Just crazy enough to work...

"When depression economics prevails, the usual rules of economic policy no longer apply: virtue becomes vice, caution is risky and prudence is folly."
Paul Krugman, Nobel Prize Winning Economist in a New York Times Op-Ed Piece

"What you see in FDR that I hope my team can emulate is not always getting it right, but projecting a sense of confidence, and a willingness to try things. And experiment in order to get people working again."
Barack Obama, President Elect in a interview on 60 Minutes

Hey Teachers...leave them kids alone!

A few days ago I went to a meeting sponsored by the club Think. The debate was on privatization. The whole issue with the collapse of many big companies and the subsequent bailout of those companies sparked this debate. Many people see the demise of these corporations and the troubles the financial system is facing as a damning critique of capitalism. Thus, the government needs to step in and help because it can do things better.

For specificity the debate ended up focusing on education and what the outcome of privatization would be. I enjoyed listening to everyone's opinions on the subject and came up with a few thoughts that I wanted to jot down about the subject.

The first idea I had was: What exactly are we hoping to accomplish with public education? I think for most people it boils down to three things. One, some parents may have smart kids that would benefit from an education but are unable to afford the cost of school. Two, some parents are lazy and irresponsible and would not send their kids to a good school or perhaps even to school at all. Three, we want the population to be well educated.

The second idea was: How do we fix these problems? Public education provides a nice base for all kids. It can avoid both the problem since poor parents have a free school for their kids and bad parents are legally obligated to send their kids.

In spite of the benefits of public schooling it does suffer from several problems. First of all, it doesn't do that great a job of educating. According to this article, the US is ranked 18th out of 24 developed countries in terms of K-12 education by UNICEF. I think this stems from the fact that public schools are set up to be little geographic monopolies. Even if you give the parents a choice between schools, they're set up so that they don't compete with each other*. Second, since the government is endorsing the curriculum, it has to pick something that is mildly satisfying for all parents. This means that the government has to pick abstinence only or safe sex, creationism or evolution, etc. No choice is going to make everyone happy. Thirdly, the government doesn't know when a course is valuable or not. At a university, if students are willing to pay for a class they'll provide it. Not so at a public middle school. Kids don't pay for a class so when it's time for budget cuts Arts and Music lose.

Public schools don't really get the feedback from the market like other businesses do and they perform badly because of it. A little competition would help get these schools behaving more like a company which means they'll fight to provide the best education they can at the lowest price. Think about it this way, everybody complains about the DVM but they don't have a choice but to go there. However, if you don't like Wal-Mart, you can go to Target and these companies know it.

And come to think of it, I've often thought about how cool it would be to open a school and in a conversation today someone echoed that desire. I know of plenty of good people who would be interested in opening schools who would be dedicated to the idea. None of them open schools because the public school system is a monopoly. On average, parent already pays around $8,000 to $10,000 in taxes per year to fund public education. For that parent to send their kid to a private school they would have to pay $16,000 (taxes plus the private school tuition) to get an education that is worth around $8,000. Not many people are willing to do that so few private school are ever opened.

I think a voucher system could introduce that competition nicely. It already seems to do well for higher education. Students can receive scholarships (vouchers) and pick the school they think offers the best education. If they want a better education, then they can spend some of their own money on top of the scholarship. Colleges have to compete to attract good students and so they have to provide a good education at a low cost. And as a nice bonus, no one has to agree on what they think a good education means. Some people prefer a conservative education, some prefer a liberal education. Some prefer to focus on math and science others on art and literature.

Vouchers also seem to solve the problem that poor parents can't afford to send their kids to a good school. Scholarships are already set up to give smart, low-income students an opportunity to go to the same schools they rich attend allowing them to get out of poverty based on merit. The taxes that fund the voucher system could be progressive so that the rich help fund the education of the poor**. So if you're worried that the rich will get richer and the poor will get poorer all you need to do is give the poor a scholarship for around what a rich person would pay for education (probably around $12,000 would do it).

Vouchers may even solve the bad parenting issue. I've heard many people argue that a bad parent will just send their kid to the nearest school and not take the time to investigate whether that school is very good. However, if a school is going to stay in business it will probably have to cater to more than just the small group of bad parents. Good parents will keep an eye on school quality and leave if the school starts doing poorly and it will have to close or improve. Thus the bad parents will free ride on the good parent's watchfulness. Bad parents are bad by definition so they could easily find some terrible shack where the teacher just beats the kids all day. I'm not sure that there are many parents that are that deliberately awful, but maybe. So I'd be willing to bend on my free market principles and OK some rating system like you find on restaurants. If a school doesn't meet some level of qualification it gets shut down.

All in all, I think privatization with a voucher system could be a really good thing for education in the country. Certainly, it is contingent on some political factors. Teacher's unions and county school boards would oppose this move and with anything that involves politics there isn't necessarily the incentive to structure the voucher system in way that won't cater to someone's special interests. But hey, even a cynical economist can hope right?


* For example, you never see two elementary school right next to each other even though you see grocery stores right next to each other all the time.

** If you're into that sort of thing.

Revealed Prefereces

I was listening to the radio recently and heard a story about how Wal-mart made lots of contributions to Republican candidates and the Republican party. The story included the opinion that Wal-mart should instead be funding the Democrats because many of their workers rely on publicly funded health care. If more Democrats were elected, Wal-mart would be able to continue not giving its workers health care making it cheaper to hire them. Wal-mart (in all of its evil) must be acting irrationally.

Or is it...

Wal-mart can pay its workers less if it gives them health care. But if the health care it gives them is not worth the reduction in wages then the workers are going to be mad and go work somewhere else. So, if workers and Wal-mart have come to the decision to work together, the people who work at Wal-mart must be happier with the slightly higher wages and no health care than the lower wages and health care.

Wal-mart knows that it will likely to have to pay more in corporate taxes if a national health care system is created. The taxes it pays will be more than what it has to reduce wages by because it knows that its employees won't be willing to work for less. For example, Wal-mart would have to pay $1 million in taxes but since its employees have health care that it doesn't have to provide for them, people will be willing to work for less. The savings in wages would not add up to be $1 million meaning that the employees of Wal-mart do not in fact value the health care they will be getting at $1 million.

How do I know that the employees of Wal-mart do not value the health care more than the wages they would lose to get it? I know thanks to Wake-Up-Walmart.com. The site claims:

"Since the average full-time Wal-Mart employee earned $17,114 in 2005, he or she would have to spend between 7 and 25 percent of his or her income just to cover the premiums and medical deductibles, if electing for single coverage. [Wal-Mart 2006 Associate Guide and UFCW analysis.]."

The people who work for Wal-mart are so poor that they can not afford the health care. They would prefer to take the risk and keep the money. Clearly, that is an unfortunate decision for those people, but forcing Wal-mart to create a health care system does not improve their situation.

A law would only make both Wal-mart and its employees worse off. Whereas, passing laws that allow for Wal-mart to make its employees as producitve as possible actually would increase their wages allowing them to purchase health care when they thought it was better than the alternative.

A Pessimistic Forecast

I'm pretty much tired of politics.

Both parties claim that they're going to make things better for everyone. This is absolutely false. Why? Because there is no such thing as a free lunch.

Essentially, any government policy will have some costs and some benefits. Which means some people will be made better off at the expense of others. No government policy is going to be good for everyone.

If they were really honest with us, they'd be saying, "I promise the 51% of you who vote for me more stuff than I take from you." Look at the tax polices. Hidden in all of the claims and promises will be a different distribution of wealth than we have today. Both candidate are hoping you feel like it redistributes the pie in your favor.

We can only hope that some of the policies a president enacts are at least better for the people they help than they are bad for the people they hurt. Sounds easy enough, but in practice, it's very hard. If you try to give stuff to people they change their behavior so you have to give them more. If you try to take stuff from people then they make sure that they have less to take or spend valuable resources just making sure you can't get it.

Universal health care is great example. It has the capability to help some at the expense of a lot of people. Universal health insurance is not free because we give up all the good things that the market does for innovation in health care. Having universal health care sucks. Not having universal health care sucks.

No president is going to change that. They're just going to change who it sucks worse for.

I hate to burst your bubble on how great the next 4 years are going to be, but it ain't gonna be what you're hoping for. Improvements in just about everything worth having don't get made by governments, especially presidents.

Six of one...

What is worse, only being told what you already believe to be true or only being told what someone else believes to be true?

It seems like a completely free media will do the first. People who are not interested in challenging themselves will choose to listen to reports that interpret the facts of a situation in a way that supports their beliefs. Liberals only read the New York Times. Conservatives only listen to Fox News.

What could be done to prevent that from happening? Place some restrictions on the ownership of the media? Consolidate the media into a government owned monopoly? It doesn't seem like any set of rules could eliminate the problems of the first situation without bringing about the problems of the second.

I suppose people who aren't interested in uncovering the truth will always be a problem. There's no reliable way to enforce the Truth because it is difficult to discover what is true in the first place. Does the marketplace of idea encourage people to find the Truth? Or do some people refuse to buy knowledge because they have too low of a demand for it?

Is the Truth always even valuable to have? Rephrasing, is it harmful to not know the Truth? Let's say communism is right. It would be better for everyone to if we were all oraginized under a communist system of production. Thinking about it in a natural selection sense, would a communist survive any better currently? It seems likely that they wouldn't.

Can we advocate a self-less pursuit of the Truth where all people would spend all of their time and energy attempting to figure out the world? Where would we even start- a scientific or religious approach?

Since many of these questions lack universally appealing answers, I think it is impossible to advocate anything but a free exchange of ideas. Even if rhetoric can sway more people than rational argument. Even if the incentive to find the Truth may not always exists in sufficient enough quantities to always find it. We merely must accept the fact that things aren't perfect, but they also can't get better.

"It's the Economy, Stupid"

According to CNN, the economy is the most important issue to voters. I think is absolutely false. The only people that the economy matters to is economists. At best, the economy is an abstraction that carries some vague connotations about wealth and the unemployment rate. Here is my claim, people don't care about the unemployment rate, they just care if they are employed. People don't care about average wages, they only care that they are getting richer*.

Perhaps, a decent definition of the economy is how easily are people able to produce and trade. When the news trots out statistics about the interest rate, GDP, and the wage gap those are all crude measures of something immeasurable. Any of these statistics can change wildly from month to month. They don't give a clear picture of how things are going.

The economy is like poker. You've got your cards and you have all the cards you need for a flush except one. Your last chance if for it to come up on the river. Mathematically, there is about 1 in 6 chance that the card you'll need comes up. Based on that probability, your opponent's bet, and the amount of the pot, there is a best strategy. Either fold when you get into that situation or go for it. Let's say the best strategy is to not bet, but you do anyway and win. That's great. You won that round, but playing as if you expect that card you need on the river isn't going to work out for you in the long run.

The same thing is true about the economy. Changing policy based on monthly or quarterly changes in economic statistics is a bad strategy. You may take advantage of something randomly, but as time goes on, that policy is going to cost more than it's worth and its going to make some better off by making many more worse off.

I can't help but feel like political candidates are always looking to do things now at the expense of tomorrow and for some at the expense of everyone else. Why get rid of the gas tax now? It won't do anything in the long run except have people drive farther in less efficient cars. Why increase taxes on the wealthy? It will just discourage investment.

Sigh.

*Actually, people probably do care about average wages. They would be happy to know they are above average, so a falling average wage could make some people happier.

A Bad Idea

I'm going to take an unpopular stance and come to the defense of oil companies. Even if those top-hatted and monocled bastards have stuck it to us recently. Exxon Mobile made a record-breaking earnings of $40.6 billion last year. Many people believe it is because oil companies gouged customers during times where oil was scarce or colluded to raise prices in the wake of Katrina. Thus these earning are ill-gotten gains which rightfully belong to the people of this great land. In the interest of fairness and honesty and integrity and vote share, we need to enact a windfall profit tax to get them back.

While, it is certainly within the realm of possibility for them to have colluded to raise prices, I'm not convinced that they did. The Herfindahl Index is a way to estimate how competitive an industry is; a score of 10,000 would mean monopoly. The FTC calculated that oil refining in the US scores around 1,300 to 2,600. This would actually make it more competitive than the markets for batteries or cereals. I may be a conspiracy theorist, but this doesn't sound like the big oil companies would have had an easy time colluding.

US News reports that even though these companies are earning more than ever before, their profit margins are still not that much better than other companies (oil companies have about 7.6% profit margin while U.S. manufacturing has about 5.6%).

It would seem that even though oil companies are sticking it to us, it is because oil costs more. Which brings me back to the wind-fall profits tax that is becoming popular rhetoric among certain parties. I didn't realize this until I did some looking, but this tax has been enacted before. During the 80's this tax was expected to generate $383 billion, but didn't pull in more than $80 billion.

This tax will not the be the cure-all to high gas prices. It will only serve to discourage investment in oil companies which leaves the U.S. more dependent on foreign countries. It also , according to one study, reduces the pensions of people who have used stocks in their retirement plans.

Clinton is advocating the windfall profits tax. What irritates me beyond belief is the fact that she went to college, she has advisers that went to college. Someone should have told her that it doesn't matter who you tax, the tax burden is always the same. The windfall profits tax will fall on consumers even if they don't realize it. I get the feeling that politicians do know the economics of their policies but ignore it because they know what will get votes. Which is why I'm a conspiracy theorist, I guess.