Fiddling the figures on student fees

The Sutton Trust has abused its polling evidence

The Sutton Trust, an education charity, has today released some polling evidence on children's attitudes to the costs of higher education.  The charity claims that

Two thirds of 11-16 year olds have university finance fears...[and] worry about the cost of going to university

 This has been swallowed by the BBC, who report that

Two-thirds (65%) of 11 to 16-year-olds polled for the Sutton Trust voiced concerns about university costs

 A quick examination of the Sutton Trust's poll, at the bottom of its press release, shows that this is a distortion of the evidence.  The 'two-thirds' figure comes from the fact that roughly that proportion responded to the question

Thinking about the cost of going to university, which ONE of the following is the biggest concern for you? 

by selecting the prompted answers 'tuition fees', 'the cost of living as a student', or 'not being able to earn money while you're studying', as opposed to 'Does not apply – I’m not concerned about the cost of university', 'Don't know', or failing to tick a box.

This is an incredibly leading polling question. The charity has prompted children to think about the costs, and then asked them to pick the worst one. Imagine we polled on the following question:

Thinking about the risks involved in flying, which ONE of the following is of biggest concern to you?

With the options 'pilot error', 'engine failure',  'terrorism', and 'does not apply - I'm not concerned about the risks of flying'.  It is highly likely that a majority would pick one of the first three options; we've made them focus in on the risks and asked them to pick the worst one. I can easily identify the risk of terrorism as of 'more concern' to me than pilot error, even though I very rarely worry about either and neither would influence my decision to fly. What we have not done is asked whether our sample usually worries about the risks of flying, or how significant those worries are when it comes to their decision to fly.  If two-thirds selected one of the first three options, we would certainly not be justified in concluding that 'two-thirds worry about flying'.

This is irresponsible use of polling data from the charity, and poor journalism from the BBC who have reproduced the charity's dubious claim.  This is particularly damaging when it comes to student finance, as we face an uphill battle against poor understanding among the public of how the system actually works. This story has the potential to make children think "everyone else is worrying about student finance - that means I should", even though they certainly should not. That works against increasing access to university.

Finally, the Sutton Trust has advocated means testing tuition fees, despite the fact that they are currently paid only on the condition that you earn a significant salary.  This is bizarre; if, as they claim, children worry about fees despite this conditionality, what makes them think they will understand a complicated means-testing system any better?

Help to Buy

 The Chancellor is happy to increase debt, so long as it's not counted 

Last week was a bad one for George Osborne, Chancellor of the Exchequer.  The IMF called for him to reconsider the pace of his austerity programme. A numerical error emerged in an academic paper widely cited as part of the case for his economic policy.  Fitch became the second ratings agency to downgrade Britain's debt from AAA. And the Treasury Select Committee criticised the 'Help to Buy' scheme outlined in the budget.

Help to Buy involves the government lending money to people to buy houses. Banks typically ask for a deposit equal to about 25 percent of house value, which many struggle to provide. If you are buying a newly built home, the government will now step in and lend you 20 percent of the value, so that you only need a 5 percent deposit. This additional loan from the government will be interest free for five years.

Osborne continually insists that there is no room for debt funded fiscal stimulus on infrastructure investment, as some have called for. Yet, as Simon Wren-Lewis points out, Help to Buy is just this.  It is funded by more borrowing today, so the government can provide its twenty percent. Unfortunately, the corresponding investment is in very risky housing equity, which the state could easily make a loss on. The risks are increased by the fact that the lending will only be to people otherwise considered to have too little security.

Why has Osborne tolerated this? Because it is off balance sheet: the investment in the housing equity will not be counted in deficit figures. These statistics are what Osborne really cares about, as they affect his political narrative. But the policy undermines his argument: it is difficult to believe that investors in Britain's debt also care more about ONS press releases than about underlying fiscal obligations and risks.  According to Osborne, these investors won't tolerate more British debt - unless we don't count it.

Misleading cost comparisons

Thatcher funeral cost: poor journalism, poor argument
Whenever people oppose any item of state expenditure, they tend to make their point by comparing that expenditure to supposed alternatives. This week has seen many such comparisons due to £10m cost to the taxpayer of Margaret Thatcher's funeral.

Economists always urge using the idea of 'opportunity cost' - the options you have foregone - when assessing any expenditure. This highlights what you are implicitly choosing not to have when you spend resources on something.  Nonetheless, the way journalists carry out such analysis is almost always infuriatingly misleading and adds little to public policy debate.

Take this piece in The Guardian, which claims that the £10m to be spent on Margaret Thatcher's funeral could pay for, amongst other things, "322 nurses". The way they have calculated this figure is to divide £10m by a nurse's annual salary.  In other words, you would be able to employ 322 nurses for one year, and then make them all redundant.  They qualify other items of their list with time periods ("annual" water bills, "two years" of aid to Iraq, "10 days" of arts spending), but not the nurses, fire officers, or paramedics. This is probably because the image of hordes of potential extra service workers is too appealing to water down with qualifications.

Far better would be to take the Net Present Cost of employing one more nurse in the NHS from now on.  Assuming a two percent real interest rate, and using their salary figure, the Net Present Cost of employing one more NHS nurse from now on is £1.6m.  In other words, the opportunity cost of Thatcher's funeral cost is just over 6 nurses, rather than 322.

The reality is - whatever your view on Thatcher - a £10m one off capital expenditure is to the taxpayer essentially nothing. This is aptly illustrated by their jobseekers' allowance comparison.  They inform us we can pay for the long period of one week of unemployment benefits for less than a ninth of all claimants. Except we can't - they've used the lower 16-24 rate rather than the normal rate without telling us. Could it be that their 'Data Blog' - where 'facts are sacred' - is trying to push a certain view?  

Update: The Guardian has now changed the first three headlines to include the "for a year" qualification.

Bankers' bonuses

We should support performance related pay

Bankers' bonuses have dominated the headlines since the financial crisis.  Today brought two interesting stories.  Firstly, the EU has agreed in principle a deal to cap bankers' bonuses at two times salary.  Secondly, RBS  (which is 82% owned by the taxpayer) announced it lost £5.17bn in the last year yet will pay out bonuses totalling roughly £600m, with £210m of that going to investment bankers.¹

No doubt, the move by the EU will cause cheer in the popular press.  However, it has been widely documented that as curbs on bonus payments have been introduced, banks have increased base salaries instead.  For any given pay package, taking more of it as salary and less as bonus makes a banker better off, as they face less uncertainty about their (very high) pay.  It also means that poor performing bankers cannot be so easily punished by lower-than-expected pay.

The public finds the 'bonus' word so toxic in the case of losses because they assume a bonus must be a  reward for doing well.  Why could it make sense to have any reward when a bank makes a loss?  In reality, the city operates on the basis that employees loosely expect a bonus of a given size, which is increased when there is good performance, and decreased when there is bad performance.  So a positive bonus can still translate into a punishment for poor performance, if it is below expectation.

This regulation reduces banks' ability to operate under such a performance-related system.  There may be good reasons for that, if bonuses are incentivising traders to take harmful risks.  Nonetheless, the regulation has the potential to make bankers better off by giving them more no matter what happens - and this is not a point you will find discussed much in the press.

In the RBS case, the devil is in the detail.  Most of the loss came from an accounting charge of £4.65bn due to the "fluctuating value of its own debt and derivative liabilities", according to the FT.  The operating profit was £3.46bn, up from £1.82bn a year ago.  And guess what?  Markets & International Banking - the investment banking arm - contributed £2.1bn to that.  Do bonuses totalling £210m still look so unreasonable?

An aside:  it always bothers me how bonuses are reported on a total rather than per-employee basis.  For those who are interested, the RBS results show 15,600 employees working in the Markets and International Banking divisions. Assuming the BBC's quoted bonus figure of £210m for investment bankers (see footnote 1), that works out at an average bonus of roughly £13,500.

1. I have taken the number for the bonus payout for investment bankers from the BBC.  However, my numbers on operating profits and headcount are from the RBS annual statements.  I am assuming the "investment banking" arm to be the International Banking and Markets divisions combined, but it is possible that the BBC has used a different definition.

Challenging an Assault on Oxford Admissions

The Guardian's conclusions are too strong

The Guardian has an article today in which it reports allegations of "institutional bias" against ethnic minority candidates for admission to Oxford University.  The paper has obtained data on admissions, and found that there is a statistically significant difference between the proportions of applicants of ethnic minority students and white students admitted to two subjects - Economics & Management and Medicine - after controlling for an applicant's (eventual) A-Level Grades.  To quote from the article:

The gap has often been explained as being due predominantly to the fact that students from ethnic minorities are more likely to apply for the most competitive courses, such as medicine. But the latest figures, which for the first time break down success rates by both ethnicity and grades for some of Oxford's most competitive subjects, cast significant doubt on these long-running explanations.

Their data blog draws an even stronger conclusion:

[Subject] mix cannot explain the discrepencies within some of those subjects themselves

They miss a rejoinder to this claim.  Any candidate of a given ability, as measured by A-Level grades, is still going to be more or less likely to be admitted depending on which course they apply to.  I achieved high grades at A-level, but given my specific skills and interests I knew I was more likely to be admitted to university economics courses than, say,  history programmes.¹

If ethnic minority candidates are pushed by cultural factors towards courses such as Economics & Management and Medicine (The Guardian only looked at these two and Law), then this will obviously reduce the likelihood of them making the choice which maximises their chance of admission.  If white applicants face no such handicap, then you would expect white applicants to be more likely to be admitted, as they would be more likely to select courses to which they know they are best suited.

Thus, the university's defence - that ethnic minority candidates are more likely to apply to competitive courses, and thus have a lower chance of being admitted - remains intact, even looking at within subject data.

1. Of course, what I am saying here is that ability for a given subject varies in a way that is not captured by A-Level grades, and the paper does acknowledge this weakness ("university spokeswomen were keen to stress A-levels are just one measureof ability, which they say is also ascertained through additional tests and interview"). Nonetheless, they missed this highly important case of such a variation caused by the selection effect which has previously been pointed out by the university.

Inflation and tuition fees

Why count them?

Inflation is set to remain above the Bank of England's 2.0% target, according to today's Quarterly Report from the Bank of England.  The Bank points out that "increases in tuition fees...have added to inflation more recently".   Indeed, the rise to 2.7% in December from 2.2% in September "primarily reflected" increased fees and increased energy bills.  Education contributed on average 0.4 percentage points to CPI inflation in the fourth quarter of 2012.

Because inflation is calculated on a year-on-year basis, it will take many months before the increased tuition fees drop out of the headline inflation numbers.  Although the fees only went up once, you get 12 months of higher headline inflation figures as the comparison is with 12 months earlier.  Moreover, the contribution of fees has been "unexpectedly large".

The benefits of including fees in inflation are unclear, especially given the impact on the index.  The fees system in the UK is complex, and is most accurately described as a time-limited, contribution-limited graduate tax of 9% of earnings above £21,000.  Most students will not over their liftetimes pay the headline 'price' of £9,000.   To be sure, increased fees have an economic impact.  But the effect on purchasing power is much closer to that of increased income tax (which would not directly affect the index, but in the long rung would be deflationary) than increased prices.  Having fees in the index only obfuscates the true level of inflation.

The failure of the high street

Shops with physical premises should be subsidised

Today brought the news that HMV is going into administration.  It is the latest in the line of high street failures which has included the downfall of Woolworths, Comet, and Jessops.  Essentially (though not exclusively), these firms have lost business to online competition.

High street stores provide a classic case study in positive externalities.  Everyone likes having them there (I presume; otherwise what is driving the clamour to 'save the High Street'?).  They are often pleasant to wander around, and it is nice to be able to hold products in your hands.  It is also viewed as good for the community to have a busy high street, and there is an "insurance" benefit of knowing that you can get something immediately in a store if you need it at short notice.  But people no longer spend much money in these stores, often preferring to go home and buy what they saw in the shop online.  The social value of the high street is not captured by the firms, and some of them go bust in the absence of sufficient revenue.

If we are to preserve the social value they create, this must be addressed.  This means compensating the firms for the value they generate yet cannot capture.  Economics 101 says that goods which exert positive externalities should be subsidised.  There is thus a case for subsidising - or at least reducing the taxes of - firms with physical stores.  This could be done, for example, by reducing rates (a kind of council tax for businesses) on shops.  Online sites may be cheaper, but Amazon will never provide the satisfying experience of browsing and exploring which many currently get for free.