Higher Education Strategy Associates

May 06

Bill 100

A couple of weeks ago, the government of Nova Scotia introduced a very strange bill in the legislature.  Though nobody directly describes it this way, Bill 100 is effectively an academic Chapter 11: a set of rules under which a university can, in effect, declare bankruptcy and re-organize itself.

The basics of the Bill: in the event of a university getting into financial trouble, it will be permitted to submit a “revitalization plan” to government.  Assuming said plan finds favour with the Minister of Labour and Advanced Education, the government will, in effect, suspend certain existing provisions of collective bargaining agreements in order to allow the institution to restructure – most notably the bits around financial exigency, which at some institutions require management to go through farcically-complicated rigmaroles in order to do fairly straightforward things, like lay-off staff in chronically under-enrolled programs (see for instance, pages 68-78 of St. FX’s 245-page Collective Agreement – yes, really – for an example).  Effectively, these provisions make it impossible, in practice, to carry out serious restructuring; hence, government’s interest in providing institutions with tools to do an end-run around them.

What has faculty unions up in arms are the Bill’s provisions suspending some the right to strike, and the right to grieve during the restructuring process.  Opponents of the Bill call these provisions unconstitutional.  It’s hard to know what to make of that.  On the face of it, these provisions do seem contrary at least to the spirit of recent Supreme Court decisions on the right to strike, though presumably the province’s lawyers aren’t completely asleep at the switch, and have some reasonable grounds for assuming the Bill will survive judicial review.

In some ways, this is a fight over nothing – it’s not as though universities are going to be lining up to use the Bill’s provisions.  Any institutions choosing to go down this route would be heading into a reputational and regulatory nightmare, (Julia Wright of Dalhousie makes some useful points re: the inadequacy of the Bill when it comes to externally accredited programs here).  It’s a very, very last resort.

So why is the province creating a mechanism no one will want to use?  Simple: the real purpose of this bill is to put faculty on notice that the “public university put” is over.  Academic unions ignore the issue of universities’ ability to pay ever-increasing wage settlements by assuming that, at the end of the day, universities are “too big to fail”, and governments will come along and bail out universities if spending commitments get too big.  By laying-out a mechanism by which universities can fail, government is signalling that it is in fact quite prepared to see them do so.  This, in theory, should moderate wage demands.

Various faculty groups have made submissions on the bill (see CAUT’s submission here), and with some justification I think have pointed out the troubling aspects of restricting the right to strike and the right to grieve.  What they are – I think willfully – ignoring is institutions’ growing financial crisis, and governments’ growing frustration with the inability of institutions to manage their wage bills.  As far as governments are concerned, everybody else in the public sector makes wage sacrifices in difficult times – why do faculty unions think they should be exempt from this?  Unless academic unions can come up with a persuasive answer to this question, they should expect more legislation like Bill 100.

May 05

The Evolution of Institutional Government Relations

I was speaking yesterday at the Government Relations Officers Conference in Banff, and it got me thinking about how the field has changed over the last 20 years.

I started in government relations back in 1996, working for the Association of Universities and Colleges of Canada (AUCC) – now “Universities Canada”.  Back then, most medium-to-large institutions had government relations officers, but not government relations offices.  There would be one person, maybe with an assistant.  Their role was essentially to act as a go-between from university Presidents, to the upper-middle level of provincial bureaucracies.  Presidents themselves did the heavy lifting of dealing with ministers and premiers; AUCC did nearly all the work in Ottawa, and was in a very real sense the “voice of universities”.

Today, of course, government relations are quite different.  It’s not uncommon for big research universities to have GR shops of six to ten people.   Many big research institutions now have people who are permanently – or semi-permanently – in Ottawa, and indeed they have founded their own lobbying group, the U15, precisely so that AUCC is no longer the sole “voice of universities”.

There’s a question here, naturally: is all this extra work and personnel “worth it”?  Are universities getting more bang for their GR buck than they did 20 years ago?  It’s hard to tell, of course, because of the lack of a genuine counterfactual; but for what it’s worth, my thought is that returns to government relations expenditures are decreasing, but that the situation in the late 1990s was probably completely unsustainable.

In the late 1990s, higher education was an easier sell to a core demographic of voters – and hence to politicians.  Boomers had teenage kids, and postsecondary was a major concern; now, they are more concerned with ensuring their own (or occasionally their parents’) health care.  Money might not have been much more plentiful in the late 1990s, but the argument for post-secondary was a lot easier to make back then, and frankly it took fewer people to make it.

Also, universities and colleges were considerably simpler institutions 20 years ago.  It took less time to explain the role of various parts of institutions, and there were fewer institutional partners to whom these explanations were due.  And the rise of “accountability culture” had not yet, well, arisen.  There were fewer reports to government, less pressure to demonstrate value for money, and the need to do community relations in tandem with government relations was considerably less.

Finally, over the past 20 years, government relations became an arms race.  In part, that’s because institutions were competing with one another for government money, but more importantly they were fighting against increasingly large government relations efforts from other sectors, which were also after government funds.  As others raised the bar, it was difficult for institutions not to respond in kind.

So, yes, government relations used to yield a lot more money per government relations officer than they do now.  And so to that extent, the folks in universities who see the expansion of government relations offices as examples of administrative bloat have a case.  But on the other hand, the policy environment is considerably more challenging than it used to be.  Universities and colleges – like other public entities – need to run harder just to stay in place.

If institutions had more flexibility in cutting costs, if their first reaction to any financial challenge weren’t always to raise more money, the need for expanded government relations might be less.  But since that’s not the case, it seems to me our institutions need as many people spreading the word about their good works as they can get.

May 04

Worst Set of Provincial Budgets This Century

It’s the first week of May, and at HESA Towers that means it’s provincial budget analysis time.  As of now, nine of ten provinces have submitted budgets.  Sure, PEI is missing, and Alberta is presumably going to have to re-do its budget once the election’s over, but neither of them is likely to have a budget before June, so now’s as good a time as any.

(Islanders feeling slighted may rest assured they are not being singled out.  Our policy is to ignore anyone who can’t get a budget passed by May.  Last year we ignored Quebec.)

Some standard but important caveats on this data: What we’re comparing here is announced spending in provincial budgets from year-to-year.  But what gets allocated and what gets spent are two different things; Quebec in particular has a habit of delivering mid-year cuts to institutions, and student aid budgets can change rapidly if there is a shift in demand and/or interest rates.

On top of this, governments do not report expenditures consistently.  In some cases (i.e. Quebec, the three maritime provinces), provinces make it difficult to differentiate between operating and capital expenditure; in other cases (Ontario, for example), we don’t have consistent data for operating and capital estimates, and so we can only report on operating budgets.  That’s not a huge deal because what we are trying to do here is not compare absolute values of transfers across provinces, but rather look at relative change in each province over time, but it is still  something to keep in mind.

Finally, changes in total transfers may be different from changes in formula funding: as governments continue to micromanage institutions, an increasing portion of total funding is being disbursed in what to institutions seems a fairly capricious (or at least unpredictable and unguaranteed) manner.  Changes in institutional funding may therefore differ from the published provincial funding amounts.

OK, on to the real numbers, which I believe are the worst since 1997 or so: this year, total budgeted transfers to institutions nationally (minus PEI) is a little over $16.9 billion.  That’s down a little over $300 million in nominal dollars, for a fall (in real dollars) of 2.4%.  There were only two provinces – Manitoba and Nova Scotia – where institutional transfers were bigger than last year’s, and of these only Manitoba actually saw an increase larger than inflation.  As predicted back here, the province worst hit was Newfoundland, where the fall in the oil price tore a $1 billion hole in the budget, and as a result post-secondary expenditures took a hit of over 8%.

Changes in Operating Grants (Canada minus PEI), Budget 2014-15 to Budget 2015-16, Real $2015














On the student financial aid (SFA) side, overall we see an increase of 1.1% in real dollars, but this conceals some major differences at the provincial level.  Alberta is down nearly 17%, and Saskatchewan is down 33%.  Whether this reflects changes in demand (fewer people applying, which would make sense demographically in Saskatchewan, at least), or the results of minor tweaks in need-assessment formulae, or simply the result of adopting new reporting practices, is difficult to tell.  So far as I’m aware, neither province has introduced major changes to its student aid system this year, so it’s hard to see what’s driving these shifts (though having now published them, I’m pretty sure I’ll be getting calls/emails from both with explanations).  On the other side, New Brunswick is projecting an 11% increase in student aid, which is both massive and a bit baffling given shrinking populations and capped tuitions.

Changes in SFA Budgets (Canada minus PEI), Budget 2014-15 to Budget 2015-16, Real $2015














So what we see this year again is a continuation of the trend of increasing SFA support, and stagnant or declining institutional aid budgets.  Just to give you a sense of what’s going on here, here’s the net increase/decrease in absolute funding for SFA and institutional budgets over the last four years.

Total Changes in Budgeted Expenditures (Canada Minus PEI), Budget 11-12 to Budget 15-16, Real $2012














Or, to put that in percentage terms:

Percentage Real Change in Budgeted Expenditures (Canada minus PEI), Budget 11-12 to Budget 15-16














The SFA numbers, it needs to be said, are highly influenced by Ontario, which accounts for 75% of the increase in provincial spending.  In fact, four provinces (BC, Saskatchewan, Manitoba, and Newfoundland) have actually seen decreases in SFA expenditure over the past four years, though that is likely because of healthy income growth related to resource prices – we’ll see if that holds next year.

So there you have it.  Worst set of provincial budgets for institutions so far this century, but student aid still keeps growing.  How long can the starve-the-institution, feed-the-students game last?  My guess is this pattern will continue playing out for some time to come.

May 01

Social Movements and Universities

I was giving a speech recently looking at long-term trends in higher education, when a young fellow called me out.  Why, he asked, was I projecting long term trends that remained stable or declining?  Why couldn’t I see that if we just got a major social movement together– you know, like the Red Square movement – we could change all that, and see a glorious new age of post-secondary funding!

It’s a nice idea.  Problem is it’s really hard to see how it ever comes true.

Take the Red Square movement, for instance – clearly one of the strongest social movements in Canada in the last couple of years.  Here’s what’s happened to the budget for post-secondary education over the last four years, in real dollars:

Figure 1: Quebec Government Transfers to Universities, 2011-2015, in Billions of Real $2015 (Source: Quebec Expenditure Estimates, 2011-15)














See that?  Despite massive protests, no change in expenditures to universities.  (I know, it looks like there was a one-time bump in 2014-15, but that was the budgeted amount before announcing mid-year cuts, which effectively wiped out the increase.)

Here’s the thing: social movements can be quite effective at getting governments not to do things.  They can prevent cuts to certain programs.  They can persuade governments not to charge for things they were going to charge for – like tuition fees.  But other than the UBC Great Trek of 1922 – which, you know, was 94 YEARS AGO – I can’t recall a single time in Canadian history where a major social movement actually got a government to spend significant sums of extra money on higher education.

(Quick aside to all you UBC folk out there: who was it that decided a 12 km walk across the lower mainland constituted a “Trek”?  It’s not like West 4th street is the frickin’ Transvaal.  Yeesh.)

To sum up: social movements – in higher education, at least – are most effective as agents of conservatism, keeping things as they are. Social movements do not wrest new resources out of government.  But they can force changes like a tuition freeze or maybe even tuition reductions, because that doesn’t cost a thing, and so frankly it’s no skin off government’s nose.  In other words, social movements – at best – can be a vehicle for taking money out of universities and handing it to students.  But there is simply no precedent in Canada for them making institutions any better off.

April 30

An Alberta Election PSE Primer

As long-time readers know, when there are important elections looming, I like to do analyses of party platforms.  There is such an election in Alberta next Monday.  It has never before occurred to me to write about Alberta election platforms because never before has it seemed like the Alberta PCs, who have been in power since Nixon’s first term, ever seemed likely to lose their majority (for the record, I never bought the polls in 2012).  And yet here we are, just a few days out, with the Conservatives in third, and the NDP running first in rural Alberta in some polls.

These are strange times.  Like, Book of Revelations strange times.  (“And when he opened the seventh seal, there was a silence about the space of half an hour, until the first polls began to trickle in” – Rev 8:1.)

And so, without further ado, here’s what the parties have to say:

The “Prentice Plan” (apparently the words Progressive Conservative don’t focus test well, despite the Party having been in power since Prohibition) promises a “world-class education system”.  Most of it is about K-12, but PSE does receive three vague-to-the-point-of-meaninglessness bullet-points.  These are: i) enhance financial aid and student awards; ii) develop a plan to ensure stable funding for institutions; and, iii) ensure apprenticeship training is more inline with labour-market demands.  For anyone who’s been awake for the last four years, this is baffling: the Tories slashed grants in 2010, and have yo-yoed institutional funding since 2008 (it’s 5% up!  It’s 7% down! Whee!).  Given the collapse in oil sands production, the most obvious way to “align apprenticeships with workforce needs” is probably to simply stop doing them for a year or two (see here for more on the link between commodity prices and apprenticeships).  So their platform seems to be mostly about running against their own recent record, with a little fantasy thrown in. Oh, and no commitment to more money for institutions, so far as I can tell.

The Wildrose Alliance Party, of course, does not have a record on which to run.  No one does, because the Tories have been in power since the late 17th century.  And that lack of familiarity with power shows in the party’s PSE platform, which is called – wait for it – “World-Class Post-Secondary, Trades & Skills Training” (imaginative, huh?).  They have an affordability and accessibility portfolio, which is pure Glen Murray (better transfer credit, more online delivery), a research policy that is nothing of the sort (more collaboration with industry, more tax credits for undergraduate students – yes really), and a trades/skills policy that is a mix of the good (more dual credit programs in trades in secondary schools), the banal (better information in high schools), the already-being-done (collaborate with other provinces to make trades certifications more portable), and the slightly weird (allow trades completers to choose between an oral and a written exam).  Note, however: no new public money for institutions.

The New Democrats, or rather, “Alberta’s New Democrats”, presumably to distinguish them from the ravening socialists who periodically run their neighbouring provinces, make only three PSE-related commitments in their platform.  One is with respect to re-installing the Summer Temporary Employment Program for youth ($10 million).  The second is “stable funding for universities and colleges” – in practice, a set of guaranteed annual increases of about 5% per year, which is quite substantial.  The third is to impose a total freeze on tuition, which undoes about 50% of the good of promise number two.

So if you’re in Alberta and you’re voting education in this election, the NDP would seem to be the obvious choice. That said: even if they are elected, and even if they are competent enough in government to deliver on their promises (a challenge for any non-incumbent party in a province where the government has been in power since the latter part of the Tang Dynasty), the net increase in money for institutions will still be below the rate of increase in universities’ underlying costs.  Cutbacks will still happen.  Sorry.

April 29

The Minimum Wage Shtick

One little rhetorical trick you sometimes see anti-tuition types using is a comparison between tuition and minimum wage.  Last year for instance, the Canadian Centre for Policy Alternative put out a piece saying that working at minimum wage (which is in fact relatively rare for students, who typically earn about 25% more than minimum wage), students today have to work more than twice as much as students thirty years ago in order to pay tuition.  What should we make of this?

The most obvious thing to note, of course, is that any analysis of affordability that doesn’t take account of the $7 billion in non-repayable aid, which Canadian governments spend every year probably isn’t worth very much.  But that’s not a complete response: even without data going back to the mid-70s, we can be reasonably confident that there is something to the underlying point: higher education is more expensive, relative to minimum wage than it was 40 years ago.

No, the better response is simply to say: yes, and that’s exactly why so many more people are attending post-secondary education these days.

If you go back forty years, the participation rate in higher education was about a quarter of what it is now, maybe slightly less.  One of the reasons participation was so low was because the rate of return wasn’t very high.  There were lots of opportunities to be had with just secondary education (or less).  Indeed, the fact that you could live quite comfortably as a student after a summer in forestry or working on highway construction in the north was indicative of the fact that anyone could live pretty well working such jobs full-time.

What’s happened over the past 40 years is that the combined effects of technology and globalization have wiped out a large number of low-to-middle skill jobs – and (a few tech whizzes apart) summer students are nothing if not low-skilled.  That’s put downward pressure on wages in those areas.  Meanwhile, returns to skills have increased.  That creates a demand for higher education that simply wasn’t there in the 1970s.  One of the ways this shows up is rising real wages for professors; they’ve increased 35% in real terms since the 1970s, or about 1% per year over the long term.  And that naturally affects the cost of higher education.

To sum up: the minimum wage comparisons do show a real change over time, even if it is exaggerated due to not taking student aid into account.  But more importantly, this is a feature, not a bug.  If the gap between the minimum wage and the cost of labour-intensive, knowledge-intensive goods weren’t increasing, we’d still have a 1970s size post-secondary sector.

Or, to put it another way: maybe that tuition fees as a percentage of minimum wage statistic doesn’t quite mean what some people think it does.

April 28

Trust, Transparency, and Need-Based Aid

If you look around the world at the kinds of subsidies made available to students, you’ll be struck by the fact that there are two very large chunks of the world where need-based aid isn’t the dominant form: post-Socialist Europe and Africa.  The reasons for this boil down to a simple issue: trust.

In the post-socialist countries, the preference for merit-based aid over need-based aid is a relatively recent affair.  Prior to 1990, access to university was restricted both in absolute numbers and on ideological grounds: in order to attend university one had to have correct “origins”.  This was another way of saying that if your family was considered too bourgeois, you weren’t allowed to attend (Vaclav Havel, for instance, was denied entrance to university on these grounds).  Though regimes eased up on this somewhat as the 70s and 80s progressed, class origins continued to play a role in admissions up to the end of the regime.

So when it came time for new, post-socialist regimes to come up with student aid policies, there was considerable suspicion about anything that looked like it discriminated based on something like class.  Preferences based on parental characteristics, quite simply, were too tainted by communism to be a viable political project: nobody trusted government to discriminate between students based on something like income.  Merit-based aid, on the other hand, was not so burdened by history, and gave the appearance of being “objective” in the sense that exam results were measured in a consistent way across the country, and could easily be used to differentiate between students.  The results, in a word, were trustworthy.

In Africa, the trust problem is slightly more complex, and less tractable.  There, the state lacks the ability to monitor individuals’ income and consumption through the tax system.  Trying to run a need-based system of aid without means of income verification is difficult, to say the least (in bits of Eastern Europe – especially Russia – income verification poses the opposite problem in that people are reticent about providing documentation that would help the government verify income).  Without income verification, need-based systems tend to rely on proxies like ownership of land or livestock, which is either very complicated or impossible to verify.  These systems quickly fall into disrepute: because it is possible to cheat them, everyone comes to assume that those who receive need-based aid have cheated.  And so again, something simple and transparent – like merit as measured through examination results – becomes the de facto standard.  Everybody knows it’s ludicrously regressive, because the awards inevitably go to students from families rich enough to pay many multiples of university tuition to attend the best secondary schools, but at least it’s transparent and not corrupt.

Japan has a similar issue: it has no need-based grants, because no one trusts that the tax system accurately captures parental income.  It does, however, have a need-based loan system.  When I asked someone senior there about why they trusted need-testing for one and not the other, he simply said “because people pay back the loans”.

All of which is to say that need-based aid requires that students and families trust that state institutions will deal with them fairly, and state institutions need to trust that families won’t try to lie to them (or, at least, have reasonably robust measures of discovering lies).  In Canada, we take this for granted, but we shouldn’t.   Without trust, and the transparency that tax-based verification tools provide, need-based aid simply wouldn’t exist.

April 27

McGill vs. UBC

In eastern parts of the country, if you use the words “the three best universities in Canada”, they look at you slightly oddly.  They know you mean U of T and McGill, but they’re not 100% sure who the third one is.  “UBC?” they ask, uncertainly. This is pure eastern myopia.  Today, I will advance the proposition that by most measures, UBC is substantially ahead of McGill, and is in fact the country’s #2 university.

Let’s start with some statistics on size, just to orient ourselves. UBC is the slightly bigger institution, and at both institutions graduate students account for about 26% of all FTEs.

Enrolment and Academic Staff Complement, UBC vs. McGill

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Now let’s look at money.  The two institutions have similar-sized endowments, a shade over $1.3 Billion, which is a point in McGill’s favour when adjusted for student body size.  When it comes to operating budget, however, there is simply no comparison: UBC’s has a total budget of $2.2 billion, and an operating budget of $1.1 billion; the equivalent for McGill is  $1.4 billion and $620 million.  On an unadjusted basis, UBC takes in $58,500 per FTE student, to McGill’s $40,493 – a 44% gap in UBC’s favour.  If we adjust for student body composition – that is, convert all FTE’s into Weighted FTEs based on field of study, and use the weights used by the Quebec government (see here for more details) – then the gap actually increases somewhat to 48%.  Point UBC.

Figure 1: Total Income per Student and per Weighted Student Unit, 2011-12, UBC vs. McGill














Now let’s look at some measures of research output, like bibliometrics.  This data is taken from the 2013-14 Leiden rankings, which is the most comprehensive publicly available list of bibliometric indicators.  On sheer volume of publications UBC wins, which probably isn’t surprising given its size.  But on measures of publication impact – normalized citation scores, and the percentage of papers among the 10% most-cited in its field in the past five years – UBC is ahead in both, as it is in the percentage of papers that involved collaboration with an industry.  Only in the category of papers with international collaborators does McGill come out on top.  Point UBC.

World Position in Leiden Rankings on Selected Bibliometric Indicators, UBC vs. McGill (Leiden Rankings, 2014-15)

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While we’re at the research output game, we might as well see what the “Big Three” (Shanghai ARWU, Times Higher, and QS) international rankings say, all of which are mostly based either on research or prestige (as measured by surveys of academics).  Two of the three say: point UBC

Positions in Major International Rankings, 2014/15, UBC vs. McGill

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Does faculty pay matter?  Here’s the most recent average pay data from the three institutions.  UBC wins again, by about 20% at the level of assistant profs, and 15% above that.  Still: point UBC.

Figure 2: Average academic staff pay by rank, UBC vs. McGill














Now this is from the Statistics Canada, Full-time University and College Academic Staff Survey, 2009-10.  And yes, that’s old, but it’s the last year for which we have data from both institutions because Statscan discontinued the survey, and as far as I know, the COU-led replacement survey hasn’t reported anything publicly yet.  And given both institutions’ limits on salary increases the last few years, I doubt the gap has changed much.

And of course, there’s student experience.  Here are the two universities compared on the main aspects of student satisfaction, using data from the final Canadian University Report.  These are scored on a 9-point scale.  Point: McGill.

Select Measures of Student Satisfaction, Canada

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In other words, UBC comes ahead on most measures.  And when you think about it, this isn’t all that surprising.  It has far more money than McGill, it has huge endowment lands, which represent a huge future income, and it is far better positioned to take advantage of the rise of Asia.  Arguably, given the imbalance in resources, the question is: why isn’t UBC even further ahead of McGill than it actually is? (Or, to reverse that: well done to McGill for being so efficient!)

To conclude: UBC is fairly clearly ahead of McGill – the question now is when will it overtake U of T?

April 24

A Fascinating Student Aid Experiment

One incredibly cool thing about this week’s budget is that it creates a policy experiment that may settle some age-old questions about financial barriers to education.  I speak of course of the abolition of the in-study income clawback.

When people talk about “financial barriers” to education, they are usually conflating two separate phenomena.  The first has to do with return on investment: if prices rise too high, students will say they are not interested because it’s more money than it’s worth.  Usually this is phrased as a matter of “I’ll to take on too much debt”, though the problem actually isn’t debt-related (borrowers and non-borrowers alike pay the same amount – a bad deal is no less crummy if you’re paying it out of pocket rather than resorting to loans).  The second has to do with liquidity: students might like to take a course, even if its expensive, but they simply can’t scrape together enough cash to pay the fees and keep body and soul together.  The solution to the first problem is to lower tuition and/or provide more grants.  The solution to the second problem could also be to provide more grants, but loans could probably achieve the same thing a whole lot more cheaply.

The thing is, when we talk about students having “financial barriers”, we never really specify which of these two phenomena is the main issue for students.  And this is a problem because it means we may not be getting the policy response right.  If a student has $20,000 in debt, and you have $1,000 to give them, does it make more sense to hand them the $1,000 and let them spend it how they like, or should you use it to reduce their debt?

The abolition of the in-study income clawback actually gives us a heaven-sent chance to understand how all of this works in practice.  The way the threshold currently works is that students get to pocket $100 a week with no clawback.  Everything above that amount is clawed-back at a rate of 100%.  In this way, up until now, work and loans have been perfect substitutes – working more doesn’t increase the amount of money you have to spend, it just means you have less debt.

But now, suddenly, work and loans are no longer substitutes.  Students who work just got handed a whole bunch more money in the form of larger eligibility for aid, which will usually be met through loans (though some will find their extra need met by remissible loans, which are essentially grants).  How they use it will tell us a lot about what students actually care about. If they keep all that new money – that is, if they maintain their work hours, take all the new loan money, and spend it – we can infer that the main issue for students is not debt, not return on investment, but liquidity.  On the other hand, if they choose not to borrow the extra money, it tells you that, in fact, debt and rate of return are the bigger issues.  Similarly, we can test sensitivity to borrowing by comparing the behaviour of students whose extra aid is made up of repayable loans vs. those whose loans will be forgiven: if there is no difference between the two, it’ll be a pretty good indication that students prioritize liquidity over lower debt.

For what it’s worth, my money’s on students caring more about the short-term than the long term: I predict they’ll take the extra money and spend it.  That will make life tougher for advocates of tuition reduction over greater loan remission: if the evidence suggests that students prefer to consume more in the short-term rather than save for the long-term, why should governments do anything other than provide greater liquidity through loans?

Though it probably isn’t what students had in mind when they lobbied for this measure, the learning opportunity afforded by this policy experiment is a golden one.  Let’s hope a research plan exists that will help us monitor the results so as to better understand students’ preferences.

April 23

The State is not Entrepreneurial

If you’re interested in innovation policy, and haven’t spent time under a rock for the last couple of years, you’ve probably heard of Mariana Mazzucato.  She’s the professor economics at the University of Sussex who wrote The Entrepreneurial State, which is rapidly becoming the source of an enormous number of errors as far as science and economic policy are concerned.

Mazzucato’s work got a fair bit of publicity when it was released for pointing out that a lot of private sector tech is an outgrowth of public sector-sponsored research.  She has a nice chapter, for instance, outlining how various components of the iPhone – the touchscreen, the GPS, the clickwheels, the batteries… hell, the internet itself – are based on research done by the US government.  This is absolutely bleeding obvious if you’re in science policy, but apparently people out there need to be reminded once in awhile, so Mazzucato found an audience.

Where Mazzucato goes wrong, however, is when she begins to draw inferences; for instance, she suggests that because the state funds “risky” research (i.e. research that no one else wold fund), it’s role in R&D is that of a “risk-taking” entity.  She also argues that since the state takes a leading position in the scientific development of some industries (e.g. biotech), it is therefore an “entrepreneurial” entity.  From this, Mazzucato concludes that the state deserves a share of whatever profits private companies make when they use technology developed with public science.

There are two problems here.  The first is that Mazzucato is rather foolishly conflating risk and uncertainty (risk is tangible and calculable, uncertainty is not).  Governments are not a risk-takers in any meaningful sense: they are not in any danger of folding if investments come to naught, because they can use taxing power (or in extremis, the ability to print money) to stay afloat.  What they do via funding of basic research is to reduce uncertainty: to shed light on areas that were previously unknowable.  Individual companies do very little of this, not just because it’s difficult and expensive (if a company is big enough, that’s not a problem – see Bell Labs or indeed some of the quite amazing stuff Google is doing these days), but because the spillover from such research might allow competitors to reap much of its value (a point Kenneth Arrow made over fifty years ago).

The second issue is that nearly all of the examples Mazzucato offers of public research leading to technological innovation and profit are American, and a fairly high percentage of these examples were funded by the Defense Advanced Research Projects Agency (DARPA).  To put it mildly, these examples are sui generis.  It’s not at all clear that what works in terms of government investment in the US, with its massive defense infrastructure, huge pools of venture capital, and deep wells of entrepreneurial talent, hold very many lessons for countries like Canada, which are not similarly endowed.  Yet Mazzucato more or less acts as if her recommendations are universal.

The book’s recommendations amount to: government should own a share of young innovative companies by gaining shares in return for use of publicly-funded knowledge.  But this is pretty tricky: first, there are very few cases where you can draw a straight line from a specific piece of publicly-funded IP to a specific product, and even where you can, there’s no guarantee that the piece of IP was publicly-funded by your local government (Canadian start-ups benefit from knowledge that has been created through public subsidies in many different countries, not just Canada).  And while there’s a case for greater government investment in emerging companies (economist Dani Rodrik makes it here for instance), the case is not in any way predicated on government investments in R&D.  In Canada, the CPP could adopt such a policy right now if it wanted – there’s no reason why it needs to be linked to anything Industry Canada is doing in science funding.  To the contrary, as Stian Westlake points out, countries that have been most successful in converting public science investments into private hi-tech businesses eschew the idea of equity in return for scientific subsidies.

Worst of all – though this is not entirely Mazzucato’s fault – her argument is being picked up and distorted by the usual suspects on the left.  These distortions are usually variations on: “Someone said the state is entrepreneurial?  That means the state must know how to run businesses!  Let’s get the state more involved in the direction of the economy/shaping how technology is used!”  This way disaster lies.

So, Mazzucato did everyone a service by forcefully reminding people about the importance of publicly-funded R&D to any innovation system.  But her policy prescriptions are much less impressive.  Treat with care.

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