Interest free student loans and compulsory schooling: Is there a better way?

Recently the two main political parties in New Zealand have announced schemes that aim to, in some ways, help up-skill 16 and 17 years olds. At the same time, National has come out stating that it will leave student loans interest free, but provide a reward for repayments (leading to much debate).

Although these may seem like separate issues, when I look at the economy the issues of youth employment/skills, education, and unemployment/employment are intensely linked. As a result any policy that the parties take up on one of these issues must take into account how it influences these other sections of society.

In this post my aim is to put forward my current belief of what an ideal policy would look like for these three sectors – that’s right, I said policy not policies. Personally I think that all three are so closely linked that we have to use the same or very similar instruments in order to provide the right sort of outcome. Now, this analysis will be unashamedly normative, I’m going to be packing it with value judgments. I will try to make these judgments clear so you can either i) attack me on them, ii) work out where my objective logic may have gone wrong, separate of the value judgments.

As a starting point I’m going to ask why do we have the dole? I believe there are two reasons that we provide this benefit:

1) As a security net when someone loses employment,

2) As a way of ensuring that people have some minimum income.

Both these reasons are important for this analysis. While the first reason is commonly used, and relatively self-evident, the second reason is a bit more contentious. Why would people be willing to pay taxes to give people money who seem unwilling or unable to get work. The reason is that there is some type of positive externality that comes from people having sufficient income to eat, that makes it optimal for society to do. Some examples of this externality are; compassion, not wanting people starving on the street, as a way of reducing crime (people that have food are less likely to steal it!). Note: There will be negative labour market ramifications from such a policy, that is why the government makes trying to find work a provision of the dole as a way to limit this.

My assumption is that giving people a benefit that is sufficient for them to live provides enough of a benefit to make the policy justifiable – therefore it should happen. This seems to be justified with casual evidence (the fact that we do provide that type of policy), and as it’s my belief it satisfies my requirement of a normative assumption.

Now, if we are willing to ensure that people have a minimum income in society it begs the question, why do we exclude certain groups? I am a bit confused that we are willing to pay people not to work, but as soon as someone chooses to become educated in a non-dole related scheme, they are not provided with the funds to live. Does society truly believe that all people should have a certain minimum income except students? In this sense I believe that all students (those living away from home, and that are citizens) should be given the dole.

So far the only change to policy is that we give students the dole. Peoples concern will be that I’m pulling people out of the labour market. By reducing the cost of acquiring an education, people will be less likely to work now. However, surely the fact that people are more highly educated will increase productivity? In this sense we need to do something else, we need to change the structure of student fees.

The fees students pay is the area where we can look to improve efficiency. Different types of training ensure different payoffs for the student, and different payoffs for society at large. The government should only be funding in a way that incentivises subjects with a high social benefit (eg teaching), and lowers the incentive for subjects with very little social benefit (eg management). By also allowing the university more freedom to set fees in a way they see as appropriate, and keeping a relatively constant revision of the subsidy on education, course fees will adjust in a way that takes into account long-term shortages of labour.

Update:  I forgot to mention the student loan scheme.  Since the loan will be only be for the private benefit associated with the education it should be subject to market interest rates.  (Note:  I do not try to tackle intergenerational equity, but that will present issues that this type of policy would have to face).

Now let’s look at the flip-side, unemployment. There should be no difference in the way we treat unemployed people or students, ultimately unemployed people should get the dole, but they should be made to up-skill and look for work while they do it. There are many types of unemployment, however this type of scheme tackles structural unemployment – something that I feel can be a relatively large problem in the modern world. In this case, no-one is unemployed except by choice, as anyone that is voluntarily unemployed becomes a student.

You may have noticed I haven’t mentioned 16 and 17 year olds. The reason for this is simple – they are no different to 18+ year olds and so should not be treated differently. This unemployment/education policy will also extend to them, should they decide to leave secondary school and home.

Ultimately, many parts of this policy are already integrated in some fashion in current government policy. All I would want to do is remove the other rubbish surrounding policy and focus on these specific schemes. Furthermore, although this policy satisfies my equity goals with the least cost on efficiency, I can not make any clear decision on the policy without actually looking at the costs associated.