Thursday, September 27, 2012

Income Inequality Not Unprecedented, Returning to 1920's and 1930's Levels

From George Mason University's Library of Econ and Liberty:
With their longer historical perspective, SOI statistics also show that inequality in the 1920s and 1930s was as high as it is today. Beginning in 1938, the income share of the top one-tenth of households fell from 43 percent to about 32 percent, where it remained until the deep blue-collar recession of the early 1980s. At that point, inequality began its return to the levels of the 1920s and early 1930s.

SOI stands for U.S. Treasury's Statistics of Income

If I Describe My Awful Idea Again, Maybe You'll Start to Like It...?

Via Ezekiel J. Emanuel, Neera Tanden, and Donald Berwick in their Wall Street Journal Article from Tuesday, September 25, 2012:
Instead of paying a fee for each service, providers should receive a fixed amount for a bundle of services or for all the care a patient needs.

The article, here is the link, is called The Democrats' Market-Friendly Health-Care Alternative.  After the title the three authors proceed to give a list of changes to healthcare that are the opposite of market friendly.

The quote above is noteworthy.  Imagine a doctor that knows he will get $10,000 for attending to a patient's care.  The patient comes, the doctor gets $10,000, and now the doctor starts to perform a variety of wellness checks, treatments for allergies, illnesses, or more serious conditions.  At what point does the doctor feel like he or she has done $10,000 worth of service?  It will depend on the doctor, of course.  But, with fixed fees every doctor has the incentive to get the maximum amount of return-on-investment.  That is, how can the doctor provide the least amount of care for that $10,000?  Is this evil?  Should we punish physicians?  No, it's human nature.  When you charge a flat fee you incentivize the doctor to find the most practical way to earn that $10,000 plus $10,000 from others, which means they will minimize their effort toward each patient, maximize the number of patients they have, and avoidi more complicated and sophisticated treatments in favor of easier ones.

When you remove fee for service, you lose track of the actual value of services.  If all services are included under an umbrella, the services begin to lose their discernible market value.  Doctors will say that they have provided $10,000 worth of service.  Patients will claim that the doctors avoid more advanced treatments to make greater profits.  The government will have two options.  First, they could try to control exactly what doctors do and how they provide service, at which point we're not really living in a free society.  Second, they could somehow try to determine the market value of each type of service provided by the doctor and then charge accordingly....which is what we have now.

Some may say, "This is a slippery slope."  If you believe that human beings rationally respond to incentives, then you cannot look at the proposed health-care system as providing anything other than a strong set of perverse incentives.

Monday, September 24, 2012

President of Chicago Teachers Union Provides Their Key Tenets (via WSJ)

Key Tenets:
1. Use time wisely.  A proposal is on the table that lengthens the school day.  Longer work day does not translate into more educated students.
2. Get teacher evaluation right and don't fixate on testing.
3. Don't close struggling schools, make them not struggle anymore.
4. Don't blame the teachers, it makes for poor morale.

My responses.
1.  Agreed.  Increasing the work day is pointless if that extra time goes to pursuing failed teaching methods and educating students on things that do not increase their chance of getting a job.
2.  This is tough.  You have to measure performance.  There are very few occupations on this planet that do not have some sort of inbuilt metric by which one's productivity is measured.  The public's suspicion will be instantly aroused if the new agreement does not require some sort of evaluation of teacher efficacy.
3.  We've been told over and over that the largest contributing factors to student performance is their home environment and other factors outside of the classroom.  If this is true, then you will not fix struggling schools because their struggle isn't related to the school.  If socioeconomic indicators all of the sudden start improving, then I'm sure the school's performance will follow.  Note: giving everyone a gillion dollars is not a solution.
4.  Teachers are often the scapegoats for really stupid government policy that creates a hash of incentives and completely distorts the market for education.  We have an army of students graduating every year with no marketable skills (as a result of edu, maybe they got it elsewhere) that have only been taught what they need to know to get into college or take the ACT.  For those students that don't go to college, they just have to hope that someone needs a person with no skill to come work for them.  Does the fault lie with teachers?  I don't think so, they're just doing what they're told: teach English, Simple Math, Some Classic Novels, Music and Art History, and Football to kids.  Then watch them graduate and not know how to use a screwdriver (I'm speaking from my experience, I never took shop).

One thing I do hold against teachers is their almost rabid defense of a system that makes their skills and passion nearly pointless.  No amount of care, passion, and knowledge can fix a system of broken incentives.

Sunday, September 23, 2012

How Much Do You Pay for One Year of Public Education?

If you do not know the answer, and for some reason you think that you should know, then you have a powerful mind that seeks answers.  Congrats.

The truth is, very few people know what the cash equivalent is of one year of education.  Proponents of vouchers, school choice, private schools, charters, etc, generally like the idea that every family receive the value of one year of education in a public school in the form of a certificate.  The family can then take that certificate, decide which school to send their child to and then give that certificate to the school.  The government would then pay the school the amount of the certificate.

Think of the following scenario.  The average cost of education one child for one year in Oklahoma is around $10,000 or so.  That's cheap, you say.  It seems that way.  But, in my first grade class in Broken Arrow, Oklahoma there were 32 students.  If each student cost about $10,000 to educate and if each student were issued the certificate for that amount, then technically the school I attended would receive $320,000 in one year (9 month period in the case of many public schools) to educate one 1st grade class.  The teacher was paid around 30-40k.  Where did the other $290,000 go?  To school lunches?  Music class?  Janitors?  Hall monitors?  Administrators?  Union dues?

There's a problem here.  I spent 90% of the time with my teacher who performed 90% of the services the school provided to me.  But, he or she received only 10 to 12% of the value of the service provided.

Friday, September 21, 2012

Do Teachers Affect Outcomes and are Evaluations Fair?

Adam Ozimek raises an interesting question.
Teachers often argue that factors affecting educational outcomes are exactly those factors that occur outside of school.  In other words, home life, parents' value of education, parents income, etc are greater predictors of educational attainment than anything teachers contribute.  Diane Ravitch, a strong proponent of teachers, takes this position now, but less than 10 years ago she was touting strict teacher evaluations, school choice, and No Child Left Behind.

Many studies in economics show that outcomes in lifetime earnings, education, and other socioeconomic factors are determined by parental outcomes in the same category.  Still other studies show that these things are primarily impacted by IQ (a measure of learning ability or talent).  So, if the biggest predictors of educational attainment are factors outside of school such has home life, IQ, parental income and education, and teachers are quick to point out that these factors are beyond anything they can control or negate, then why is the debate about teachers at all?  Higher salaries, better classrooms, stricter standards, teacher evaluations, etc are all irrelevant to the factors that teachers say matter most.

Ravitch says that the real goals should focus on jobs in the community, poverty reduction, hunger abatement, etc.  Then, maybe the students educational attainments will follow.  Now, we just need to give everyone a job, eliminate poverty, and feed everyone and make sure they don't make any bad decisions that hinder these goals.  In case you're new to my blog, I don't think this is possible in a free society since it would be impossible without just enslaving everyone and making their decisions for them.  Free societies allow people to make their own decisions and people with poor decision-making skills sometimes make bad decisions with negative consequences.

Thursday, September 20, 2012

Why Evolutionary Psychology Excites Me

Cafe Hayek — where orders emerge

Bad Investments and Hayek

Government interference in markets (like education) can cause malinvestment, overinvestment, in things like education (majors in disciplines that the labor market has little use for).
See the link.
Cafe Hayek — where orders emerge

Majors Matter

High school students intending to go to college are given advice that can usually be grouped into two categories.  First, follow your passion.  Second, follow the money.    The first piece of advice, the wording, the imagery conjured when you visualize someone following their passion, feels right.  It feels right to send an army of graduates into the labor force who are passionate about what they've learned and are eager to earn a living doing what they love.  The second piece of advice doesn't sound so nice.  Maybe, you read it and felt a little bit of disgust, you thought about people consumed by their materialistic wants, or maybe you just thought that following the money doesn't sound fun.

Consider the following two hypothetical post-graduation interviews.
Person 1: Derek
Major: Acoustic Guitar Performance
Minor: Music History
Question:  How has the job search gone after graduation.
Answer: Not too bad.  I've put together a pretty good resume and have sent it to several staffing agencies and most of them have responded.  I've had a few interviews but not in any type of job that I'd be willing to take.  I'm more interested in managing bands, or night clubs.  Getting a job at Riverwind would be pretty, you know, like a house band lead guitarist or something.  I've thought about going to grad school since that will increase my chances of getting a good job that might actually be interesting and related to my major.  But, I'd have to take the GRE and I hear there's math on it.  Math is not my thing.  At any rate, I've been working at Barnes and Noble since May to pay the bills.  It's a pretty good job, I like it.  There are a lot of people that work there that I went to school with.  A couple of them had similar majors.  My wife and I went to Branson last week.  We were going to go to Cancun again, but we're trying to save up until I get a job in my field.  They usually pay around 25-30k to start.  You like my wife's ring?  Thanks.  I had to pawn a couple of my guitars but I'll get new ones later, after I've started working in my field full time.

Person 2: Tyrell
Major: Finance
Minor: Accounting
Question: How has the job search gone after graduation.
Answer.  Not too bad.  I put together a resume and started sending it out to companies and a few staffing firms.  I've had a few interviews.  Not any of them actually involve being a CFO or managing wealth.  I went ahead and took a job at MiddleEarth finance.  I basically crunch numbers which isn't the most interesting job in the world.  But, they'll pay my tuition if I do an MBA, and get good grades, or they'll pay for me to take the CFA exam.  I think I'll go the CFA route.  They have fantastic careers and I've learned most of the skills already.  My wife and I just got back from Cancun.  We were going to go to Branson, but then thought we'd celebrate my new job.  It pays around 45k but they bump you up fast.  Oh, and I went out and got this (pulls out acoustic guitar).  I've always been passionate about music, and used to take guitar lessons.  I think I'll start taking them again, I can afford it.

Silly?  Maybe.  But investing in college is a human capital investment.  You are investing in an upgrade of your skills so that you will be able to sell your labor at a higher price than you would without those skills.  The government subsidization of college education has led to a massive increase in the number of majors available as colleges compete for student's money (most of which is debt).  However, the number of majors that actually pay off remain remarkably consistent.  See the link below.

Which Majors Yield Benjamin Piles

Tuesday, September 18, 2012

Why Suggest Private Schools as Solution to Educational Woes?

Public school teachers hate hearing about privatization as the solution to the decline and fall of American public education.  I would too if I were in their shoes.  It is important to distinguish between the privatization of public schools and privatizing education.

Privatizing public schools involves moving workers from a broken system and introducing them to a foreign atmosphere where all of the sudden they have time to actually teach and incentives to become experts in the subject that they teach.  It always strikes me as odd that a person with a doctorate in mathematics is not "qualified" to teach children how to count.  The usual objection is something along the lines of "But they haven't completed any courses on how to decorate the classroom, make a coloring book, insert a catheter, etc"  This is not a knock on teachers, but in general the people who best know how to communicate information about a subject are the ones who know the most about a subject.  So, moving public school teachers and the rest of that broken system into a private system would produce quite a mess.

Privatizing education is the more plausible route.  It involves allowing private schools to proliferate, not following a cookie cutter approach but allowing individuals with passion, drive, and initiative to experiment with different learning techniques and environments.  It involves letting parents choose where their children attend school, switching from low performing schools, or schools not suited to their child's needs, to more appropriate ones.

People deeply rooted in the public school system will most likely scoff at the ideas in the above paragraph.  "That's not possible.  There won't be a massive increase in private schools.  These amazing and innovative learning institutions will not appear out of nowhere.  The quality of private schools isn't under control, you'll end up with so many bad ones."

These are silly arguments.  When you unleash the power and creativity of the private sector to solve a problem and they have incentive to solve it, it gets solved.  These institutions would absolutely appear out of nowhere, they would utilize greater technology, focus on subjects actually in demand, and educate your children more quickly, efficiently, and thoroughly than anything you think possible.  The quality of private schools isn't under control?  That implies that the quality of public schools is under control, they aren't.  The public school's quality looks about like the neighborhood it's in.  If it's in a wealthy area, the school is nice.  If it is in a poor neighborhood, it isn't.  There are some exceptions to this I'm sure.  Do you want to know the difference between a public of poor quality and a private school of poor quality?  The private school eventually goes out of business.  The public school lasts forever unless an act of god (or congress) allows it to go out of existence.

It always strikes me as ironic that public school teachers with any talent and drive defend the public school system.  They tell you all about how passionate and caring they are, how talented they are, and then they defend the institution that restricts or destroys any opportunity they have to implement their unique and innovative ideas and they defend the system that divorces the relationship between their effort level, intelligence, and passion and their income level.

Monday, September 10, 2012

Teachers on Strike in Chicago

When I see the pictures of striking teachers in Chicago, I experience many emotions. 

A few points:
  • Chicago teachers rejected a 16% pay raise.  See here.
  • They have the highest average teacher salary in the nation.  See here. 
  • The average teacher in Chicago makes $76,000  per year before benefits.  See here. 
 The last point means that someone that teaches children how to color might be making as much as a chemical engineer.  Granted, not all teachers are overpaid, and not all teachers teach coloring.  The problems in education are vast.  But it is incredibly hard to feel sorry for the teachers in Chicago.

I agree with one analysis that says the strike is just a political maneuver designed to allow Rahm Emmanuel and President Obama come in, end the strike, get credit for being awesome.

A Mighty Quote

The following quote is from Ludwig Von Mises:  

Any advocate of socialistic measures is looked upon as the friend of the Good, the Noble, and the Moral, as a disinterested pioneer of necessary reforms, in short, as a man who unselfishly serves his own people and all humanity, and above all as a zealous and courageous seeker after truth. But let anyone measure Socialism by the standards of scientific reasoning, and he at once becomes a champion of the evil principle, a mercenary serving the egotistical interests of a class, a menace to the welfare of the community, an ignoramus outside the pale. For the most curious thing about this way of thinking is that it regards the question of whether Socialism or Capitalism will better serve the public welfare, as settled in advance -- to the effect, naturally, that Socialism is considered good and Capitalism as evil -- whereas in fact of course only by a scientific inquiry could the matter be decided. The results of economic investigations are met, not with arguments, but with …"moral pathos" …and on which Socialists and (Statists) always fall back, because they find no answer to the criticism to which science subjects their doctrines.
 Agreed.  Von Mises is eloquently stating a sentiment we often hear.  If Socialism was based on its intentions alone, then it would seem very nice.  But its results are usually the opposite of its goals.  When they want to help the poor, they tax the rich and run out of money for the poor.  When they want to build a just society, they have to rely on highly unjust means of enforcing unjust rules.  And so on.

Sunday, September 09, 2012

Watch these Rap Videos

Every MBA Econ class I teach is forced to watch these two great rap videos.  The lyrics are great.  The actors are pretty funny too.

Fear the Boom and the Bust


Fight of the Century

Both written by Russ Roberts from George Mason Univ and Francis Coppola from....I'm not sure.

Saturday, September 08, 2012

Two 16 Year Olds at Panera Bread

I love walking past a couple of sophomores in high school and overhearing a deep conversation about politics.  All I heard was, "All Republicans think that....." and I didn't hear the rest, but when you begin a sentence with "All x think..." the rest of the sentence will be wrong. 

This got me motivated to learnicate and edufy my friends on FB and Twitter.

To this end, here is a Garrett Jones book review of Paul Krugman's "End This Depression Now!"  My favorite sentence: "When you're disagreeing with Friedman, you're probably in the wrong. And sadly, when you disagree with Paul Krugman, you have a better than even chance of being right."

I know that I'm a moderate.  What "moderate" means is the subject of another post.  When I discuss anything related to economics with a liberal, the first thing they throw in my face is Paul Krugman.  I think most economists feel about Krugman the way that most ministers feel about the pastor of the Westboro Baptist Church.  They acknowledge the person, acknowledge that they have similar education and understanding of quite a bit of theology (except some really important points), but they completely disagree on its application in this world where real people's lives are affected by policy.

Maybe the analogy with the Westboro pastor is extreme, but after years of reading economists that I admire and respect opine on Krugman's latest red-faced tantrum on television or his NYT blog, and after hearing nice people on the left invoke his name in the same way they would a god, I cannot help but show some frustration.

Thursday, September 06, 2012

Favor Tax Cuts or Government Spending to Stimulate Economy

John Taylor lists here a few economists who argue that government economic policy has delayed economic recovery rather than help it along.

I agree.  First, our government, and most governments, are depressingly bad at designing economic policies conducive to economic growth.  In particular, the most recent bout of stimulative government spending went primarily to shoring up state finances since so many states found that their future obligations toward retired and retiring public servants were going to be hard, if not impossible, to meet.  How much extra money is a retiree going to spend when he/she finds out that the monthly pension they collect will still be coming?  Not much. 

You may argue that the backstopping of profligate state finances was necessary to prevent panic-stricken states from enacting austerity budgets.  But, you say, the next round will go toward "shovel-ready" projects like building roads and bridges (I'm starting to hate roads and bridges, by the way.  Now I just drive on the grass.)  Why is this seen as a good thing?  The rate of technological advancement promises to make many low-end manufacturing and labor jobs obsolete.  Why invest in labor and technology that will soon go by the wayside?  This promises to provide a very small bang for our government spending buck.  The government should instead focus on research and development of technologically advanced products and industries that improve technological advancement and promise future increased economic growth.

Simple, right?  Democrats generally favor government spending increases, and they are beholden to labor unions like the AFL-CIO, Teamsters, Teachers, et.c.  They have promises to keep, so they will have to continue to spend money on projects with less value and potential than what reason dictates.

Republicans tend to favor tax cuts (at least, their rhetoric does).  When taxes decrease, every individual receiving the tax cut has more income and they choose how to spend it or save it.  If they spend it, we get a clear signal about what products and services are in demand, a signal that the government cannot provide, and companies can respond by increasing their supply of products consumers actually want (this helps avoid misallocation of resources that lead to asset bubbles).  If they save it, then banks will lend out the savings to entrepreneurs and companies who are attempting to meet a demand they see in the economy.  Cutting taxes is more efficient, causing fewer distortions to the market.