HESA

Higher Education Strategy Associates

Tag Archives: Economics

February 17

Four Mega-trends in International Higher Education – Economics

If there’s one word everyone can agree upon when talking about international education, it’s “expensive”. Moving across borders to go to school isn’t cheap and so it’s no surprise that international education really got big certain after large developing countries (mainly but not exclusively China and India) started getting rich in the early 2000s.

How rich did these countries get? Well, for a while, they got very rich indeed. Figure 1 shows per capita income for twelve significant student exporting countries, in current US dollars, from 1999 to 2011, with the year 1999 as a base. Why current dollars instead of PPP? Normally, PPP is the right measure, but this is different because the goods we’re looking at are themselves priced in foreign currencies. Not necessarily USD, true – but we could run the same experiment with euros and we’d see something largely similar, at least from about 2004 onwards. So as a result figure 1 is capturing both changes in base GDP and change in exchange rates.

Figure 1: Per Capita GDP, Selected Student Exporting Countries, 1999-2011 (1999=100), in current USD

Figure 1: Per Capita GDP, Selected Student Exporting Countries, 1999-2011 (1999=100), in current USD

And what we see in figure 1 is that every country saw per capita GDP rise in USD, at least to some degree. The growth was least in Mexico (70% over 12 years) and Egypt (108%). But in the so-called “BRIC” countries world’s two largest countries, the growth was substantially bigger – 251% in Brazil, 450% in India, 626% in China, and a whopping 1030% in Russia (and yes, that’s from an artificially low-base on Russia in 1999, ravaged by the painful transition to a market economy and the 1998 wave of bank failures, but if you want to know why Putin is popular in Russia, look no further). Without this massive increase in purchasing power, the recent flood of international students would not have been possible.

But….but but but. That graph ends in 2011, which was the last good year as far as most developing countries are concerned. After that, the gradual end to the commodity super-cycle changed the terms of trade substantially against most of these countries, and in some countries local disasters as well (e.g. shake-outs of financial excess after the good years, sanctions, etc) caused GDP growth to stall and exchange rates to fall. The result? Check out figure 2. Of the 10 countries in our sample, only three are unambiguously better off in USD terms now than they were in 2011: Egypt, Vietnam, and (praise Jesus) China. Everybody else is worse off or (in Nigeria’s case) will be once the 2016 data come in.

Figure 2: Per Capita GDP, Selected Student Exporting Countries, 2011-2015 (2011=100), in current USD

Figure 2: Per Capita GDP, Selected Student Exporting Countries, 2011-2015 (2011=100), in current USD

Now, it’s important not to over-interpret this chart. We know that many of these countries have been able to maintain. Yes, reduced affordability makes it harder for student to study abroad – but we also know that global mobility has continued to increase even as many countries have it the rough economically (caveat: a lot of that is because of continued economic resilience in China which has yet to hit the rough). Part of the reason is that if a student wants to study abroad and can’t make it to the US, he or she won’t necessarily give up on the idea of going to a foreign university or college: they might just try to find a cheaper alternative. That benefits places which have been pummelled by the USD in the last few years – places like Canada, Australia and even Russia.

In short: economics matters in international higher education, and economic headwinds in much of the world are making studying abroad a more challenging prospect than they did five years ago. But big swings in exchange rates can open up opportunities for new providers.

May 18

Canadian B-Schools and Economic Growth

If there is one thing university Presidents desire, it is to be useful to society – and preferably to the government of the day, too.  After all, post-Humboldt, universities exist to strengthen the state.  The better a university does that, the more it will be appreciated and, hopefully, the better funded it will be.  So it has always struck me as a bit odd how little universities (an business schools in particular) have really done in order to help work on the causes of Canada’s perennially sluggish economy.

Canada’s fundamental economic problem is that outside the resource sector, companies struggle to reach scale.  Outside the oligopolistic telecoms and banking sectors, we are a nation of small and medium businesses.  Judging by the party manifestos in last year’s elections, many people like things that way.  Small businesses are good and deserving of lower tax rates, big businesses are bad and deserve to be taxed more heavily. 

The problem with this little story is that it is simply wrong.  Big businesses are crucial to innovation and hence to economic growth.  Big businesses are the ones that have the money to invest in R & D.  They are the ones that can make long-terms commitments to training employees (if you don’t think firm size plays a role in Germany’s ability to sustain its apprenticeship system, you aren’t paying attention). People may be rightly cautious about the power of capital and its influence on the political process; but that doesn’t mean we shouldn’t encourage the formation of large companies in the first place.  Ask the Swedes: their social democracy would never have existed without very large companies like Volvo, Saab and Ikea.

And so the key question is: why don’t we have bigger domestic companies in Canada?  Oh sure, we have the occasional behemoth (i.e., Nortel, RIM) but we don’t seem to do it in a non-ephemeral way, or do it across the board.  And when our companies do start getting big, they often sell out to foreign companies.

We can point fingers in a whole bunch of directions – one favorite is a lack of appropriate venture capital.  But to a considerable degree, it’s a question of management.  Universities like to talk about how they are teaching entrepreneurship but getting people to start businesses and getting those businesses to grow are two very different propositions.  We seem not to have a lot of managers who can take companies from their first million in sales to their first ten million in sales, or to take our businesses out of the Canadian context and into a global one (if you haven’t yet read Andrea Mandel-Campbell’s Why Mexicans Don’t Drink Molson, on this subject, do – it’s revealing).   And for that matter, how is it that our venture capital industry still seems more comfortable with mining projects than life science or biotech?

Can it be – say it softly – a question of education?

We pretend that success in innovation is a function of prowess in tech.  But to a large degree, it’s a function of management prowess: how can staff be better motivated, how can processes be changed to add value, how well can business or investment opportunities be spotted.  Might it be that the education of our business elite doesn’t include the right training to do these things? 

To be clear here, I don’t really have any evidence about this one way or the other.  No one does.  But if I were a university president, or a business dean, it’s a question I’d be asking myself.  Because if there’s an economic conundrum that needs solving its this one, and if there’s any way in which universities can contribute, they should.

May 02

What’s Going On With College Graduates in Ontario?

I see that Ken Coates and Bill Morrison have just written a new book  called Dream Factories: Why Universities Won’t Solve The Youth Jobs Crisis.  I haven’t read it yet, but judging by the title I’d assume that it makes pretty much the same argument Coates made back in this 2015 paper  for the Canadian Council of Chief Executives, which in effect was “fewer university students, more tradespeople!” (my critique of this paper is here)

With the fall in commodity prices, it’s an odd time to be making claims like this (remember when we had a Skills Gap?  When’s the last time you heard that phrase?).  There’s no evidence based on wages data that trades-related occupations are experiencing greater growth that those in the rest of the economy – since 2007, wages in these occupations have grown at exactly the same rate as the overall economy.  True, occupations in the natural resource sector did experience higher-than-average growth between 2010 and 2014, but unsurprisingly they underperformed the rest of the economy in 2015.  (see figure 1).  More to the point, perhaps, these jobs aren’t a particularly large sector of the economy – if you exclude the mostly seasonal agricultural harvesting category, Canada only has about 265,000 workers in this field.  That’s less than 1.5% of total employment.

Figure 1: Real Wage Increases by Occupation, Canada, 2007-2015, 2007=100

2016-05-01-1

Source: CANSIM

More generally, though, the assumption of Coates and those like him is that in the “new” post-crisis  economy college graduates have qualitatively different (and better) outcomes than university graduates, too.  But a quick look at the actual data suggests this isn’t the case.  Figure 2 shows employment rates 6-months out of college graduates in Ontario over the past decade.  Turns out college graduates have experience more or less the same labour market as university students: an almighty fall post-Lehmann brothers and no improvement thereafter.

Figure 2: Employment Rates of College Graduates, Ontario, 2005-2015

2016-05-01-2

Source: Colleges Ontario Key Performance Indicators

The decline in employment rates can’t really be described as a regional phenomenon, either.  There is not a single college which can boast better employment rates today than it had in 2008: most have seen their rates fall by between 4 and 7 percentage points.  The worst performer is Centennial College, where employment rates have fallen by 13 percentage points; one wonders whether Centennial’s performance has something to do with the very rapid growth in the number of international students it has started accepting in the last decade.

Figure 3: Change in Employment Rates 2008-2015

2016-05-01-3

Source: Colleges Ontario Key Performance Indicators

So what’s going on here?  Is there something that’s changed in college teaching?  Is it falling behind the times?  Well, not according to employers.  Satisfaction rates among employers stayed rock-solid over the period where employment rates fell; and although there has been a slight decline  in the last couple of years, the percentage saying they are satisfied or very satisfied remains over 90%.  Graduate satisfaction fell a bit during the late 00s when employment rates fell, but they too remain very close to where they were pre-crisis.

Figure 4: Employer & Student Satisfaction Rates for College Graduates, Ontario, 2005-2015

2016-05-01-4

Source: Colleges Ontario Key Performance Indicators

My point here is not that colleges are “bad” or universities are “better”.  Rather, my point is that if you measure the success of any part of the post-secondary system exclusively by employment rates, then you’re basically hostage to economic cycles.  Some parts of the cycle might make you look good and others might look bad; regardless, it’s largely out of your hands. So, maybe we should stop focusing so much on this.  And we should definitely stop pretending colleges and universities are different in this respect.

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.

February 19

The Dollar Quandary

If you haven’t been hiding under a rock these last few months, you may have noticed that the US dollar is on a roll.  And it’s not just on a roll in Canada, where the price of oil has reduced the value of our own currency; since mid-2014, the US dollar is up over 20% against a trade-weighted basket of currencies. This creates some interesting conundrums and strategy options for pricing international education.

The change in the dollar’s status means that everyone’s price has been reduced vis-à-vis those at American universities. If you’re a university in, say, Sweden, it doesn’t matter much because practically all of your competitors are European. Basically: if your price isn’t changing relative to that of your main competitors, then the fall of the dollar is fairly meaningless.

However, if the fall in the value of your currency is greater than that of your competitors, then this does actually create some room to maneuver. I was in Russia last week, where the fall in the value of the rouble (76:1 USD, down from 37:1 USD at the end of 2014) means that their product is now much cheaper, relatively speaking, than that of their competitors, and that makes them a more attractive destination.  As a result, the Russians are now marketing themselves as a “bargain” product because, let’s face it, Russian universities have a brand image problem after the disasters of the 1990s. Their strategy is to go low price, high volume, and admit as many Asian and Latin American students as possible.

That’s one strategy. But there are others. If you are an Australian or a British university with a reasonable reputation, you might ask why you should keep your prices constant in local currency. If you think your main competitors for international students are American schools, you might also think it makes sense to take advantage of your lower currency, and increase prices a bit. It won’t necessarily hurt you with recruitment, and you can make a little bit of extra money in local currency terms. Basically, in these situations, universities have a choice between marketing themselves as a “bargain” institution (take advantage of low price to increase volume) or as a luxury institution (risk volume to increase price).

Now in Canada we have a somewhat different set of issues at play, for two reasons. First, we actually have a lot of American students, institutional pricing strategies need to take account of that market. Second of all, unlike European universities, Canadian schools can be very sure that US institutions are a major source of competition, and hence we have more scope to re-price based on currency changes. So here’s the question: should institutions take the “bargain” route and keep prices steady in local terms, or a “luxury” strategy that sees us raise prices, or perhaps even start charging in US dollars?

Essentially, this is the choice every institution needs to make over the next couple of months. I think there’s a pretty clear case for Toronto, UBC, and McGill to move to USD pricing, and keep last year’s fees constant in USD terms (that is, raise them by about 20% in $CDN terms). Will they lose some applicants? Probably. But they have the brand power to deal with that, and the students for which they are really competing are going to be paying more anyways to go to an American university. And the prize is a big whack of extra cash.

For everybody else, it’s a trickier proposition. Some institutions – particularly if they are experiencing recruitment shortfalls (say Trent, or any one of a dozen Atlantic universities) – will probably see more benefit in going the “bargain” route, and aggressively going after students looking for a “cheap” North American experience. Others – Windsor, perhaps – might decide to take that pitch directly to American students. The institutions with the trickiest task are the other U-15 universities. They might be tempted by the USD route, but may be unsure if they had the brand power to make it work. Expect a period of experimentation, not all of it successful.

In any case, for those interested in looking at price elasticity as a function of institutional prestige, the next couple of years promise to be quite interesting.

February 04

Lessons from Scandinavia on the Value of Tuition Fees

Whenever you hear somebody complaining about higher education funding in Canada, it’s usually only a matter of time before someone says “why can’t we be more like Scandinavia?”  You know, higher levels of government funding, no tuition, etc., etc.  But today let me tell you a couple of stories that may make you rethink some of your philo-Nordicism.

Let’s start with Denmark.  The government there is trying to rein public spending back in from a walloping 56% of GDP, and bring it back down to an only slightly less-imposing 50% by 2020.  And it’s doing this while the economy is still weak, and while oil prices are falling (Denmark has some North Sea oil so, like Canada, it tends to see low oil prices as a negative).  So cuts are on the way across many services, and higher education is no exception: universities there will see cuts of 2% in their budgets for each of the next four years.  Over to Finland, where it’s the same story in spades.  Nokia as a technological saviour/massive boost to government coffers is long gone, and economic contraction in Russia is hitting Finnish exports hard.  With the economy declining and the government trying to stay out of debt, the government there also laid out cuts to many services, including higher education: there the hit is a cut of roughly 13% out to 2020.

Now, in North America, when you hear about cuts like this you tend to think “oh, well, at least the government will let institutions make some of it back through tuition, either by increasing enrolment, or raising fees, or both”.  And in general, this attenuates the impact of funding cuts (unless of course you’re at Memorial in which case you are plain out of luck).  But remember, these are free-tuition countries.  By definition, there is nothing that can attenuate the cuts.  And so that 2% per year cut for the next four years in Denmark?  The University of Copenhagen has since announced a first round of cuts equaling 300M DKK ($62 million Canadian), equal to about 5.5% of the university’s operating budget, and that will involve cutting 500 staff positions.   Those cuts in Finland?  The University of Helsinki has decided to cut almost 15% of its staff positions.

Total reliance on government looks good on the way up; much less so on the way down.  That’s why tuition fees are good.  You know students will pay tuition fees every year, which makes them more dependable than government revenue.  Fees balance the ups and downs of the funding cycle.

Another thing tuition fees do is to provide an incentive for institutions to accept more students; if institutions can’t charge tuition and aren’t funded according to student numbers, their inclination will be to accept fewer students, thus undermining the “access” rationale for free tuition.  And this seems to be the case in allegedly-access-friendly Sweden, where enrolment in first and second degree programs has actually been in decline over the past few years.

Total Bachelor’s/Master’s Enrollment at Swedish Universities, 2007-2014

unnamed

 

 

 

 

 

 

 

 

 

 

 

 

I know what you’re wondering: is it a demographic thing?  No.  The 2015 version of the annual report, Higher Education in Sweden (which is a great report by the way… one of those documents you wish every country could publish), makes it clear that the ratio of applications-to-acceptances for students with no previous post-secondary education (i.e. 18-19 year olds) has actually been rising for the last few years (from 2:1 to 2.5:1).  And it’s not a financial thing either: between fall 2010 and fall 2014, real expenditures at Swedish universities increased by 12%, or so.

So what’s going on?  Well, a few things, but mainly it seems to be that universities prefer to get more dollars per student than actually increasing access.  And I mean, who can blame them?  We’d all like to get paid more.  But I genuinely cannot imagine any jurisdiction in North America – you know, big, bad North America, with its awful access-crushing neo-liberal tuition regimes – where reducing spaces while government expenditures were increasing wouldn’t be considered an absolute scandal.  Yet this is what is happening in Sweden, and apparently everyone’s OK with it.

Total reliance on government funding can make universities complacent about access.  Fees can incentivize institutions to actually admit more students.  Fees have a role to play in access policy.  The data from Scandinavia says so.

January 21

Marginal Costs, Marginal Revenue

Businesses have a pretty good way of knowing when to offer more or less of a good.  It’s encapsulated in the equation MC = MR, and shown in the graphic below.

profit-maximisation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Briefly, in the production of any good, unit-costs fall to start with as the benefits of economies of scale start to rise.  Eventually, however, if production is expanded far enough you get diseconomies of scale, and the marginal cost begins to rise.  Where the marginal cost of producing one more unit of a good rises above the marginal revenue one receives from selling it (in the above diagram, Q1), that’s the point where you start losing money, and hence where you stop producing the good.

(This gets more complicated for products like software or apps where the marginal cost of production is pretty close to zero, but we’ll leave that aside for the moment.)

Anyway, when it comes to delivering educational programs, you’d ideally like to think you’re not doing so at a loss (otherwise, you eventually have a bit of a problem paying employees).  You want each program to more or less, over time, come close to paying for itself.  It’s not the end of the world if they don’t, cross-subsidization of programs is a kind of core function of a university after all; but it would be nice if they did.  In other words, you really want each program to have a production function where the condition MC=MR is fulfilled.

But here’s the problem.  Marginal revenue’s relatively easy to understand: it’s pretty close to average revenue, after all, though it gets a bit more complicated in places where government grants are not provided on a formula basis, and there’s some trickiness when you start calculating domestic fees vs. international fees, etc.  But the number of universities that genuinely understand marginal cost at a program level is pretty small.

Marginal costs in universities are a bit lumpy.  Let’s say you have a class of twenty-five students and a professor already paid to teach it.  The marginal cost of the twenty-sixth student is essentially zero – so grab that student!  Free money!  Maybe the twenty-seventh student, too.  But after awhile, costs do start to build.  Maybe on the 30th student there’s a collective bargaining provision that says the professor gets a TA, or assistance in marking.  Whoops!  Big spike in marginal costs.  Then where you get to forty, the class overfills and you need to split the course into two, get a new classroom, and a new instructor, too.  The marginal cost of that forty-first student is astronomical.  But the forty-second is once again almost costless. And so on, and so on.

Now obviously, no one should measure marginal costs quite this way; in practice, it would make more sense to work out averages across a large numbers of classes, and work to a rule of thumb at the level of a department or a faculty.  The problem is very few universities even do that (my impression is that some colleges have a somewhat better record here, but the situation varies widely).  Partly, it’s because of a legitimate difficulty in understanding direct and indirect costs: how should things like light, heat, and the costs of student services, admissions, etc., be apportioned – and then there is the incredible annoyance of working out how to deal with things like cross-listed courses.  But mostly, I would argue, it’s because no one wants to know these numbers.  No one wants to make decisions based on the truth.  Easier to make decisions in the dark, and when something goes wrong, blame it on the Dean (or the Provost, or whoever).

Institutions that do not understand their own production functions are unlikely to be making optimal decisions about either admissions or hiring.  In an age of slow revenue growth, more institutions need to get a grip on these numbers, and use them in their planning.

January 18

Would Lower Tuition or Lower Student Debt Improve the Economy?

Short answer: not really, no.  But judging by this Chronicle Herald article last week entitled “Eliminating Tuition Fees would Buoy Bluenose Economy“, bad ideas die hard.  So let’s think this one through.

As I wrote back here, there are basically four ways to lower tuition or reduce student debt.  Government can raise taxes to pay for it, borrow to pay for it, re-allocate spending to pay for it, or reduce the cost of educational provision (i.e., cut spending on equipment and salaries).  If you choose the taxing, re-allocating, or cost-reduction methods, the net effect on the economy as a whole is zero.  Yes, students gain, but others lose, so it more or less nets out (exception: taking money from profs with a high propensity to save and giving it to students with a high propensity to spend actually probably would make a bit of a difference in the short-term, but since no one’s actually proposing that we’ll leave it aside).  Only by borrowing to reduce tuition/debt could government actually achieve the goal of a short-term boost; but then again, deficit spending on anything gives the economy a short-term boost.  What’s the case for spending it on students?

(A colleague has since pointed out to me that in theory there is a fifth option: the government could expand the money supply by printing money and using it to buy down student debt.  But that’s: a) not an option open to a provincial government; and, b) really unlikely to be used by a federal government, so I think we can confidently give this one a miss.)

There is certainly a case in Nova Scotia at least for spending some money on controlling student debt.  This is not a province that spends a whole lot on student aid – as we at HESA noted in our work on net prices, entitled The Many Prices of Knowledge.  Nova Scotia is for most students, by most measures, one of the most expensive places to study, so there’s not much doubt that some targeted assistance is in order. But free university tuition for everyone is obviously regressive, so making a case for that option is much harder.

The article doesn’t address the issue of regressivity but it does make quite a different case, which is that a province in as bad a demographic and economic situation as Nova Scotia needs to toss a bone to its youth.  And for what it’s worth, that’s true: the situation for youth in Nova Scotia is pretty dire, and out-migration is a serious issue.  But if that’s the problem you’re trying to combat, why give the biggest subsidies to that section of youth who: a) mostly come from better-off families; and, b) are likeliest to be making high salaries in the future?  Why direct money to them and not youth who haven’t accessed PSE?

If Nova Scotia really wants to do something big and bold, something that will attract or retain youth, and isn’t quite as brutally regressive, it should think about creating a type of tax rebate for all youth – say a 50% reduction on provincial taxes for anyone born within the last thirty years.  That’s a heck of a message to send to young workers – and one that might resonate outside the province as well.  And yes, okay, it’s still regressive, but likely less so than free tuition because at least it includes some benefits to those who don’t attend PSE.

Worth a thought, anyway.

January 14

The Dollar: What Everyone in Higher Ed Needs to Know

Issues run in cycles.  Remember the skills gap?  It was a big deal back when the price of oil was over $80 a barrel.  We haven’t heard so much about it since – and judging by the way oil futures markets are behaving, it may be awhile before we hear it again.

But don’t be dismayed: as one cycle disappears, another pops up somewhere else.  With the dollar having dipped slightly below 70 cents US on Tuesday, I think it’s almost certain that we’re about to replay a number of the seriously banal discussions from the late 90s.

So, without further ado, here’s a quick primer on what a low dollar means for Canadian higher ed institutions, and how all the major players will react.

Things are going to Cost More.  Most of the material costs in higher education – materials, equipment, and pretty much everything in the library – are priced in US dollars.  So a low dollar means costs rise, which means even if budgets stay stable (an iffy proposition) institutions are not going to be able to afford as much as they used to.  Libraries have had enough difficulty over the last few years dealing with parasitical journal publishers endlessly raising prices; with the drop in the dollar over the last 12 months we’re looking at another 20% jump in price in Canadian dollar terms.  Expect lots of cuts – and please, just don’t blame underfunding, OK?

People are Going to Leave.  Remember how in the 1990s we all cared about Brain Drain?  Yeah, that issue’s back.  I give it maybe six weeks before one of the big university presidents – or maybe AUCC – starts writing op-eds about how terrible it is that bright people are heading south, and so of course something has to be done… like maybe give universities more money so they can pay profs more.

Problem is, we’ve seen this movie before.  Last time we had a sub-70 cent dollar, it was tough to keep top STEM talent in Canada.  However, when governments started giving money to universities, the salary increases were spread quite widely.  We needed to spend big to keep STEM talent, but we ended up giving money to all staff (mostly a consequence of unionization), which was an expensive way to keep top people.

I don’t actually think Brain Drain will be as severe this time.  We’re still going to lose people, but the scale will be more modest; the state of the US economy is nowhere near as hot now as it was in the 1990s, and public universities aren’t in much of a position to hire.  But that doesn’t mean old arguments won’t get pulled out.  Caveat emptor.

International Recruitment Strategies Will Be Under Pressure.  I guarantee you that at many institutions, the low dollar means there will be pressure to shift geographic strategy and go after the US market.  “Of course they’ll come north”, people will say.  “Look how cheap we are in comparison!  And who doesn’t love a bargain?”

(You know how to spot a Canadian at a party?  They’re the ones telling you how little they paid for what they are wearing.)

Let me be blunt: Americans willing to pony up mid-five figures annually are not interested in bargains.  They are interested in prestige.  If you try to sell them based on “everyday low prices” they will assume you are like Wal-Mart.  This is a flat-out disastrous strategy.

The discount strategy will likely work better in developing countries, where price sensitivity is more prevalent. There, it is very much worth trying to talk up Canadian universities as affordable alternatives to US institutions (which will be rising in price for just about everyone around the world, not just Canada).  But if you’re after a more developed world clientele, my advice would be this: raise your prices.  Keep them constant in US dollar terms, to show that your product is as good as what they’re pushing down south.  Yes, you might lose a few students, but net revenue per student will rise nevertheless, and that’s a good thing.

December 07

H > A > H

I am a big fan of the economist Paul Romer, who is most famous for putting knowledge and the generation thereof at the centre of  discussions on growth.  Recently, on (roughly) the 25th anniversary of the publication of his paper on Endogeneous Technological Change, he wrote a series of blog posts looking back on some of the issues related to this theory.  The most interesting of these was one called “Human Capital and Knowledge”.

The post is long-ish, and I recommend you read it all, but the upshot is this: human capital (H) is something stored within our neurons, which is perfectly excludable.  Knowledge (A) – that is, human capital codifed in some way, such as writing – is nonexcludable.  And people can use knowledge to generate more human capital (once I read a book or watch a video about how to use SQL, I too can use SQL).  In Romer’s words:

Speech. Printing. Digital communications. There is a lot of human history tied up in our successful efforts at scaling up the H -> A -> H round trip.

And this is absolutely right.  The way we turn a patterns of thought in one person’s head into thoughts in many people’s heads is the single most important question in growth and innovation, which in turn is the single most important question in human development.  It’s the whole ballgame.

It also happens to be what higher education is about.  The teaching function of universities is partially about getting certain facts to go H > A > H (that is, subject matter mastery), and partially about getting certain modes of thought to go H > A > H (that is, ways of pattern-seeking, sense-making, meta-cognition, call it what you will). The entire fight about MOOCs, for instance, is a question of whether they are a more efficient method of making H > A > H happen than traditional lectures (to which I think the emerging answer is they are competitive if the H you are talking about is “fact-based”, and not so much if you are looking at the meta-cognitive stuff.  But generally, “getting better” at H > A > H in this way is about getting more efficient at the transfer of knowledge and skills, which means we can do more of it for the same price, which means that economy-wide we will have a more educated and productive society.

But with a slight amendment it’s also about the research function of universities.  Imagine now that we are not talking H > A > H, but rather H > A > H1.  That is, I have a certain thought pattern, I put it into symbols of some sort (words, equations, musical notation, whatever) and when it is absorbed by others, it generates new ideas (H1). This is a little bit different than what we were talking about before.  The first is about whether we can pass information or modes of thought quickly and efficiently; this one is about whether we can generate new ideas faster.

I find it helpful to think of new ideas as waves: they emanate outwards from the source and lose in intensity as they move further from the source.  But the speed of a wave is not constant: it depends on the density of the medium through which the ideas move (sound travels faster through solids than water, and faster through water than air, for instance).

And this is the central truth of innovation policy: for H > A > H1 to work, there has to be a certain density of receptor capacity for the initial “A”.  A welder who makes a big leap forward in marine welding will see his or her ideas spread more quickly if she is in Saint John or Esquimault than if she is in Regina.  To borrow Matt Ridley’s metaphor of innovation being about “ideas having sex”, ideas will multiply more if they have more potential mates.

This is how tech clusters work: they create denser mediums through which idea-waves can pass; hence, they speed up the propagation of new ideas, and hence, under the right circumstances, they speed up the propagation of new products as well.

This has major consequences for innovation policy and the funding of research in universities.  I’ll explain that tomorrow.

Page 1 of 3123