I work in the general area of social policy providing economic perspectives on decisions about education, training, children’s services and social care.  “So it’s all about saving money?”  Well, no.  It’s about making sure that we make best use of what we have and considering what might be the unintended consequences of well-meant policies.  It also provides some indications about what we should take into account when considering policy options.

Take education for example. Are student loans a bad thing? 

Certainly, graduates now leave university with a high level of debt as well as marketable skills.  Over their lifetime they can also expect to earn a salary premium of about 20% compared to their peers with 2 or more A levels.  Of course, this is only an average so some will earn a higher premium and some a lower one.  Moreover, the premium depends on the subject studied and for Arts degrees in general graduates will be financially worse off over their lifetime than they would have been without a degree. 

So, if Arts graduates don’t appear to acquire marketable skills, should we discourage our children from registering for degrees in Arts subjects?  Or should the government provide grants to students in these subjects to avoid them graduating with debts that aren’t justified by their potential earnings?  Or should the government abolish loans and return to the days of the universal means-tested student grants?

The answer to the policy questions depends on what we’re trying to do as a society. 

Grants to students who expect to receive a wage premium in the future is a gift from the general taxpayer to young people who will be the higher earners of the future.  In effect, it’s a transfer from the “have nots” to the “haves”. 

You might say that this could be avoided by a graduate tax by which graduates would be taxed at higher rates than non-graduates.  If the rates were set such that over a lifetime, the average graduate would repay the costs of their degree (fees plus grant) this arrangement would be roughly equivalent to the UK graduate loan system whereby graduates only make loan repayments when they earn more than a certain amount and where their repayments in any year depend on their earnings that year.  In fact, the graduate tax has certain advantages for the taxpayer because it is designed to repay all costs whereas the loan scheme will never repay all the costs because some graduates may never earn enough to repay (because of family responsibilities, illness, death or simply job choice).  So let’s replace loans with a graduate tax!

This is where the law of unintended consequences starts to bite. 

Under a graduate tax, the most successful graduates will be asked to repay not only their own costs but a considerable portion of those of other graduates.  In addition, there will be no limit to their liability.  The more they earn – and the longer they earn it – the more they will pay. 

Whether this additional burden is fair is a matter for public debate but it’s likely to have an impact on overall productivity.  It gives incentives to the more successful graduates to emigrate or to end their working lives early.  Not only will this be a loss to the economy as a whole by losing the contributions of its more productive members but it will also reduce the proceeds of the graduate tax so it might prove to be no better – or perhaps even somewhat worse – than the loan system in terms of its impact on public expenditure.

But you don’t need to be an economist to work this out.  It’s just common sense!

In one sense, this is absolutely true.  Economic theory is based on some very simple ideas.  The basic idea behind all economic theory is that each person will make choices that lead to the best outcomes for him/herself.  This doesn’t necessarily mean that each person is completely selfish and self-serving (although some may be) but it does mean that, taking all his/her preferences and values into account and looking at the variety of options available, his/her choice will leave him/her feeling better than some other choice. 

I think that economists’ main strength is the ability to take this simple idea and make it work hard by asking how those choices will change as the options facing the chooser change.