HESA

Higher Education Strategy Associates

April 21

Harvard. I Mean, Really.

Last week, the Harvard Crimson printed some unofficial estimates on the university’s current capital campaign.  Be forewarned: these numbers will give many of you a heart attack, so to soften the impact I’m going to lead  by providing some background on the campaign. 

Universities raise money.  Sometimes it’s small donations, sometimes it’s big ones.  Sometime the university spends that money right away, sometimes the money goes into an endowment, which means the capital is available in perpetuity and the university only a small fraction each year (often less than the interest earned).  The standard “take” from endowments these days is 4%, hence the fundraising joke “the quickest way to turn $1 million into $40,000 is to endow it”.  Big donations – the kind you read about in the papers – are almost always endowments.

(The campaign numbers are two paragraphs away.  Are you sitting comfortably?  I want you to be sitting comfortably, because it’s going to be a shock.)

Every 15 years or so universities do something called a “capital campaign”. This is an intense, time-limited effort to get a lot of money out of donors, usually for purposes of acquiring specific physical assets like a new building or two – though the politics of universities are such that capital campaigns aren’t entirely about infrastructure (it’s suicide not to fundraise for scholarships at the same time, for instance).  Capital campaigns always have the same format: they start with a “quiet” period in which money is raised behind the scenes.  Then, after a year or more, they have a public launch ceremony in which the institution sets a goal for the campaign and announces that “surprise!” they’ve already met some suitably high percentage of that goal.  Needless to say, this is always done in such a way that the announced goal will be surpassed.  The face(s) of this effort are always drawn from the senior ranks of local business and alumni.

(Are you ready?  The number is coming.  Deep breath.)

The largest ever university capital campaign was concluded in 2011 at Stanford University, which raised $6.2 billion.  Naturally, when Harvard launched its campaign in 2013, it set a target of $6.5 billion ($8.1 billion Canadian), of which it raised $2.8 billion during the “quiet” phase.  Last week the Crimson broke the story that the $6.5 billion target had been reached.  The University declined to comment, noting that it only announces updates every October, but if true this means that with two years to go, the campaign is on track to raise something on the order of $10 billion by the time it finishes in 2018.

(Everything OK?  Another deep breath.)

Think briefly, if you will, about what $8 billion looks like.  It’s about three years worth of the entire budgets of our granting councils.  It is 33% more than the gross domestic product of Prince Edward Island; (or, if you want to get all internationalist about it, equal to the GDP of Malawi).  It is more or less equal to the aggregate operating budgets of all the universities in Ontario.  And remember, this is just the take from four and a half years of a capital campaign.  We’re not talking the entire endowment here – that’s six times as large again (US$37.6 Billion at last reporting but presumably around US$40 billion now).

Of course, all of this money comes tax-free.  Donations are deductible to the donor, and of course universities are charities and consequently exempt from most taxes.  But at a certain point you have to wonder whether or not Harvard is a charity in any meaningful way.  What’s the public good of having all this money go to a single institution?  Assuming a 30% tax rate, the Harvard campaign has cost American governments almost $2.2 billion in lost revenue.  Imagine the number of students that could be supported with that money. 

Recently, the legislature in Connecticut debated taxing charities’  endowments (read: Yale’s endowment) if they exceeded $10 billion because beyond a certain point it’s tough to make the case that there’s a genuine public benefit to that money.  In the end, they chose not to pursue this idea, but this is – deservedly – going to be a significant public policy issue for the next few years.  There are limits to the amount of money a university needs.  Berkeley aside, the top half-dozen American research universities are now reaching that limit.

April 20

The Politics of Unfreezing Tuition

Freezing tuition is a terrible policy.  Free tuition is actually a better idea.  At least it’s based on a particular theory of access and public expenditure.  A tuition freeze is just a decision not to take any more decisions.  It’s a recipe for drift.

And what’s worse, the longer you let policy drift, the harder it is to stop drifting.  Case in point: Newfoundland.

To recap: In 2000, the province of Newfoundland decided to reduce tuition by 5% a year over four years and then freeze tuition thereafter.  And it’s been frozen ever since, with the agreement of all political parties.  The ostensible rationale for this is that it improves access to post-secondary (though in truth participation rates remain well below those in Ontario, where tuition is 3 times as expensive); in practice, what it’s done is reversed the flow of student from Newfoundland to Nova Scotia, bringing home their own students and attracting a few hundred new ones.  

As long as some of those new students were staying in province and helping reverse the long-term population loss, that was probably a good deal for the province.  Of course, no one actually tracked this to see if it was true and the policy was working, but that’s cool – this is Canadian postsecondary policy and we’re used to never evaluating the success of a program.  But now that oil revenues have plummeted and unemployment seems headed back towards 20%, it’s harder to maintain that this is happening, and so the cost of the tuition pledge seems to outweigh the benefit.  And given the government is currently spending roughly 33% more than it is taking in tax revenue, time for a change of policy, right?

Wrong.  In last week’s budget, the government raised all sorts of fees related to apprenticeship, which tends to heart lower-income learners.  It cut student aid, turning part of its vaunted grants programs into loans, which also hurt lower-income learners.  And it cut $14 million from Memorial’s budget.  But God forbid it touch tuition.  Upper middle-class people pay that stuff. Nuh-uh, no way, not touching.

Actually it’s somewhat worse than that.  The government didn’t touch tuition, but instead started making noises about how Memorial has always had the ability to set it’s own tuition (nudge, nudge) and of course the government expected to do what was right for students (wink wink).  I mean, first of all this is nonsense – the tuition freeze promise has been formally written into every provincial budget since 2000 – and second of all it’s unbelievably cowardly.  Unable to muster the political courage to get rid of tuition on its own, the government is reduced to pleading for the university to do something (but maybe not too much) to help it out of a jam.  I suspect if Memorial weren’t so broke ($54 million in cuts over two years, if you include cuts to the pension plan) it would tell the province to grab a chair and then rotate at an ever-increasing speed around that idea.  I know I would.

But the point is this: even a new government, with a massive majority in the legislature, facing the biggest fiscal emergency in twenty years, and having the courage to cut all sorts of programs still doesn’t have the courage to touch tuition.  It will touch all sorts of things which hurt the less-fortunate, but not tuition.  The upper middle-class defends its privileges to the last.  Which is precisely why those privileges shouldn’t be given out in the first place.

April 19

The Balkanization of Canadian Student Aid

So, a couple of things happened late last week worth mentioning:

First, the Newfoundland Budget was released and as predicted it was a slash-and-burn exercise.  The province, facing a deficit of something like 8% of GDP, had to make major changes.  Unbelievably, the tuition freeze stayed, sort of (more on this tomorrow), but student aid took a hit.  Remember in 2014 when Newfoundland eliminated grants?  That’s over, the first $40 week in provincial aid is now a loan again.  But more importantly, the government has completely eliminated grants for students studying outside the province if their program of study is offered inside the province.  So, a law student going to Dal gets the grant, but if God forbid you want to study Science or Engineering somewhere other than MUN – it’s loans only on the provincial side (said students would still receive federal grants).

Second, the premier of New Brunswick announced pretty much out of nowhere that low-income students in his province would be free and that details would be available from the Ministry of Advanced Education “in a few days” (at time of writing we’re still waiting).  Not many details yet – from the few nuggets available it sounds a lot like the Ontario program (provincial tax credits are being axed) – which is of course a Good Thing.  But one key point did come out, namely that the grant would not be portable.  If you chose to leave New Brunswick, it would be loans only on the provincial side.

I. Am. Furious.

The extent to which young people in Atlantic Canada are treated as “resources” to be hoarded is just appalling.  It’s almost never “how can we attract young people”, it’s “how can we keep the ones we’ve got from leaving”.  From a very young age, bright young people are essentially sold a bill of goods by guidance councilors and community leaders – “don’t leave the province, it’s a betrayal to leave the province, you are our future”.   The guilt-trips are outrageous.  And now along comes provincial policies in Newfoundland and New Brunswick to use financial means to punish students who have the temerity to want to study outside the province. 

At least you can sort of excuse the Newfoundland one on grounds of austerity because financially that government really is in trouble.  But New Brunswick?  They canned a huge graduate tax rebate last year and promised to re-invest the money.  There is no way that amount of money wouldn’t cover an extension of the program to out-of-province students.  Hell, Ontario actually cut total grant + tax-credit dollars in its announcement and still managed to extend the coverage of its new grants (currently, the Ontario Assistance Grant is portable but the Ontario Tuition Grant is not – the new grant is fully portable).  Instead, New Brunswick is doing this specifically to try to divert New Brunswick students away from out-of-province schools in order to give its own universities more tuition revenue and hence obviate the need for the province itself to actually pony up some money.  Brian Gallant calls that a win; we’ll see if he thinks the same when New Brunswick lose students after Nova Scotia and PEI retaliate in kind.

Now look, I get it.  People want what’s good for their communities, and the economics of Atlantic Canada have been scary for decades.  It’s easy to retreat into a defensive shell.  But holding your own youth hostage is not cool.  Those kids aren’t resources to be hoarded; politicians need to let them go and succeed wherever they want to succeed.  Student aid should be about expanding opportunity, not limiting it.

These changes need to be reversed.  And if the provinces won’t do it on their own, the federal government should change the legislation underlying the Canada Student Loans Program to penalize partner provinces whose loan programs don’t provide mobility across Canada.  More than ever before, their programs are built around federal largesse – Ottawa should extract something in return.  And freedom to study without penalty anywhere in the country is a right worth fighting for.

April 18

Some Alternative Explanations for Provincial Funding Decisions

So, last week (see here) I contrasted the fact that higher education was a consistent winner at the federal level over the past twenty years, and contrasted that with the fact that higher education had largely been a loser at the provincial level since about 2010 (and not just in the sense that funding is falling in real terms – also in terms of having the ability to offset those losses with higher fees).  I went on to suggest that this contrast was more than passing curious since both levels of government are ultimately responding to the same electorate.  And I finished by saying that the only possible answer here was that politicians and the public are a lot happier with what universities and colleges are doing on the research front than on the undergraduate teaching front.

A few readers pointed out that it was a bit facile to call that the “only possible answer” and offered some possible alternative explanations, including:

  • The state of the economy and provincial fiscal capacity.
  • Changing demographics and lower student numbers
  • The fact that some provinces at least have privileged resource development over knowledge production
  • Provinces understand that universities can make up the difference by loading up on international students

OK, so clearly I shouldn’t have said my explanation was the “only” possible explanation.  But I still think it’s the most likely one.  Let’s run through those possibilities.

State of the economy?  Both levels of government are suffering from weak growth, so it’s difficult to use as an explanatory variable.  Yes, the feds are in somewhat better shape fiscally and able to dive into debt in part to fund higher education, but that hardly explains higher education’s success in the latter Harper years.

Privileging resources production over knowledge production?  I think that actually proves my point.  If post-secondary education can’t compete with commodities whilst we are in the middle of the mother of all commodity downswings, then post-secondary education’s perceived value proposition must really be terrible.

Demographics?  This could be a more persuasive argument – the reductions in the real value of grants look somewhat less scary in some provinces if you express them in per-student levels.  But a) that doesn’t explain a reluctance to see tuition rise and b) the reductions in government grants don’t map onto changes in demographics very well (i.e. the biggest drops aren’t in the provinces with the biggest demographics issues).   This factor is in fact probably exercising some influence on policy-making but I don’t think it’s in the foreground.

The “foreign students will pay for the difference” argument?  This is an interesting one because it reverses the usual causality argument – is increasing internationalization of enrolments a cause or a consequence of government funding decisions?   I tend to view it as the latter, but can’t really rule out the former.   But man, if it is the former, provincial politicians should be called out on this.  Someone ought to actually force them to say “do you expect post-secondary institutions to increasingly fund themselves by being finishing schools for the Asian middle-class”?  Because if the answer is yes, everyone needs to be thinking much more carefully about their internationalization plans.

So maybe there are some other potential explanations.  But ask yourself this: can anyone imagine a government relations strategy which is successful in reversing this decline which doesn’t rest on an improved “offer” from post-secondary institutions?  Even if demographics were the problem, the answer to the problem is still going to hinge on the question “what can institutions do better/differently that would change politicians minds?”  Even if dissatisfaction with current offerings is not the (sole) root of the problem, can anyone imagine a positive solution which involves universities and colleges staying at the status quo?

No?  Me neither.

April 15

Are Teaching Costs Increasing at Canadian Universities?

On Wednesday, someone took me to task in the comments section of the blog for part of my analysis on the financial situation of higher education, saying:

“The HE sector has hiked tuition up far faster than inflation citing “Increased teaching costs”. They have been unable or unwilling to provide proper costings for this.”

Is this true? Well, it depends how long a time-frame you choose to use. Let’s look at the data.

To look at “teaching costs”, we need to use data from the Statscan/Canadian Association of University Business Offices Financial Information of Universities and Colleges (FIUC) survey. FIUC divides salary costs into three categories – “academic ranks” (meaning permanent academic staff), “other instruction and research” (meaning mostly sessionals), and “other salaries and wages” (meaning non-academic staff). Unfortunately, it does not break out “benefits” costs in the same way – these are all lumped together in a single category. It also allows you to divide these up by “function” (admin, student services, libraries, etc.)

For this exercise, I will restrict the analysis to expenditures under “Instruction and non-sponsored research”, and include salaries for both permanent and sessional academics. Within this category, these two groups make up about 80% of all salaries, so I’m going to assign 80% of all benefit dollars as well (this is probably an undercount because academic staff tend to have better benefit packages). Together, I will call these “core teaching costs”. I will then going to divide total expenditures on these three areas by the number of “full-time equivalent students”, which, according to Statscan, = FT students + (PT students/3.5)

Here’s what that looks like, in $2016, back to 1979-1980.

Figure 1: Core teaching Costs per FTE Student, Canada, 1979-80 to 2013-14, in $2016

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So: a major decline in per-student core instructional costs from 1979 to about 2003, of about 20%, followed by a decade of increases – mainly on the benefits side – which saw costs rebound by 17% to bring us up to our highest point since 1980. In other words, the story is pretty mediocre if you look at a really long view, but not bad if you take a lend of a decade or so.

Now, to tuition, which is much simpler to track, using the standard Statscan tuition: average undergraduate fees across all programs.

Figure 2: Average Undergraduate Tuition, Canada, 1979-80 to 2013-14, in 2016

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That’s a pretty simple story: flat in real dollars through the 80s’, sharp increases in the 1990s and more moderate ones since then (if one were to include subsidies like grants and tax credits, it would be close to flat since 2000, but let’s not complicate the analysis).

Now let’s compare what’s going on here over a 10 and a 35-year horizon. Figure 3 shoes that if you confine the analysis to the last decade or so, tuition and core instructional costs are rising at similar rates.

Figure 3. Tuition vs. Core Instructional Costs, Canada, 2003-4 to 2013-14, 2003-04 = 100

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However, if you extend the analysis back to say 1979, you get a completely different picture.

Figure 4. Tuition vs. Core Instructional Costs, Canada, 1979-80 to 2013-14, 1979-80 = 100

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Why the difference? Well, mostly because the 1990s were a time of disinvestment, so in part higher tuition fees were replacing government spending, but also because between 1990 and 2005 or so there were some fairly major changes to the way universities spend their money. A lot more money went into IT, student services, scholarships (and, yes, administration), meaning that core instructional costs shrunk as a percentage of total expenditures. So my comments-section interlocutor is certainly right over the long term, less so over the short term.

That said, there is a real question about whether or not those “core teaching costs” are really meaningful over time given the appearance that an increasing portion of staff time is devoted to research rather than teaching. But that’s a debate for another day.

April 14

A New Deal

Yesterday, I noted that  for the last few years provincial governments have refused to either increase funding to PSE institutions to keep up with inflation, or give institutions latitude to raise tuition to make up the difference. Effectively, provincial governments seem a lot more concerned with ensuring that post-secondary education is cheap than with ensuring that it continues to receive real increases in income.

There are competing opinions about why this is the case. My view is simply that few provincial governments see much political return in allowing institutions to increase fees and/or increasing government grants – which is another way of saying the present value proposition for undergraduate education is not very attractive. I would love to see more evidence about this. Imagine if university and college government relations-types would actually go straight up to MLAs/MPPs/MNA/MHAs and say “what is it we could do to get you to spend more money/allow us to raise tuition”? But they seem not to be doing that (or if they are, the answers are disturbing enough that they are not telling the rest of the community). I’m going to go with Occam’s razor here and stick with: they aren’t buying what the sector is selling at the price the sector wishes.

So what to do? Well, broadly, there are two choices.

The first is to do nothing. Don’t change a thing. Avoid the hard questions and the hard trade-offs and keep telling each other we just need to tell better stories. The result will be years of slow decline. To be fair, some people may prefer this to large-scale change. Fair enough. That’s a defensible position. After all, we could drop twenty percent of real dollars per student and still only be back where we were in the late 1990s. It’s unpleasant, but not the end of the world.

The second is to face up to why public support for new money in post-secondary education money has been dwindling. I don’t have any special insight into this but my guess would be that the cause is rooted in some mix of

1) A perception that salaries at post-secondary institutions are too high. To take one example, when the Windsor Faculty Union gets militant starts threatening strikes despite  an average salary of over $134,000  in one of the country’s least expensive housing markets, you have a perception problem. The same issue arises when universities continue to add senior non-academic staff positions at salaries over of over $100,000, or when a president double-dips his or her salary. In Ontario, the number of university and college employees in the sunshine list has gone from 1190 and 39 (respectively) to 17,065 and 4,910. The numbers will differ a bit across Canada but not much. And yes, that’s not a completely fair comparison because the cutoff line hasn’t been adjusted for the ~50% inflation over the same period. But public perception is not always fair. The reality is that the public looks at institutional salaries and it sees fat

2) A perception that undergraduates – in arts and sciences at least – are a low priority to institutions. There are too many stories of undergrads stuffed into 1,000 seat auditorium, taught by sessionals for half their degree, or finding required courses unavailable due to either size-cap or simply disappearing from the calendar for a semester. This is unfair to colleges, because frankly they do a whole lot better than universities in terms of keeping education at a human scale, but what universities do in lower-year infects a lot of the public perception about PSE in general.

3) A perception that they are not preparing students for the labour force. This one drives many in universities round the bend, because there are lots of disciplines which are not designed to lead to particular careers. But that’s not the issue. Majors are majors and careers are careers – they don’t need to line up and in many cases they shouldn’t. But according to over 80% of students (and probably around 100% of legislators) the reason students and governments pay for post-secondary education is to help students get better jobs. Institutions can accomplish this through a number of different means: providing experiential learning (like, actually provide more, not just the exercise in re-labeling I’m seeing at many universities), building more explicit assessment of communication, team-work and critical thinking skills into the curriculum, and generally treating learning outcomes and career transitions as if they mattered. Colleges are in some respects better than universities at this, but even there many programs don’t have direct labour-market transitions (anyone looked at placement rates in Police Foundations programs lately)

4) A perception that PSE Institutions are not transparent with data. This is undeniably true. I don’t think I need to elaborate on this.

Regaining a measure of public trust will almost certainly be a prerequisite for increases in public investment. Universities and colleges are going to need to make changes – fairly dramatic ones, I think – in these four areas. If I were in university government relations, I’d be field-testing ideas with politicians, to see what it would take to create a New Deal for post-secondary education. What if institutions froze salaries over $100,000, shrank undergraduate class-sizes, revamped curricula to make them more outcomes-focused and became much more transparent with data? Would that be enough to convince the public that what was on offer was a better, more valuable product, one worth investing in?

I don’t know. But it’s worth asking. Because that other option, the long, slow, decline option, looks pretty unappealing.

April 13

Situation Critical

So, we haven’t yet got through all the provincial budgets, but it’s crystal clear from those in Ontario, Quebec and British Columbia, plus the election promises made by the winners/likely winners in Saskatchewan and Manitoba, that there is no chance whatsoever that provincial governments, on aggregate, are going to increase government grants to institutions by an amount equal to inflation.  This will mark the fifth time in the last six years that provincial grants to institutions have lagged inflation. 

While provinces aren’t spending on post-secondary institutions, they do seem to be quite interested in post-secondary students.  In total, aggregate provincial spending on student aid is up by around $600 million in real dollars over the past six years.   Which is to say: provinces are happy to make higher education cheaper, they’re just not interested in increasing institutions’ purchasing power.

In contrast to the dire situation in the provinces, universities and (to a lesser extent) colleges are on an unprecedented winning streak in Ottawa.  There’s been a goody for postsecondary in literally every single one of the last 20 federal budgets.  No other sector can claim anything close to that.

On the face of it, this is a distinctly weird state of affairs.  Both the federal and provincial governments are catering to the same set of voters, so why does one level seem to think that post-secondary institutions are worthy of continued attention while the other does not?  It’s not an ideology thing: this situation seems to be true no matter which parties are in power (and in any case at the moment Liberals are in power both federally and in most provinces).  The answer is pretty simple, though.  And I will say it loud and clear, because it’s a message institutions themselves seem unwilling to admit.  Ready?  Here it is:

The public likes what institutions’ are offering in terms of being engines of economic growth via research and will support it through tax-funded programs.  The public does not like what institutions are offering in terms of undergraduate teaching – at least at the price currently offered – and will not countenance major increases in either funding or tuition.

There’s no other explanation here, folks.  This is the central, basic dilemma that every university and college is facing right now.  The sector used to have a value proposition that the public accepted.  That’s how universities more than doubled their income between 1999 and 2009.  But no longer.   It’s not that the public dislike universities, or think they are “broken”.  They are just no longer convinced by the value proposition on offer and would like the cost (and by cost here I mean both tuition and the cost to the treasury) to come down. 

Universities and colleges are, I think, mostly in a state of denial about this.  “We need to tell better stories”, they say.  But c’mon.  The public isn’t stupid or in some state of false consciousness.  More students are going to post-secondary education than ever before, more people have contact with post-secondary graduates than ever before.  They have some sense of what they are talking about.  They might, in short, be right about the value proposition.

So instead of assuming the proles and the pols are wrong, and that we just need improve our comms for government to go back to increasing funding at inflation plus 4% the way they were a decade ago, let me suggest that perhaps universities and colleges might actually need to change.  If they want the slow erosion of funding to stop, they will actually need to present the government with a new value proposition, a different offering in return for renewed funding.

No, it won’t be easy.  But it is necessary, and sooner rather than later.

Tomorrow: what a new value proposition might look like.

April 12

Going Overboard on Basic Research?

I’m getting some worrying vibes from the new federal government.  It’s nothing I can directly put my finger on (other than some annoying Ministerial tweets last week which seemed to claim that any money put into PSE infrastructure is ipso facto about “innovation”) but I get the sense that the new government is in danger of making some real mistakes with respect to innovation policy.  Specifically, I’m worried that in the rush to repudiate the Harper legacy in all things science, they may end up with an innovation policy that takes us back to the naïve 1990s.

What do I mean by this?  Well, in the late 1990s, when the Chretien government began seriously investing in research (after having initially slashed the bejesus out of it in the 1995 Budget), their rationale went something like this: growth requires innovation, research is the wellspring of innovation, therefore:

      $ to universities for research → a miracle occurs → productive high-tech economic future

And on that not very sophisticated basis, billions were spent.

Now, without denying some good came from this, I think it’s fair to say that this is a pretty limited view of how innovation works.  For one thing, there’s an implicit suggestion that innovation is about “new discoveries” being turned into “new products”.  And while that is one type of innovation, it is far from the only one.  What about process innovations or business model innovations, to name but two?  Why focus on the “big breakthroughs” when so many incremental innovations are possible?  Why focus on only one part of the value chain (and possibly not a part Canada is particularly good at) when there is value in so many others?

To put this more bluntly, to assume that basic research is the only type of research an innovation policy should fund is crazy.  Serious countries understand this.  It’s the reason, for instance, that Germany, besides funding its universities and the Max Planck institute, also funds the Frauenhofer Institutes, which is one of the world’s greatest performers of applied research.

Over the course of the last few years there have been many complaints that the Harper government focused too much on applied research.  True, all granting councils (but especially CIHR) were pulled in the direction of having grantees justify their funding in terms of “immediate benefit” and finding commercial co-partners, etc, and for the most part this idea of injecting some “appliedness” into basic research funding was bad policy.  But the fact is that the actual amount we spend on research which is exclusively applied in nature – that is, Frauenhofer type-stuff, or programs like the Industrial Research Chairs – is actually pretty small.  The revamp of the National Research Council was a stab in a Frauenhofer direction – albeit a somewhat clumsy stab, with over-inflated expectations of quick success.  But now even that’s been thrown into question, the revamp now “suspended” pending the outcome of a review of the government’s review of its basic science policies. 

To be clear, it’s not that the government has yet made any definitive false steps.  But rhetorically it seems to be backing itself into a corner in terms of thinking of innovation exclusively in terms of basic research plus maybe funding some exciting business/university co-location spaces (an idea which I think we could also describe as being less-than-fully-baked, as I explained back here.  That would be a bad mistake.  What Canada needs is a full-spectrum innovation policy, one which doesn’t put all its eggs in the new discoveries/new products basket. 

Or, to put it another way: yes to basic research, but stools need more than one leg.

April 11

Those New Infrastructure Funds

I have been meaning to write about the new $2 billion “Strategic Investment Fund” (SIF), the 3-year infrastructure money-dump the Liberals announced in the budget.  However I waited a bit too long and Paul Wells beat me to it in an excellent little article called How to Spend $2 Billion on Research Really Quickly (available here).

Do read Wells’ piece in its entirety, but the Coles Notes version is:

  1. The deadline for submission is quite soon (May 9), which is kind of a crazy goal for slow-moving organizations for universities to hit
  2. The money is not a straight-out grant: matching funding is required, which could be a bit of a challenge
  3. The amount of work required to a shot of that money in terms of getting engineering and regulatory approvals, environmental assessments, providing evidence of “additionality”, “sustainability”, “meeting industry needs”, “benefiting aboriginal populations” and of course getting approval from one’s Board of Governors, is stonkingly huge.

Those are all good points.  Let me add a couple of more.

First of all, yes these things are challenging but hardly unprecedented. The timeline and process are almost exactly those seen in the Knowledge Infrastructure Program (KIP) the Tories created for the 2009 budget.  In both cases, the programs were announced with unbelievably tight timeline criteria (about two months from budget time to deadline) and the same matching funding requirement.  In both cases, the program was announced with eligibility criteria but no selection criteria.  That means we don’t really know what the government is looking for, what kinds of things it wants to see in submissions and how it will go about choosing from among the many submitted projects.  There is a margin for shenanigans here, but it’s the same margin the Tories had in ’09 and everyone seems to think that process went OK.

Second of all, the key thing to understand here is that although the rhetoric around infrastructure is always about “new” infrastructure, the fact of the matter is given the timelines and the rules, this program will be almost entirely about renovations and re-fits. (and occasionally some expansions).  The tight timelines make it impossible to submit any build project that isn’t already in the pipeline, and the rule that the federal money shouldn’t displace already-committed money means pretty much anything in the pipeline is ineligible.  In my (admittedly non-random) quick scan of projects completed under KIP, I could only find one example of a project which was 100% new build, namely, the ART Lab studios at the University of Manitoba.

(Also – apparently U of M managed to get KIP to fund seven different projects.  Kudos to one or both of their planning shop and government relations shop).

Third, between twenty years of CFI funding plus now two rounds of KIP/SIF (let’s be honest, it’s the same program), one does start to wonder at what point we start entering into a moral hazard position where the provinces essentially opt out of the infrastructure game because they know the feds will pony up – or indeed whether we haven’t actually reached that point in several provinces.   True, the feds might respond by saying “but they can play a role by choosing the projects for which they want to provide matching funds”.  To which, if I were a provincial government, I might calmly explain that the feds should use this explanation for a rather protracted rectal examination because in effect what they are doing is blackmailing the provinces into spending on things they didn’t really intend to spend money during a period where most provinces are trying to control spending not increase it.  (I might also explain that if the federal government that when it says it wants to consult with provinces, it’s generally more effective to do so before announcing the program rather than after).

I’m sure there are many in Ottawa (including some higher education membership organizations) who think the idea of adding infrastructure to student aid and research as areas of shared jurisdiction in higher education would be just swell.  But it’s not entirely obviously to me that divorcing capital investment policy from system-level strategy is a recipe for good outcomes.  I suspect this is going to be part of a debate on “fiscal imbalances” between federal and provincial governments sometime quite soon.  Watch this space.

April 08

Overproducing Graduates For The Win!

A few weeks ago, my colleague Melonie Fullick teed off in her University Affairs column on some of the rhetoric around calls to increase the number of PhDs. Universities always like these kind of calls (and – guilty – I’ve made them myself), because they mean some combination of more money and more horsepower to do advanced research (in the Sciences at least). But universities are obviously producing a lot more PhDs than they are ever going to hire, and so, as Fullick points out, the question becomes what’s the absorptive capacity of the economy to take all these PhDs?”

I mostly agree with the points in this article – and certainly agree that we spend way too little time thinking about graduate destinations (and adjusting the content of PhDs programs accordingly). But let me suggest that there is another reason for us to increase the number of PhDs which was not dealt with either by Fullick or the folks she was taking to ask; namely, to push down the post-graduation wages of doctoral degree holders.

You’re recoiling in horror. OK, let me explain.

There are both public and private benefits to education, which is why we split the costs between government and students. But when we talk about “public benefits”, what do we mean, exactly? What does the state get out of subsidizing education? The short answer is that by subsidizing education, it increases the number of people able to attend, which in turn increases the productive capacity of the economy, which benefits everyone.

But think closely on that. How does increasing the number of students increase the productive capacity of the country? Well, let’s think about it in terms of a new technology – say teleportation – and you’ve got two countries of more or less equal size. Country A manages to produce 10 PhDs in teleportation technologies, while country B manages to produce 30. What happens then?

Well, in country B, maybe 4 or 5 get hired back in academia – which is great because they can train more teleportationists. And you’ve got 25 or so who can go into industry. Now how are firms in country A going to compete with that? They’ve only got 10 or so – and they have to fight with academia to hire some of them. It’s not just that Country A has fewer top brains to work on this task – it’s that they have more market power. And that raises the cost of R & D and likely production as well. Firms in country B won’t necessarily “win” the teleportation technology battle, but their innovation efforts will have a lower cost structure.

Now, that doesn’t mean country B will always have lower pay for teleportationists. Pay depends in part on product success and once firms in country B achieve success and become profitable, it is in their interest to raise wage levels in order to attract top talent. But at the start, the “overproduction” of graduates gives firms in country B a big head start. And if you think that’s crazy, go read up on the history of the German chemical industry: “overproduction” of PhDs in the 19th century gave firms in that country a lasting advantage that endures to this day.

Now this doesn’t work everywhere. In mature industries, particularly capital intensive ones, the spillover benefits to overproducing graduates is less because either there is less new-product innovation or because it is so capital intensive that the cost of researchers’ labour is trivial in terms of providing a cost advantage. I suppose one could argue that some benefit could be wrought by pumping out more PhDs skilled in process innovation, but to be honest I’m not sure anyone’s ever shown that process innovation rally relies on PhDs, so we can maybe rule that one out.

So maybe we need to revise Fullick’s conclusions a bit. It’s certainly true that across-the-board increases in PhD students might not be such a good idea, and that in mature industries, we do need to care about receptor capacities. But in newer industries, there’s a really good case for putting the pedal to the metal and letting the chips fall where they may. We could use a German chemical industry-like success around here.

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