Anti-Poverty and the Education Monopoly

Thanks to the Amateur Economist blog for these two excellent pieces.

First, is Steven Horwitz’s column in The Freeman, A Libertarian Anti-Poverty Agenda.  In it, Horwitz disputes the claim by one of his readers that he “hates poor people” and provides three libertarian recommendations for reducing poverty by removing some of the structural barriers that keeps poverty around.  I wonder if his readers will be able to respond to those recommendations without resorting to ad hominems.

Second, is this quote from the Jennifer Grossman:

[A]ny provider that commands 90 percent of the market — whether we’re talking about software, phone service, or heating oil — is, by definition, a monopoly. Our government employs thousands of bureaucrats to track down and break up monopolies on the grounds that monopolies stifle competition and thereby produce bad products at high prices. Doesn’t it strike anyone as strange that the same government protects its own monopoly in education? And stranger still, that nearly everyone accepts this state of affairs as normal — as something that has always been and must always be? … [C]ompetition forces public schools into making long-overdue repairs. And it offers poor parents the choices they desperately desire.”
— Jennifer A. Grossman, Source: How Philanthropy Is Revolutionizing Education

I have a thing for such clear and obvious insights.  Grossman’s insight exposes an inconsistency in thinking that can cause people who hold it to give more serious consideration to their positions.

I predict that one reaction could be, I trust the government because it is held accountable to voters, but I don’t trust private enterprise.  To that I’d recommend the people evaluate the effectiveness of political voting vs. economic voting.  And, I’d offer the education system as a prime example of the relatively less effective political voting.

By the way, Horwitz’s second poverty reducing recommendation lines up with Grossman’s.

Revealed preferences and unions

Taylor Swift by David Shankbone 2010 NYC

Image by david_shankbone via Flickr

Many assertions and studies comparing union and non-union pay have been circulating since the teachers union in Wisconsin have been demonstrating against the representatives of their employers this past week.  Some say union workers are overpaid, some say they are underpaid and others hold that there are too many factors to make a fair comparison.

I think most of the logic that goes into such comparisons is bad.  Whether someone is underpaid or overpaid is up to them to determine, and it’s not something that is easily ascertainable by third parties.

We each value things differently and have different preferences and situations.  Some people like football, some like Coke and some like Taylor Swift.  But not everybody likes them.

It’s very difficult to capture those preferences in studies.  But, I think we can learn a lot by how people behave.

It occurs to me that if the union workers in Wisconsin were not overpaid in some regard — be it salary, job security, benefits or in some other non-monetary aspects of their employment trade-off — they wouldn’t care nearly as much about it as they appear to.

Another thought occurs to me.  Nearly ever time I patronize most stores the workers there thank me.  I can’t remember the last time someone from my local school district thanked me for paying my property tax, which funds their job.

Why the U.S. is not a democracy

In this previous post, I promised to write about the insights that moved me away from the fence sitting position of ‘fiscal conservative, social liberal’ toward libertarian thinking.  Walter Williams helps me start that discussion.

This week, Williams writes about why the U.S. is not a democracy, even though many people think it is or should be.

The word “democracy” appears nowhere in the two most fundamental documents of our nation — the Declaration of Independence and the U.S. Constitution. Our Constitution’s Article IV, Section 4, guarantees “to every State in this Union a Republican Form of Government.”

But why?

James Madison, in Federalist Paper No. 10, said that in a pure democracy, “there is nothing to check the inducement to sacrifice the weaker party or the obnoxious individual.”

John Adams said, “Remember, democracy never lasts long. It soon wastes, exhausts, and murders itself. There was never a democracy yet that did not commit suicide.”

Alexander Hamilton said, “We are now forming a Republican form of government. Real Liberty is not found in the extremes of democracy, but in moderate governments. If we incline too much to democracy, we shall soon shoot into a monarchy, or some other form of dictatorship.

So, what’s the difference between a democracy and a Republican form of government?

John Adams captured the essence when he said, “You have rights antecedent to all earthly governments; rights that cannot be repealed or restrained by human laws; rights derived from the Great Legislator of the Universe.” That means Congress does not grant us rights; their job is to protect our natural or God-given rights.

I don’t know about you, but that’s still fuzzy to me.

To John Adams, I’d ask, how do democracies commit suicide?

I think the answer is that 51% of the people end up using government to force their will on the other 49% and that chokes off the productivity of the evolved patterns of interactions that spawned a society that could afford to form a democracy in the first place.

The simple image of why democracies fail is two wolves and a sheep voting on what’s for dinner.  I think a more accurate picture is Cinderella and her two step sisters taking a vote on whether Cinderella would get to go out for the evening.  Think of the missed opportunity for Cinderella if her step sisters had that kind of power over her.

I believe the founders wanted two things from government:

1) Protect individual liberty.

2) Limit itself from encroaching on individual liberty, to keep the wolves from using government to eat the sheep.

The U.S. has functioned more like a democracy than a limited republic for a better part of century because many folks don’t appreciate the value of #2.   I didn’t appreciate it when I was a ‘fiscal conservative, social liberal” or a conservative.

When I came to appreciate it, I started to think more like a libertarian or a classical liberal, even though I didn’t know it at the time.  It took me awhile to discover that.

I think ‘fiscal conservatives, social liberals’ have a vague notion of #1 and an even vaguer idea about #2.  Conservatives tend to be stronger on #1, but soft on #2.

I will write more about how I came to appreciate #2 in the future.

Netflix for Kindle — Coming Soon!?!

Thanks to my friend Lane Myer for sending me a link to this Wall Street Journal review of the OverDrive ebook lending service that public libraries are beginning to use.

The service still doesn’t work on the Kindle — yet (ever?).  Since my library offers this service, this has tilted my preference toward purchasing the Nook over a Kindle.

What is a job?

Creating jobs is effective political rhetoric.  Who would be against creating jobs?

But a job is different than just giving someone money.  It’s a subtle difference that few people understand.

Allen Sanderson explains it in this article, Jobs, Jobs, Jobs (via Greg Mankiw’s blog).  In this paragraph Sanderson gives the typical economic refrain:

…pay 100,000 people salaries of $50,000 a year to dig holes in the ground every morning and another 100,000 folks  $50,000 annually to fill up those holes in the afternoons. That’s also $10 billion in spending—and 200,000 new jobs created. Of course, at the end of the day we will have the same level of output as before to show for our “shovel-ready” efforts.

Most people can clearly see that the effort of digging holes and refilling them produces no benefit.

But, much of government spending does produce visible benefits, like repairing roads or building bridges.  So, people view Sanderson’s example as extreme and discount it.

What they don’t consider is whether those visible benefits from government spending was worth the cost or whether there were better alternatives for the spending.

Several years ago in my hometown someone in local government got the idea to spruce up a couple houses in a blighted neighborhood to spur revitalization.

They city spent $1.1 million to renovate two homes in a blighted neighborhood and eventually put the homes on the market for about $160,000 each and they didn’t sell for anywhere near that. That project was not even close to be worth the cost.

I’ve been thinking about how to better differentiate between an activity that produces benefits in excess of costs, like a job, and an activity that doesn’t.

Here are some thoughts:

  1. A job is something you would willingly spend your own money on to have done.
  2. If charged with the financial accountability of an organization (which means you get fired if you do a poor job of making decisions that create value for the organization), it’s something you would willingly spend the organization’s money on.
  3. A job isn’t something that you would spend money on only if you have no direct accountability to it.  Most of public spending falls into that category.

When you willingly spend your own money, you consider two criteria:

  • Will the benefit exceed the cost?  In the business world, this is known as a cost-benefit analysis.  In economics this is known as evaluating consumer surplus.
  • Are there alternatives that will bring me more bang for my buck, that is, provide more benefits than this option?  In economics this is known as opportunity cost.

Private spending is not perfect. Like most things, it is trial and error. In many cases we misjudge potential benefits and later discover that the benefits were not worth the cost. But, we then use that as a learning experience for the future.

We  stop spending money on the things where the the benefits did not exceed the cost. We get better at knowing our options and projecting benefits. These simple feedbacks drive private spending to be an effective generator of value in an economy.

Public spending does not often have to satisfy these same two criteria.  In the public spending arena many other criteria come into play, and few of those have to do with whether the spending is generates benefits in excess of the cost.

Here are some of these criteria:

  • Will this create a multiplier effect to stimulate the economy? How much of a factor is the economic multiplier effect when you spend your own money? Not much.
  • Will I [politician] be able to claim that I was hero for spending other people’s money to solve some problem in order to encourage people to vote for me?
  • Will this spending of other people’s money please a special interest group enough to garner me campaign donations and other favors (like lobbying jobs in my post elected life) from that special interest group?
  • If I vote for this spending of other people’s money that politician B supports, will politician B vote for my ideas on spending of other people’s money so I can claim to be a hero?

So, the next time a politician pushes a big spending project, ask yourself if it would be something that you would be willing to put your own money into.

Who’s accountable to the spending and what happens to them if the spending doesn’t generate enough benefit to offset the cost?  If cost-benefit isn’t governing the spending, what is?

Awards don’t say much

From this news article:

The arrest of 90-year-old Florence D’Imperio stunned the Westchester County community. The elderly volunteer was recently named citizen of the year by Harrison’s mayor for her work at the food pantry that she allegedly plundered.

Secret to Good Business: Part 2

From Rich Karlgaard‘s latest column in Forbes magazine:

Bill Gates once said that a great programmer is worth ten thousand times the price of a good programmer. Such extreme talent may or may not be relevant to your company. What matters to every company is talent evolution versus talent deterioration. Multiply 1.01 times a large number and watch it grow. Conversely, multiply 0.99 times a large number and watch it shrink. Now think of your employee base: Is it getting better or worse?

I think there’s more luck involved in success than just finding good talent, but I do think good talent can improve the odds.



The difference between Eqypt and Wisconsin

In Egypt, they protested to remove oppressive bureaucrats from power.

In Wisconsin they are protesting over which oppressive bureaucrats they want to have power.

Credentials please

In the February 28 issue of Forbes magazine, Steve Forbes writes about how the Internet and other technology will change higher education.  He quotes from a February 1 piece by Louis Lataif of Boston University:

If you can buy a self-paced calculus course on DVD for $67, is it worth spending $5,000 to take the same course at a private university? Of course, the mutual learning that occurs in college is of value. But is it worth spending 75 times more for the same body of knowledge?”

Good question.

I enjoyed both articles.  Though, I think they missed key aspects of the value of higher education.  Higher education isn’t just about learning.  It’s also — and maybe more — about signaling, credentialing and networking.

I’ll be interested to see if new forms of education can marginalize these aspects of education.  I believe much of this value derives from bureaucratic organizations.

Bureaucrats love to hire credentialed associates,  if only to protect their own job from when a hire turns out bad.

Well, he was from [big name school].  How was I supposed to know?

He had such-and-such experience on his resume.  How was I supposed to know?

Unfortunately, in bureaucratic organizations such nonsense is met with a shoulder shrug , a nod and better luck next time, instead of a more appropriate corrective action like, Part of your job is hiring, developing and promoting good people.  Perhaps you should look beyond things like their school or experience and evaluate your hires based more on the what they have actually accomplished–much like a basketball or baseball coach might do. You don’t hear many pro baseball coaches explaining away their duds by claiming they were from such a good baseball school.

Here are some of the things I wouldn’t be surprised to see emerge for education over the next 25 years:

  • Effective bottoms-up instructional education efforts for preschool through 8th grade will emerge away from the central command of the DoE and state control.
  • Much of the formal instruction that occurs from 9th grade through the 2nd year of college will become somewhat more of commodity and easier to intersperse with other forms of education.
  • One of those forms of education will be learning-by-doing.  That might mean that doctors start on med school a couple years earlier.  Entrepreneurs might find apprenticeships with venture capital firms, business owners will work with folks directly.   Seth Godin recently experimented with a learning-by-doing MBA project, where he screened several folks to come in and work with him on their own self-directed, intense projects over a few month period.
  • There will still be room for universities.  But in addition to degree programs, colleges will more and more offer certification programs.  These will be smaller and more specialized snippets of knowledge.

Of course, there will be many other things that make an impact.  Screen casting is just now catching on.  I’ve learned a good deal about economics while jogging and listening to podcasts.

I’m very interested to watch what will unfold.

The Great Stagnation

In this highly recommended episode of the EconTalk podast, Russ Roberts and Tyler Cowen discuss Cowen’s new $4 ebook, The Great Stagnation.

The premise of Cowen’s ebook is that the growth and progress experienced by the average family from around 1890 to about 1970 was much higher than the progress experienced since.   He believes the first period picked the low-hanging fruit like greatly reducing death to disease through antibiotics, plumbing and hygiene and reducing infant mortality through better baby delivery methods.  Since the low hanging fruit has been picked, Cowen believes improvements have been slower and tougher to make.

That thesis has received a good deal of criticism from economists on the conservative and libertarian end of political spectrum, surprisingly.   Some of the criticisms include:

  • The measures Cowen uses to make his case are flawed and don’t properly reflect technological improvements that allow so many more people to afford things that weren’t conceivable even ten or twenty years ago.
  • Cowen’s exaggerates the meaning of stagnation.
  • Tyler, himself, is courting leftist bloggers (I don’t think that one came from an economist, but I seen it in the comments on various sites discussing Tyler’s book).

As Cowen points out on EconTalk:

I’m coming along and saying the rate of growth for the typical family has declined, and oddly I’m hearing skepticism from a lot of the same economists who are criticizing current policies for lowering the rate of economic growth. That’s always fun.

Great point.

Even though many people think of the late 70s through 00s as a time of deregulation, it has been a time when government has grown larger than necessary — under both Democratic and Republican administrations — with greater interference in private markets.

Government influence on markets in contributing to the financial crisis was a good example.

The politicians’ influence on the private market showed up in policy aimed at expanding home ownership through such things as the Community Reinvestment Act, Fannie Mae and Freddie Mac and Federal Reserve monetary policy.

A specific example: Fannie and Freddie were sanctioned by the implicit (now explicit) guarantees from government (taxpayers) to buy loads of sub prime mortgages — that is, mortgages from folks who did not have a good history of repaying debt — thereby creating a market for something that really didn’t have much, if any, value.

To better understand Tyler’s point on how all this might divert resources from productive pursuits and slow real growth, consider what would happen if government signed up taxpayers to buy surpluses of the singing and dancing mounted fish that were a popular novelty item a few years ago.

You can imagine that a lot of people would make singing and dancing mounted fish and we would have more of those things than anybody would want.  Which means taxpayers would be funding the purchase of loads of those fish when they could have spent their hard earned wealth on things they found more valuable.

Which gets to another point Cowen made in the discussion.

So, when we talk about biases in measuring output and living standards, the bias I worry about the most is we’re spending a lot of money and simply writing it down as value added when it might not be.

This comment of Tyler’s inspired by post C + I, which I plan to write more about soon.