06May
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7 Government Policies That Hurt Young People

1. Zoning and land-use restrictions

Government is to blame for Australia’s sky-high housing prices, blocking young people from renting and buying. However, following the usual formula, the government shifts responsibility: first, they blame foreigners. If that fails, they blame rich people.

You may have heard that greedy Chinese investors are hoarding property and are to blame for high housing prices. However, given that they account for less than 5 per cent of the real estate market, this seems unlikely.

You may also have heard that negative gearing is responsible, as this ‘tax break’ encourages the wealthy to buy up houses and deny them to the rest of us. This is nonsense.

Negative gearing only applies to individuals who purchase properties as investment and put them on the rental market, which means that it does not reduce the overall supply of housing. It takes pressure off the rental market, which in turn frees up real estate to buy, as people who may be indifferent to renting or buying have increased opportunity to rent, thus leaving more houses to those who specifically want to buy. Negative gearing actually increases overall housing stock by providing the ability to negatively gear debt taken on to build new rental properties.

The only reason housing prices increase is that total demand for dwellings outstrips the total supply. Unfortunately for young people who want to move out of home, government strangles the supply of dwelling units through restrictions on building, zoning laws, heritage overlays and other regulations.

Restrictions on building height—often for the purpose of protecting other residents’ views, for maintaining the ‘character’ of the community, or just to suit the tastes of some state or local politicians—mean thousands upon thousands of houses and apartments are never built.

Heritage listings can make it difficult and costly, if not impossible, to replace smaller, dilapidated houses with larger ones that could accommodate more people. Land-use restrictions mean that thousands upon thousands of houses are never built in the first place.

Given our steadily growing population, anyone with even the most rudimentary understanding of economics will know that the result is increasing housing prices to stem demand. This benefits established homeowners (usually older people) at the expense of people who are yet to buy their first home (usually young people).

In fact, The Economist estimates that land use regulations increase the price of office space in London by 800 per cent, and that equivalent rules in the United States reduce GDP by 6.5 per cent.

And, to add insult to injury, state governments, having already punished you by stifling the supply of houses, will slog you thousands more for stamp duty if you do decide to buy a house.

The overregulation of housing hurts young people in several ways. Firstly, it means that many who want to move out of home, or stop renting and buy their own home, will have to delay. Secondly, it means that young people have to save harder to buy a home, depriving them of the capital they could invest in their own education or in their own businesses and other projects. Finally, this reduces their future income, which is particularly damaging given the large mortgages with which many people will be saddled to pay inflated house prices.

2. Debt and deficit

You can always count on the government, no matter how hard we try to save and keep our personal finances under control, to shackle us with debt.

This year Australia’s national fiscal deficit, the combined finances of all the states and territories as well the federal government, is set to top $122 billion. That means that the government is plunging every Australian $5,000 deeper into debt. And that is on top of a gross federal debt of over $400 billion or about $17,000 debt for every Australian.

Of course, the ballooning debt matters more to some people than it does to others. Naturally, it will be young people who will have to pick up the tab when the debt has to be repaid in the future, by which time they will be the taxpayers who suffer increased tax rates or fewer government services.

It might be different if this money were being borrowed to finance capital projects that would dramatically increase productivity in the future, however, unfortunately, almost all government spending is on current services.

This is particularly unfair. Firstly, in no other context can a parent take out a loan knowing that the debt collector will pursue their child for the principle and interest. Secondly, many of the young people who will eventually have to repay the government’s debt had no say in the money being borrowed in the first place because people under the age of 18 cannot vote.

The persistent deficits being run by the federal government, and the state and territory governments, are an inter-generational racket: older people benefit from exorbitant government spending, while deferring the payback to such time that their kids and grandkids will have to pay.

However, we should not be so quick to blame greedy older people. Young people themselves are often among the biggest advocates for wasteful government spending and extravagant boondoggles. It is a great irony that young people demand that everything be provided to them for ‘free’, such as university, when they will ultimately be the ones who pay for it when they are older.

Accumulated deficits are an unjustified burden with which to shackle future generations, yet another way that the government hurts young people.

3. The high minimum wage

Minimum wage laws are a classic example of government regulation that has the opposite of the intended effect. Rather than encourage good working conditions they make it illegal to hire people with low skills, particularly young people.

The maximum hourly wage an employer will be willing to pay a worker is equal to their marginal revenue product—that is, the number of extra dollars of revenue that a worker brings to a business for every hour they work. If they pay workers any more than this, they will be employing workers at a loss, and no employer wants to do that.

So, say that the government decides to enforce a minimum wage of $17 per hour. If you only have a marginal revenue product of $16.50 an hour (in other words, the employer judges that you only increase their revenue by $16.50 per hour), they will not hire you. It is that simple.

As a consequence swathes of workers with skills that do not warrant whatever minimum wage the government chooses to set find themselves almost unemployable. These are often young people, because they typically lack experience, education and maturity.

The evidence is incontrovertible that minimum wages have wreaked havoc on youth, and particularly young people of minorities, who usually suffer from lower education and fewer marketable skills. Before the great minimum wage hike of 1949 in the United States, black teenage unemployment was less than 10 per cent. Since the hike, it has never been less than 20 per cent and has reached as high as over 50 per cent.

The result is that young people, who might have been happy to work for $15 per hour, are now denied the dignity of work, and forced to accept $0, as the minimum wage prices them out of the market.

But not only do young people lose the income—they lose the valuable experience and on-the-job training, which is one of the main reasons that young people try to get jobs.

People may start working at McDonald’s for a low wage to begin with, but it is usually not for long, as the graduate from washing dishes to flipping burgers to customer service to perhaps a management position. The minimum wage denies young people the opportunity to start at an entry-level job and work their way up. It is for this reason that the minimum wage is often equated with ‘cutting the bottom rung off the economic ladder.”

Some skeptics may argue that even if the minimum wage increases teen unemployment, it at least protects them from exploitation by unscrupulous employers. In actual fact, the minimum wage increases exploitation of young workers.

When the government imposes a minimum wage, it creates a large pool of workers competing for a now greatly restricted number of jobs. For this reason, the lucky people that do get a job know that they will struggle to get another one if they lose their current one. They will therefore be unwilling to quit, and will have to put up with employers stripping fringe benefits and worsening conditions. Employers, after all, know that a ‘reserve army of the unemployed’ is willing to take any vacant job in a heartbeat, thanks to the minimum wage. Workers are therefore more disposable and can be treated worse.

The high minimum wage encourages exploitation of young workers, makes it hard for young people to get jobs and denies them the opportunity to gain vital skills and experience.

4. Lack of school choice

Let us assume that education is something that we wish to guarantee to everyone, like food or clothing. Even acknowledging this, can our current system of allocating students to schools be justified?

Imagine if the government decided that, in order to guarantee access to food and clothing to low-income people, it would set up state-owned food and clothing dispensaries and compel low-income people to shop only at their closest state-run outlet, perhaps unless they sat some special exam to qualify for another, better supermarket.

Imagine the outrage and indignation if the government adopted this ham-handed, paternalistic and authoritarian approach to providing education. Most of all, imagine the disaster it would be in terms of meeting the needs of consumers.

What are the chances that the supermarket or clothes shop closest to you is the one that best suits your tastes and needs? Why would these outlets compete at all to provide better goods and services when they know their customers are compelled to give them their patronage? The result would be lousy food and dismal clothing that does not suit consumers’ needs.

If the government promulgated such a policy tomorrow, there would be a revolution. Yet this is exactly how the government provides universal education, and yet nobody bats an eye.

The results are exactly what one would expect from such an insane system of allocating students to schools. Students are not homogeneous and have very different talents and learning needs. The chances that the best school is the one in their suburb are slim.

Students who excel in languages, sport, the sciences, mathematics, the arts or the humanities should be able to attend schools that specialise in those areas, but parents who cannot afford private school fees do not have that option. As a result, students are arbitrarily allocated to schools based on geography, not based on that school’s suitability. This deprives students of the best education.

Moreover, even students that are most suited to their nearest school are harmed. Due to their monopoly over many local students, school administrators have little incentive to devote great effort to providing the best education possible. Why would they when they are largely shielded from the competition of other schools?

Moreover, government-run schools in themselves fail students. Again, we do not ensure that low-income people have access to food by establishing state-owned farms, distributors and supermarkets. Why? Because we know that government is simply incompetent compared with the private sector. So we simply give low-income people money and let them make their own consumption decisions. Why should it be any different with education? We are punishing the least privileged students by trapping them in a Soviet-style education monopoly and depriving them of the benefits of privately run education.

As an alternative, the government should do what it can to ensure access to even more essential goods, such as food: give low-income people money or some form of voucher and let them choose the best school for their child.

At worst, they will just choose the school that is closest, which is no worse than the status quo. In fact, increased competition would likely mean this school would probably be better anyway.

At best, they would be able to shop around for the best possible school, near or far, for their child, substantially improving educational opportunities and outcomes.

The current system is arbitrary, unfair, and a failure to students. This condescending, paternalistic system must give way to school choice.

5. Parallel import restrictions on books

Parallel import restrictions (PIRs) on books, a form of trade protectionism, substantially drive up the price of books. The impact of high book prices is especially acute for students, who are forced to pay extortionate sums of money for textbooks each semester.

PIRs forbid book retailers from importing books if an Australian publisher already publishes a version. This means that retailers cannot import a foreign version if it is cheaper, but it also means that domestic publishers have a greatly reduced incentive to lower the price in the first place.

As a consequence, consumers, and particularly students, pay through the nose for most titles. These parallel import restrictions can easily add up to 30 per cent to the price of most titles and are the main reason why books in Australia are eye-wateringly expensive compared with other countries.

These restrictions do not just punish university and high school students when they try to buy textbooks. Artificially high book prices can hurt young people in ways that are much more pervasive and harder to see.

Higher book prices naturally reduce the number of books that young people will buy and read during their childhood and school years, which means that Australia’s youth are partially deprived of the increased literacy and myriad other intellectual and educational benefits that come from regular and wide reading. This is part of the reason that the Productivity Commission recommended the abolition of these restrictions in 2009.

So these arbitrary government restrictions to free trade are a double whammy for Australia’s youth. It deprives them of the enrichment that comes from cheap books when growing up, and then slugs them for money that they often cannot spare as university students when they do go through the biannual shakedown of buying textbooks. It makes no sense to punish students and voracious readers in this way.

6. Compulsory superannuation

A system of privately managed superannuation is definitely preferable to a government-run social security system, and if compelling people to save is necessary to keep people off the pension, then to that extent, they are a good thing. However, it makes little sense to force young workers to put aside some of their pay check for retirement.

When you are trying to get an education, or perhaps just entering the workforce with the intent of starting your own business, or perhaps trying to buy your first house, there are more pressing and important uses for your capital than putting them into a retirement fund.

If saving for retirement by investing in a superannuation fund is the best investment for a young person, they can still do that if they want, but it is entirely conceivable that a young person could put their earnings to better use in the absence of mandatory contributions.

As a proposal, perhaps using their income to fund a part-time masters degree will yield a student more future income than putting it in a super fund, which would in turn actually increase their superannuation contributions as they progress through middle age.

Similarly, perhaps a young person wants to use all their income to invest in equipment to open a business. Compulsory super contributions for young people deny them this opportunity, which in turn could reduce their future earnings and the ultimate size of their retirement nest egg.

A young person could even use their income to buy equity in their first home, instead of equity in a wealth fund, but once again, they do not have this choice under the status quo.

In fact, it may be best for a student to simply use their meagre income to cover living expenses. Many students struggle to get by, and it is unfair for the government to dictate that they must devote some of their wages to saving for retirement.

Ultimately, what compulsory superannuation contributions boil down to is the government overriding individuals’ judgments about the best investment of their income. This may be necessary at some point in life, given the moral hazard created by the pension to consume almost all of one’s income and save little for retirement.

However, in these crucial years of an individual’s life, where they are trying to get the best possible education, start their career of save for a house, there are very possibly more efficient uses for their limited capital. Compulsory superannuation contributions mean that young people are denied to choice to use their money how they will and forced to forgo opportunities and potential earning.

7. University regulation

Higher education is ultimately no different from any other good or service and, for this reason, government price fixing hurts the consumers, students, in the same way.

If the government fixes the price artificially low, universities must either cut the quality or quantity of the courses they offer. If the government fixes the price artificially high, it results in either a surplus of places or courses that are unnecessarily extravagant for the needs of students and society.

As a result, many students cannot access their preferred course at their preferred institution, yet still often have to pay equally high fees for a degree at a less prestigious university. That is unfair on the students who do not get into a top universities.

In addition, it reduces the range of educational choice available for students. In a functioning free market, consumers should have a range of different combinations of quality and price available to them. Students should have the choice to opt for a less marketable degree in return for paying lower fees, or they can pay higher fees to get a more prestigious qualification from a sandstone university. However, university fee regulations restrict students’ choice in this way.

Fee regulations also seriously harm the ability of tertiary institutions to maintain and improve the quality of education. If universities cannot increase their fees, it is unavoidable that the quality of the courses they offer must eventually suffer. If Australian students are to get world-class tertiary education in the future, fees have to be allowed to rise.

In addition, government regulation of fees stifles product competition in the university sector. Why should the most prestigious institutions compete to be much better than the competition because their less prestigious counterparts are forbidden from undercutting them on price? In a free market, there would be significant fee discrepancies between universities, and more expensive universities would have to justify their higher fees with demonstrably better courses, instead of just resting on their laurels because the government has priced their less attractive competitors out of the market.

Many are fearful that, in the absence of fee regulation, university fees would skyrocket. To the extent that this is true, it is itself only an artefact of government regulation. The fact that the government decides what can and cannot count as a tertiary institution itself means that established universities are shielded from competition, and can therefore use this power to raise fees inordinately, or compromise on quality.

There is no reason why there should only be 42 universities in Australia. Creating a proper free market would allow the emergence of new and innovative institutions that would challenge the sandstone universities’ market power, and lead to cheaper and better degrees for everyone.

There is no more reason for the government to accredit universities than there is for the government to accredit food or clothing. Consumers (in this case students) should be able to decide for themselves which institution they wish to attend, and they should do say based on the reputation that universities have established for themselves and the numerous other market institutions designed to provide information about the quality of universities.

Free markets provide us with the best food and clothing. They will provide young people with the best universities as well.

John Hajek

John Hajek is the IPA Campus Coordinator at the University of Melbourne.

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