Rethinking the Welfare State: The prospects for ... - e-Library

Rethinking the selfare state 184
secondary education in a way that Friedman’s regime would not, as his assumption is that
the dividend rate on the equity investment would be set so as to reduce (if not eliminate)
the prospect of systemic subsidization. The same could be done for a true loan program,
but high interest rates and the rigours of the compounding on liabilities would probably
make this policy unattractive. For this reason, there might be some pressure to introduce
interest rates lower than comparable market rates. However, this would introduce
incentive problems into the system. With sub-market interest rates students would have
an incentive to borrow as much money as possible and reinvest whatever borrowed funds
were superfluous to their needs at market interest rates. Consequently, if the degree of
subsidization associated with a true income-contingent loan program with an at-market
interest rate were thought insufficient, we might maintain some transfers directly to
institutions. However, they would be reduced in direct proportion to the amount of
subsidization that the income-contingent loan program provides.
To the extent that citizenship or civic virtue considerations favour participation by
students in undergraduate and graduate liberal arts programs that in themselves offer
limited income-earning prospects after graduation, income-contingent loan programs will
by design take this into account in determining post-graduation repayment obligations. If
this is thought to be an insufficient response to citizenship and civic virtue concerns,
modest universal per capita subsidies to all students admitted to first degree nonprofessional
programs may be justified. For those attending vocationally-oriented
community college programs where citizenship considerations are less salient, an
income-contingent loan program should sufficiently address distributional concerns.
Although some scholars actually advocate reducing or eliminating the level of
government support to universities, 74 the economic and social importance of higher
education 75 militates against this view. Those who recommend a reduction in government
support argue that this will introduce market discipline into higher education, thereby
weeding out mediocre faculty and students, and producing a better system in the long run.
The benefits of market discipline, however, can still be gained without such drastic
measures. First, the case for public funding of research is not related to the efficiency
benefits of a pricing scheme for education that reflects its market value. Furthermore, we
also have strong reasons to maintain substantial government support for students. We
should support the public benefits of post-secondary education such as the promotion of
citizenship values, economic growth, the development of a robust civic culture, and the
wide dissemination of society’s stock of knowledge. Thus, government should intervene
in and fund post-secondary education to a significant extent. Consequently, it is not the
fact of the current intervention and subsidization that is at issue, but the nature of the
current subsidization and support that is problematic.
Government’s post-design role
Ongoing government intervention in the market for post-secondary education should be
limited to remedying the problems identified in the first part of this chapter. That is, the
government should finance the public portion of the benefits of post-secondary research
and education and guarantee access to loans for all students, regardless of familial
means, 76 so as to facilitate access to higher education. It is sometimes argued that
reducing barriers to entry to allow private post-secondary institutions to operate freely