The NZ Initiative's Khyaati Acharya says while there are wider social benefits from a more educated population, many of the benefits of tertiary education accrue to the individual who undertook that study

The NZ Initiative's Khyaati Acharya says while there are wider social benefits from a more educated population, many of the benefits of tertiary education accrue to the individual who undertook that study

By Khyaati Acharya*

As a general rule, heated policy debates do not really make for appropriate wedding banter.

Regrettably, this was the situation in which this correspondent found herself over Waitangi weekend, stuck in a rather incoherent conversation with a heartily inebriated guest over whether the benefits generated by tertiary education are entirely public.

The trigger for this conversation was the Labour Party’s recently announced proposal for three years of free tertiary education.

The announcement has led to considerable debate from both sides of the fence. Advocates of the policy claim that greater steps towards universal free tertiary education could help improve equity, alleviate the private debt burdens faced by many students and increase the benefits to society from having a more educated population.

However, for the critics, this policy might seem a little like an early election bribe. The last major tertiary education policy introduced under the Labour Party was the interest free student loan scheme, in 2004. That policy alone has cost Kiwi taxpayers a cool $6 billion in written-off interest to date.

Dr Oliver Hartwich, in last weeks’ Interest column, argued that free tertiary education is a regressive policy, and that the lack of any cost decreases the value to students of enrolling in university courses. If higher education is entirely free, there exist no price signals to effectively guide the study choices and course selections among individual students. Dr Eric Crampton also questioned the purpose of the policy and highlighted potential problems in its implementation.

Whether or not Labour’s path to free tertiary education is paved with good intentions, it is still a proposal that overlooks the reasons why tertiary tuition fees exists in the first place – sharing the costs of higher education necessarily reflects the shared benefits.

Tertiary fees for students were first introduced in New Zealand in the early 1990s, coinciding with the establishment of the country’s first student loan scheme. While initially set at a flat rate, then deregulated during the 1990s, tuition rates have been slowly increasing since 2000, subject to centrally mandated fee caps.

But tuition costs for students are a matter of principle. Those who benefit from a service should also help pay for it. Though there are certainly wider social benefits from having a more educated population, many of the benefits of tertiary education accrue to the individual who undertook that study in the first place. For most students, earning a university degree is one of the most important investments made during their lifetime. Private benefits include higher post-tax earnings, improved employment probability and greater attachment to the labour market.

Norman LaRocque, a former policy advisor for the now-disestablished Education Forum, pointed out that the significant private benefits associated with tertiary education provide a strong incentive to undertake higher training, despite the associated cost.  After all, most investments involve some kind of short-term sacrifice in return for a longer-term benefit. Besides, the degree to which price might prove a deterrent is mitigated by the existence of a student loan scheme, where students are not required to pay upfront the costs of tuition.

Public spending is always subject to competing claims. And while all levels of education have some aspect of positive spillovers to the wider public, some studies argue that social returns from education are likely to be higher at lower levels of education, as noted in one review of the literature, and in a study conducted by Pennsylvania State University. Thus, a case can be made for higher private contributions at the tertiary level because taxpayer’s funds might be more effective and efficient if directed at primary and secondary education. 

Another common line of reasoning among advocates of free tertiary education is that, like defence forces, street lighting and clean air, higher education is a public good. The economic definition of a public good is a “good that is both non-excludable and non-rivalrous, in that individuals cannot be effectively excluded from use and where use by one individual does not reduce availability to others.”

Except that in economic terms, higher education is a private good. It is rivalrous because university courses have enrolment caps, use by one student then diminishes the use for another student. It is also excludable – the doors to universities can be shut.

The proportion of the costs of higher education borne by taxpayers are already significant, and as previously argued, largely underestimated by students themselves. Media coverage on student loans is overwhelmingly focused on the private debt burdens faced by Kiwi students, rather than the extent to which taxpayers subsidise middle-class welfare. Sharing the costs of higher education between taxpayers and students necessarily reflects that there are both private and public costs and benefits to tertiary education. Arguing that the benefits of tertiary education are entirely public, is a fallacy.

Tertiary education is an economic commodity. Whatever Labour’s reasoning, voters should keep in mind that any extra resources devoted to the tertiary sector come at the expense of other activities, like health, social development, public infrastructure or primary education, activities that may indeed reap greater social benefits.


*Khyaati Acharya is a research assistant at the New Zealand Initiative, which provides a weekly column for

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Nicely balanced article. A lot of my observation on the argument by the current generations as to why fees should be cut, is the complaint that the baby boomers got free tertiary education. This needs to be put into perspective. If you were raised in a university town and continued to live with your parents, then this might have been true. However coming from a regional town, with no tertiary institutions, tertiary education was far from free. At the time I struggled to even afford a basic vehicle (push bike was the primary mode of transport), so moving to a uni town and being able to study on part time wages of the time was just too great a burden, with no other support and the parents certainly couldn't afford it!

So Khyaati makes some really good points about price signals and benefits. I do agree with her conclusions, and would suggest that there needs to be some cost to the students.

do you really believe what you write? What about the students coming from a regional town nowadays?

Yes, I know a few. Most are doing a combo student loan and part time work. The part time work most do provides pocket money and some living costs. But I think the big difference is that student accommodation is much more available today than when I finished school, and possibly more affordable. an indicator of attitudinal change that tended to continue to prevail at the time carried on from when Massey was first set up. Apparently the original town of choice was Wanganui, but the City council of the time didn't want the town "overridden with yobbo students"! I certainly remember how much rent I had to pay at the time and couldn't afford a flat without sharing, while I had a full time job. There where student hostels at the time, but I recall them being pretty much full. One friend of mine who had won a scholarship had to live with relatives to make it work.

yet Ive seen a comment that student accommodation is crippling in Auckland, so no probably less affordable.

Hardly surprising

They've been lied to, used as fodder by the elites, misled, fed mis-information, told how good everything is

Didn't they know, they were living in the land of opportunity
Now they realise it is they themselves who are the opportunity to be used by the elites
without compunction or remorse

The article that Steven has linked to above is well worth the read.

propaganda time again. Now the supporters of free tertiary education are also inebriated drunks.

There's a lot of bullshit being shoveled in this article. The issue is not so much the cost of education but crippling debt levels. Some get an education and find they have a lifetime tax increase. If they go overseas the interest rates can now be a lot more than what they can afford to pay to maintain interest.

All this is heading towards the student debt problem that the US has. I'm just waiting for some idiot to start claiming that interest must go back on the loans. In the US it's common to end up with $120k of interest bearing debt after completing a standard 4 year degree. Most don't earn enough to do more than make minimum payments on a 20 year repayment term. It's debt slavery.

If some changes aren't made there will be a lot more defaults and written off principal. If a large enough number of people don't get any tertiary education due to lifetime debt we are going to have problems.

Primer reading here is Glenn Harlan Reynolds (Instapundit) "The new school"

Reynolds' arguments are simple: higher education has run afoul of the cost/benefit principle. In many cases, a tertiary 'education' leads to no job, high debt, and no discernable increment in a person's ability to communicate, analyse, work with others, or show up on time. Under these circumstances, higher ed needs to be regarded as a consumption, not as an investment, item. And you wouldn't incur debt to the tune of tens of thousands of pesos for consumption.....

Reynolds has also re-jigged Philo of Alexandria's dictum thus:

The government decides to try to increase the middle class by subsidizing things that middle class people have: If middle-class people go to college and own homes, then surely if more people go to college and own homes, we’ll have more middle-class people. But homeownership and college aren’t causes of middle-class status, they’re markers for possessing the kinds of traits — self-discipline, the ability to defer gratification, etc. — that let you enter, and stay, in the middle class. Subsidizing the markers doesn’t produce the traits; if anything, it undermines them.

So, there is that to factor in as well: is what passes for Higher Ed in Godzone, in large measure, 'Subsidizing the markers'?

what a load of codswallop, "self-discipline, the ability to defer gratification"

These days a consistent marker for being a Third World country is a mass of unemployed university graduates.

"voters should keep in mind that any extra resources devoted to the tertiary sector come at the expense of other activities, like health, social development, public infrastructure or primary education, activities that may indeed reap greater social benefits."

I would suggest there are much greater social benefits in free tertiary education than continuing to pay NZ Super to those on high incomes. Previously reported figures suggest $570 million would be saved by placing a, rather generous, cap on NZ Super at $70,000 other income. What is the social benefit to NZ of another mid-winter international excursion??

1) Tertiary education is no longer just a means to better one's situation. it is rapidly becoming a must in today's job market, where the minimum wage for low skilled jobs is not enough to live on, an zero hour contracts are becoming more and more prevalent

2) If a tertiary degree is a must in order to make a living, it has become a form of welfare. One can't do without and still expect a decent wage. But it is welfare based on ability, not on means. It is definitely a discussion we should have as a nation. Bringing back strong unions which would mean blue collar jobs pay a decent living again, would be one way of ensuring not everybody needs a degree.

3) The situation in the US is a bit more extreme than it is here. There the demand for tertiary education has risen to such heights, that the supply thereof has been severely lagging. Cue the rise of for profit institutions, who are attracting the poorest students as they simply are getting rejected by oversubscribed existing universities. These for profit institutions have been proven to saddle their students with more debt than not for profit ones.

4) Raising student fees as had no impact on the number of students enrolled. Neither has it had an impact on the level of education provided. The value of the degree obtained has not increased. Rather, universities are feeling the need to spend their extra cash on newly created marketing departments (to attract the 'right' kind of student), and increased admin staff, not on tutors.

5) Universities (in the US, mainly) charge more very much based on their reputation. Ivy league college degrees are more desirable than other university degrees, purely because employers discriminate on the degree their job applicants have. In today's competitive job market, it's not only whether you have a degree that counts, but also the type.

6) Student fees have the largest impact on students from poor families. People from poorer back grounds are more debt averse, because the debt which needs to be taken on seems to not be worth the advantage gained from a degree. If your parents have a household income of 50K, it seems obscene to take on a debt of half that, "just to get a degree". Students who come from families where the previous generation are university educated see the benefits more clearly.

7) Public spending is indeed always subject to competing claims. Rather than spend less on health care or other public services, efforts should concentrate on minimising corporate welfare and tax evasion.

8) The claim could be made that the immediate benefit of a degree is to the student themselves, but ultimately these benefits flow through to the rest of society: more higher paid jobs lead to higher tax take. Higher educated people on the whole live healthier lives (lower take up of smoking, smaller families, so less of a drain on public health systems)

9) Free education levels the playing field. As a libertarian institution, NZ's Initiative should welcome this, since libertarianism can only work (in theory), fairly, if everybody starts out from the exact same position.

I'm fine with free tertiary education. But we must eliminate the low quality courses - which could be most of them. And our kids should have better paths to employment, with education not necessarily university, and for skills we want as a nation.
Easy to say, hard to do of course.

KH, can you define what you mean by 'low quality courses'?
I agree that there should be better paths to employment. We need more training colleges, trade schools, vocational schools....

DFTBA: " Rather than spend less on health care or other public services, efforts should concentrate on minimising corporate welfare and tax evasion." Tax evasion whether legal or not, to the estimated tune of $6B a year in NZ. Could get a lot of public services for that amount. Neither it nor corporate welfare are likely to be addressed by this govt.

Yes, bender, I am aware of the figure the government loses out on due to tax evasion.
It is worth pointing out, that the people ultimately losing out, are the regular tax payer, who because of these missing billions have to put up with underfunded healthcare, public transport, education system, and other public services.

Oh dear, this is just an opinion piece full of fluffy speculation about how the world might work. It's the sort of rubbish I might come up with! However, I am not a paid researcher, just a businessman who has to make decisions on the limited information available to me (and sort out the consequences).

Surely there is data on all these assertions. I am extremely suspicious of the source and intent of many of the arguments put forth, they all seem to favour the financialisation of education. The bald truth is that NZ had to submit to this policy went the country went bust, not that it was chosen freely.

There are real issues here that deserve the rigour of the Productivity Commision at the very least. The debt levels are an issue, as is the mismatch between study and earning ability that results. One good suggestion was to make it the students who pay the staff directly, not the university administrators - so they get good teachers, not good brown nosers.

Well done Labour for bringing the subject into the political arena. Let's give it the serious deliberation it deserves.