Tuition fees and the debt question

One aspect of Lord Browne’s proposals on university tuition fees has received no coverage, at least none that I’ve seen; yet it’s the ghost at the party and should be dragged out of  its gloomy corner and exposed.

The reason the government is planning such savage cuts is that over the last decade and a half Britain has accumulated a crushing load of debt.   This debt wasn’t run up by the government whose finances remained quite reasonable right up to the outbreak of the crisis.   It was done by the private sector – it went on expensive German cars, on cheap Chinese clothes, on Mediterranean holidays but most of all on housing which seemed like a one-way bet, a sure route to a quick capital gain and a comfortable retirement.  It was all financed by a banking sector that was happy to extend credit; debt was cheap and most of it was secured against those very same houses whose ever-rising prices worked like a private ATM for their owners.

Yet, while the debt was run up by the private sector the government cannot escape blame.   It could have/should have intervened to stop the debt build up before it became dangerous but didn’t because it was blindsided by the ‘experts’ (including most economists in banking, in government and in academia) whose belief system contains two fatal flaws (actually more than two, but two that proved particularly dangerous in this context).  Firstly, that markets are just wonderful, endued with an almost God-like power of all-knowing and certainly far better at anticipating the future than a meddlesome government.   Secondly, that growing private-sector debt isn’t a problem because for every debtor there’s a creditor so increasing debt levels will, they reason, merely transfer income from debtors to creditors and cancel out at the national level.

Upton Sinclair noted that, “It is difficult to get a man to understand something, when his salary depends upon his not understanding it“;  maybe we should paraphrase him to observe that “Politicians prefer to believe those economists who tell them that the economy is doing better than it really is, even when they are talking utter rubbish.”   For the uncomfortable truth is that the debt build up of recent years papered over the terrible failure of the real economy – the economy beyond the City that the Americans call ‘Main Street’.   Had government faced up to the weakness of the real economy it would have had to tell the voters that they were indeed getting poorer on its watch.  This is not something politicians like to do.  Moreover, one thing that increasing private debt obviously does is to powerfully increases income and wealth inequality so it’s popular with the banking classes who see their income rise.   Labour’s attempts to restore fairness by tax-and-spend redistribution without addressing the underlying problem are therefore squarely in the foolish tradition of King Canute’s courtiers who fantasized that he could hold back the incoming tide. 

Which brings us back to tuition fees and student debt.  For the unasked question – the ghost at the party – is, “Who should shoulder the burden of this accumulated debt?”   

Gordon Brown’s answer, and also that of the Coalition, is that it should be the taxpayer, in part directly by bailing out the foolish (and sometimes criminal as we will eventually discover) bankers, in part by supporting the economy via deficit spending to compensate for the sudden reduction of private spending.  Unfortunately, this creates an immediate difficulty.  The debt is so huge that to raise taxes sufficiently to keep the government’s own debt under control would crush the economy.   The Coalition’s plan is therefore to find anyone they can who is not already up to their eyeballs and load them up with debt which makes students suitable marks;  they have some tuition fee debt but could have a lot more.   The advantage from the government’s point of view is, so to speak, that the can is kicked down the road and well past its election horizon.  Helpfully also, students have a relatively low propensity to vote so the electoral consequences are likely to be muted (all the more so for the Conservatives if it’s Lib Dems who take the hit).

None of this is to say that there isn’t a big problem in university funding anyway and quite separately from the debt crisis.  There clearly is.  It’s the inevitable result of years of bad policy from Labour driven by Blair’s arbitrary target of getting 50% to university, and never mind the academic standards or the economic rationale, and of neglecting alternatives to university that might have been developed to suit many school leavers far better than university ever could.   Also it’s correct to observe, as many have, that a funding system that worked when only 5% or 10% or even 20% went to university will not work when the numbers are much higher.   I’m in favour of reform – just not one driven largely by debt.

While the Coalition may think that shuffling a part of the national debt pile onto students will help, I disagree.  Yes, supporting the debt burden through higher taxes for years to come will crush the economy but so will supporting it through future student loan repayments.  Either way it eats up the spending power that should have gone on living, on goods and services supplied by companies large and small that employ people – including graduates.   A rose by any other name…

The elephant in the room that both government and opposition are doing their best not to notice is this: debt that can’t be repaid won’t be repaid.   How this is to happen is a question we must face sooner or later – and preferably sooner.  Let’s not make debt, tuition or otherwise, an intergenerational issue as well.

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