HESA

Higher Education Strategy Associates

The Size and Purpose of Government

Ever wonder why it seems like higher education is always in a financial trouble?  One big reason can be found in Agatha Christie’s autobiography.  Reflecting on her station in life as a young woman early last century, she noted in her memoirs how she never thought she would ever be wealthy enough to own a car – nor ever so poor that she wouldn’t have servants. 

In today’s world, of course, this makes no sense at all, since almost everyone has a car and almost no one has servants.  But 100 years ago the relative price of labour was such that it made perfect sense.   The lesson here is that over time, labour tends to rise in price relative to machines. 

Continually improving production efficiency is absolutely fabulous when it comes to consumer durables.  It means that cars are  a fraction of their former cost, while being faster, safer, and more reliable.  It means that for a couple of hundred bucks, anyone in the world can have more computing power in their cellphone that existed in the entire world in 1970. 

But the effect in labour-intensive industries is just the opposite: relative to other sectors, prices rise continually.  If everything were purchased privately, this would be no big deal – people would just adjust their budgets to spend the savings they make in one area (durable, machine-produced goods) and spend it on the other (labour-intensive goods). 

But here’s the problem: a few decades ago, society decided that most of the important labour-intensive industries – mainly health and education – needed to be in the public sector.  This limits the ability of individuals to shift consumption from one sector to the other because we constrain the ability of individuals to spend on their own education and health-care.  So the only way large-scale shifting between labour-intensive and capital-intensive goods can happen is through taxation.  For obvious reasons this complicates things.

So here’s the deal. The cost of providing a given standard of health and education will go up and up and up, no matter what anyone does.   We can either pay for that by taxing a heck of a lot more to fund those services (and hey, why not?  With cheaper consumer durables we require fewer post-tax dollars to keep ourselves clothed, sheltered and fed), or we can ask/allow citizens to pay for a greater part of the services they receive, or some mix of the two.  Those are the only choices.  Despite this, what governments across Canada are doing right now is the exact opposite of this.  They are freezing taxes while preventing these services from raising money themselves through new fees.   

As a long-term strategy, this is leading nowhere but failure and mediocrity.  We need to stop pretending we can avoid hard decisions on this.

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