A Thing of Beauty

Kevin Williamson sometimes gets carried away but his post on NRO today is a thing of beauty.  The topic of discussion is Hollywood and the attempts by California and LA to keep entertainment where it has always been but he ties it into the changing structure of business.  Now we have more risk, more rewards, and more change.  Humans adapt but political organizations change more slowly.  Read it an pay careful attention to the antepenultimate paragraph.

 

Starting government policy on Colleges

In this post MWG discusses some of the bad ideas and problems with policy on colleges.

First, not everybody should go to college.  There are lots of other post-secondary options and not everybody is going to need post-secondary education.  We need plumbers and hair stylists but lots of folks will improve their human capital with on-the-job training (OJT).  One of the goals of policy should be to put options on an equal footing.

Obama has proposed a rating system for colleges based on various factors.  As we have known since at least Deming, a single number is always suspect.  In fact, Deming was an OJT guy.  Colleges offer a wide variety of programs.  Some are excellent financial opportunities while others have less opportunity for financial success.  Of course, the college brand has an impact.  A graduate from an exotic program at an Ivy League school would bring more occupational interest than a graduate from a similar program at a third tier program.  So if students are to make economically informed decisions then the data has to be by program rather than the whole university.  Prospective students will see that difficulty of the program and financial success of the graduates are often intertwined.  That is, not everybody gets into med school.

Because of demand and cost, some programs are more expensive to run.  Pricing for these programs is an issue for state policy.  For example, let’s say that the engineering program is expensive and a good financial opportunity for students.  Should the state set a higher price on the engineering program which would support the high cost but might decrease demand? Should the state allow the engineering program latitude in setting prices?   It might not decrease demand because informed students could conclude that it is still a good investment at the higher cost.

To summarize some of the issues in policy on colleges

  1. We need opportunities other than college on an equal footing,
  2. Information for students needs to be disaggregated to be useful, and
  3. There are challenges in pricing programs.

College Costs and the Government

President Obama has made some proposals related to higher education.   Since local, state, and the federal governments are involved in higher education it is an important area for discussion.  In this post we will discuss some background and then get on to proposals in a later post.

First it is true that higher education cost have gone up substantially.  There is some danger that there is a bubble.  The problem with the analysis is that for most students in state schools is that the price is subsidized and the subsidy has changed.  In the 1970s, when most analyses start, tuition at many state schools was nominal, from $50 to $150 per semester, with the state subsidizing the rest of the cost.  

In the passing decades, many states (I would be shocked if it is not all) have reduced the percentage of cost that they subsidize.  State budgets have been balanced on the backs of students, parents, and other interested parties.  It seems reasonable to have the person that benefits pay most if not all of the costs.  This adjustment for state subsidy will not eliminate the the higher ed bubble but it is not quite as bad as some think.

The other issue is complaints about the bookstore, student housing, parking, food service, and athletics.  Except for athletics, we could find strong majorities against all of these areas.  But from the tuition perspective these are all flow through costs that have a trivial impact on the rest of the university.  To take two, university housing and food have improved by leaps and bounds.  Housing is more expensive because it is better but students choose to pay the cost.  The change in food service is even more dramatic.  A student from 40 years ago would have sold his soul to have food this good on campus.

The last issue is the federal government offers low interest rate loans to students that leads to rising debt and higher default rates.  There is reason to think that the explosion of low cost financing has encouraged tuition to rise.

So the situation is decreasing state and local support for college with increasing federal support for low cost borrowing.  College tuition has gone up substantial caused in part by government policies at both levels.  Peripheral items like housing have a trivial impact on tuition and are managed by the market.  So what should be done?  Next post.

Causality

The incisive Michael Barone has an interesting quote today:

Higher gasoline-mileage requirements — something Congress has also blessed — are responsible.

Let’s agree that he uses words carefully and that “requirements … are responsible” means those federally mandated MPG requirements (CAFE) so he is taking a side on the cause of higher MPG.  There is no wiggle room.  Let’s also agree that causality and counterfactuals present challenges in proving.

MWG sees it the other way.  The extant increase in CAFE is consistent with what voters and consumers want.  The current standard of 29.7 generally reflects consumer interest as indicated by advertisements and word of mouth.  High MPG is like a low priced airline ticket – something to crow about.  Of course, automakers game the system, for example, you must use a certain type of oil while the vehicle is under warranty because that weight increases CAFE.  They also reduce vehicle weight and safety.  So the outcome of the counterfactual (no CAFE rules) is that CAFE is perhaps 28 rather than 29.7 and vehicles are safer.  Since the original CAFE for passenger cars was 18 in 1978, the argument is that the standards did not lead.

A test of the hypothesis will be the new standards.  By 2025 CAFE is required to be 54.5.  The 2025 CAFE may lead to some negative response by consumers.  Roughly 30 MPG is consistent with our technology but roughly 55 MPG may not be consistent with it.  Of course, as the fracking and horizontal drilling revolution has shown the private sector is capable of amazing advances that improve the environment.  The problem is, currently, the solution would be electric cars.  First, they are not very good.  Second, the run off the grid and so use, in part, coal, and stress the grid.  Business may find a solution but it is not an obvious one.

My conclusion is if there is a major revolt against the new standards it would mean that the previous changes in CAFE were more lagging than leading the consumers. 

How not to have a conversation

Best of the Web Today quotes Paul Krugman

This achievement will represent a huge defeat for the conservative agenda of weakening the safety net.

Paul Krugman is a person of some distinction.  It would be disappointing but not unexpected if somebody in the comment section made such an uninformed assertion.  Kevin Drum reminds us how that works.  When somebody of Krugman’s stature makes such a comment it becomes clear how difficult a task the US faces to save our safety net.

MWG does wish a pox on both the progressive and conservative houses.  It is our observation, however, that progressive leadership is more prone to such transgressions than conservative leadership.  That being said, it is a great idea to study but a real challenge to measure.  National Review Online is a conservative leader but not every word written on it reflects conservative leadership.  Not every word written should have equal weight and opinions have lots of humor and inside jokes.    Good luck with your research but until then be careful about assigning motives to folks.  As an example, folks who want to increase the minimum wage don’t hate (or love because they want more) poor people.  They have other, usually undisclosed, goals.

Smoking on a Train

MWG watched The Lady Vanishes on PBS.  It, as the host intoned, isn’t Hitchcock but it was entertaining enough that I hope Tuppence and Tom do the sequel.  I’m not interested in reviewing the show but in the ubiquity of smoking and how regulation works.  In the dining room, in the train compartments, and in the hallways there was lots of smoking.  It was even a plot device as Iris (Tuppence) uses a cigarette to burn a person that might be trying to accost her.

For most of the 20th century smoking was allowed almost everywhere.  Among other things, it was a positive sign of status.  Around 1990, smoking had been ended in our classrooms but the common areas in the building were positively blue.  A group was looking to ban smoking in the building.  It took time but eventually there was enough support to lead to the banning of smoking in all buildings. It has been a successful regulation because there was popular support for the change and the change was not global so that there were very limited problems with enforcement.

Sidebar: There are serious concerns about pure majority rule.  See, for example, Morsi’s Egypt.  We do, however, need to recognize that forbidding smoking on trains is different from burning churches.

So, to summarize, regulation can be really effective when it has substantial support before the regulation and the regulation does not go too far.  MWG has always felt that the term limits movement has snatched failure from the jaws of victory by asking for too strict limits.  The same goes for you folks that want to ban smoking outside.

Liberals versus Conservatives

EJ Dionne’s op-ed starts with an astonishing sentence:

In thinking about inequality, we tend to focus on practical remedies such as raising the minimum wage or supplementing the income of the working poor.

I have not seen a sentence that identifies the gulf between liberals and conservatives as well as this does.  Conservatives might start with, “Markets are the best solution to any economic problem. ”  Mr. Dionne’s thinking comes right  from Aerosmith.  Most folks thought Ten Years After was intentionally ironic.  Let’s parse the sentence !

He starts with, in thinking about inequality.  What do we think about inequality?  Is it finding the magic gini coefficient?  Do we care about income inequality other than it does not exceed reasonably wide bounds?  For example a gini coefficient of one means that income is equally distributed and zero means that one person has all the income.  Both of those outcomes would be unacceptable.  The conservative goal should be to increase income.  See question one from Steven Hayward.  There are problems in measuring income.  Fringe benefits are often left out and that omission presents a problem because the value of those benefits can change substantially over time.  In addition, the measure of central tendency presents problems.  A simple example of this is mean versus median.

He continues, a practical remedy for treating income in equality is raising the minimum wage.  I can assure you that Mr. Dionne does not want to intentionally increase inequality.  It hard to imagine that moving some incomes to zero will reduce inequality.  See Milton Friedman for a fun explanation.

We will supplement the income of the working poor.  So there are two possible practical solutions: government regulation and government transfer payments.  

To summarize Mr. Dionne point of view:

  1. Income inequality is a big economic problem
  2. Government is the only solution to economic problems.

His one astounding sentence explains why there is difficulty in finding middle ground between liberals and conservative.