With declining public funding at the root of the problem and the shift towards a business model of managing universities, the entire university dilemma in higher education is exacerbated by a phenomenon known as Baumol’s cost disease.

Essentially, economists William Baumol and William G. Bowen put forth a theory approximately fifty years ago positing that industries that couldn’t increase labour productivity would eventually face rising costs. The disease would be even more pronounced when said industries must respond to rising salaries in other industries that can and have increased labour productivity. For example, manufacturing experienced increased labour productivity with technology. Australian Financial Review reports that for a lecturer in the United states it would have cost the university approximately USD3.02 (for a two-and-a-half-hour class) in 1862 but in 2020, the same lecturer would have cost USD71 for that same period of time.

Furthermore, Sydney University economist Justin Wolfers highlights that not only is labour a crucial input in education, but it is also an output. Education relies on the interaction between professors/tutors/lecturers and students. After all, the best professors can only teach a certain number of students before quality of education inevitably goes down.

Not all is lost, however. While Baumol’s cost disease is largely premised on the fact that universities cannot scale their efficiencies and productivity, technological advancements like online learning can help universities to increase some of said labour productivity. However, the verdict is still out on whether or not the quality of online learning matches that of in person teaching. Furthermore, students may start to question why they are paying the same fees when they aren’t even getting access to university facilities and they could potentially get the equivalent from a Masterclass/Youtube seminar.

The rising costs faced by universities predicted by Baumol’s cost disease don’t get any better when due to their inability to cut costs, universities have to continually find ways to keep students. This has led to many universities continually upgrading and advertising their student amenities in the hopes of attracting students to a “fun university life”. The problem with this is that it eventually leads to a red queen effect since every university, regardless of prestige, can and will try to increase their funding into student amenities. Eventually, this leads to rising costs which compounds the already existing high costs from Baumol’s cost disease. Even worse, no university achieves their goal since their competitors (other universities) are engaging in these same practices.

In the last few decades increased globalisation and technological connection has led to a rise in people studying abroad. The unbearable pain of leaving behind family and friends has now been reduced as social media enables us to communicate with one another anywhere in the world. Benefits of studying internationally include more choice, exposure to other cultures, and better employment prospects in students’ home countries.

The resulting influx of international students has greatly boosted the revenues of Universities around the world, particularly in the US, the UK and Australia. However, the Covid-19 pandemic has exposed many universities’ overreliance on these international students.

Universities are now racing to cut costs, involving staff lay-offs, cuts to research funding and presumably much more in the near future.

While debate rages as to whether globalisation will continue to increase (particularly in the midst of political tensions between the US and China), now is a great time to consider how the Australian Government can protect the financial viability of Universities in the future.

Is the Higher Education Contribution Scheme sustainable?

Recently the Federal Government took action to tighten access to Commonwealth-supported places in Universities. Students who fail 50% or more of their subjects after taking at least eight units will have to pay the full cost of their studies upfront to continue. Previously in 2019 the Government implemented changes that meant students would have to begin repaying their student loans when they earn $45,000 – instead of $52,000. These changes are a clear message from the Government that they believe the HECS debt system is unsustainable in its current state. Now that the Government faces a nearly $1 trillion reduction to the Federal budget over the next decade due to the Covid-19 pandemic, more cost reducing changes to tertiary education funding are probably on the way.

So, what can the Australian Government do?

One equitable improvement to student debt could involve domestic students from wealthier families being required to pay for more of their course upfront. The higher the income bracket of a student’s family, the higher a proportion of their fees they must pay in cash, not later on as HECS debt.

Another way to improve the HECS system and reduce defaulting rates is to educate students about student debt BEFORE they take on the responsibility of this debt. In America, student debt has become an enormous ($1.6 Trillion USD) issue. While Australian student debt does not accumulate interest like US student debt, there is much to learn from America’s woes. Many students report being unaware of the risks of student debt as they were too young to comprehend the devastating impact it would have on them. Crippling student debt can result in people delaying major life events such as marriage, buying a home or even having children. Emphasising that this issue is not yet as severe in Australia, the Government must still communicate that taking on debt presents a risk to one’s future living standards if their University degree does not result in employment opportunities.

Finally, an interesting longer-term idea is a Graduate Tax. One early proponent of such a tax was London School of Economics economist Howard Glennerster. He argued that while Universities are funded as a social service by all taxpayers, only a select proportion of the population (graduates) receive the benefits from University education. Therefore, University graduates should pay a small additional tax each year after they receive their degree. A “Pure” graduate tax proposes a tax which is imposed on graduates throughout most of their productive lives. 

However, as University has become more universally accessible and with there being positive externalities associated with an educated population, this argument is less compelling than it perhaps was in the 1960’s. It is becoming increasingly hard to argue that University is not a social service. Additionally, such a tax could be seen as a deterrent for people to pursue an education.

Or potentially the Government could reconsider excluding universities from the JobKeeper initiative, as universities contribute to the economy as well.

Ultimately, the best solution to ensuring Universities remain financially viable in the future is to ensure that students who undertake Tertiary education are serious about their study and will be able to use their degrees to boost their future earning potential, therefore allowing them to repay their student loans. By protecting the financial viability of Universities, we ensure more people can access tertiary education regardless of their socioeconomic status.

2020 is not a year for which most people would look back on with great fondness. In fact, it has more or less turned out to be an “Annus Horribilis”.

However, it can also be thought of as a blessing in disguise.

The economic shock due to Covid-19 can serve as a reminder to people on the outcome of being overly reliant on one sector and not paying enough attention to other factors. It may also encourage people to take a more balanced and diversified approach in life and ensure that there is always another plan that can be used when unexpected situations arise so that the event of being placed between a rock and a hard place does not happen.

References:

https://independentaustralia.net/life/life-display/australias-universities-are-over-reliant-on-overseas-students,13049

https://www.afr.com/work-and-careers/education/universities-have-to-work-harder-on-their-reputations-20200228-p545cx.

https://www.educationnext.org/does-baumol-effect-explain-rising-college-costs/.

https://www.insidehighered.com/blogs/technology-and-learning/baumol-cost-disease-orthodoxy.

https://home.kpmg/au/en/home/insights/2020/08/cost-disease-higher-education.html#:~:text=Higher%20education%20is%20a%20prime,derived%20from%20sectors%20that%20can.

https://doi.org/10.14453/aabfj.v9i3.2

https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/FlagPost/2018/May/HELP-debt-statistics

https://www.abc.net.au/news/2020-08-13/university-hecs-limits-for-failing-students-explained/12553548

https://www.theguardian.com/australia-news/2019/jul/02/hecs-debt-repayment-changes-why-more-people-will-be-forced-to-pay-off-student-loans

https://www.afr.com/policy/economy/australia-s-1-trillion-budget-burden-20200927-p55zlt

https://en.wikipedia.org/wiki/Graduate_tax

The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ, our Partners and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.

Meet our authors:

Thomas Sinclair
Editor
Qi Rui Soh
Writer
Aleisha Jiang
Writer
Oliver Soo
Writer