New York Tuition

This is going to take several posts.  Governor Cuomo announced (h/t Instapundit):

New York will be the only state in the country to cover four-year public college tuition for residents after the program was included in the budget package approved Sunday night.

The state’s Excelsior Scholarship program will be rolled out in tiers over the next three years, starting with full coverage of four-year college tuition this fall for students whose families make less than $100,000.

The income cap will increase to $110,000 in 2018 and $125,000 in 2019.

It will cover 80 percent of NY residents.  We are trying to find out more information as the details always matter.  For now let’s consider demand and pricing.

Yes, demand curves slope downward to the right so at a price of zero demand will be higher than it currently is.  The current price is $6,470 so this will have a big impact on demand and the NY budget.  If all of the out-of-state and international enrollment is undergraduate then NY undergraduate headcount enrollment is about 360,000.  Taking 80% and making a big adjustment for part-timers, let’s say there are 200,000 undergraduate full-time students in the system. This would cost 50,000 * $6,470 in the first year or $323 million.  That would explain the entire 6.3 percent increase and then some.  Of course, people don’t complete in four years so our estimate might be high but it seems reasonable to us.

So there will be much greater demand for SUNY from NY residents.  That means more rejections by admissions.  High demand schools will be able to raise admission standards.  Those schools will be happy but the rejected folks will not.  There will also be the within school demand to consider.  Will these financially motivated folks be interested in financially rewarding majors?  That seems likely.  That means that places like the business schools are likely to see increasing demand.  Unless they get resources they will find ways to turn away students.  We know at least one business school that uses a sliding admission standard to admit the number of students they want as juniors.

Pricing is another way that business schools and other in demand programs use to control demand and provide resources because most in demand programs are high cost.  They are, in part, high cost because the faculty are in demand and, consequently, high priced.  Business schools have surcharges to pay the cost of the programs and discourage less motivated students.  We wonder how the NY scholarships will deal with such surcharges.  It is like insurance.  If the students don’t pay they they won’t care.  If the state pays then there will be a great incentive for programs to add surcharges.

In short, making college free is going to put incredible stress on the SUNY System.  There will be more rejections in admissions.  There will be stress on programs to get resources or control numbers.  Given that the state budget increase seems insufficient to pay for the “scholarships,” it is going to be a hard year at SUNY schools.  We are glad we are retired.  We can tell recruiters for any SUNY program in advance that we are not interested at any price.

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Henke’s Idea

Steve Hanke at Cato has a good idea:

To stop Venezuela’s death spiral, it must dump the bolivar and adopt the greenback. This is called “dollarization.” It is a proven elixir. I know because I operated as a State Counselor in Montenegrowhen it dumped the worthless Yugoslav dinar in 1999 and replaced it with the Deutsche mark. I also watched the successful dollarization of Ecuador in 2001, when I was operating as an adviser to the Minister of Economy and Finance.

It is a good idea but monetary policy is not the only lever available and inflation is not the only problem in Venezuela.  Dropping Chavismo,

Sidebar: WordPress really wants to convert Chavismo into Charisma.  We hope that it stays as we wrote it.  End Sidebar.

Venezuelan socialism, would be a great idea.  The advantage of Hanke’s idea is that it is easy to implement but a real blow to the current Yankee hating administration in Venezuela.  Renouncing Chavismo would be more important but way more difficult.  The current state of affairs may lead to both.

Duh … But

Michael Tanner has one of those articles on prescription pricing that makes you think, “Duh, that is too obvious for you to write” but then you realize “But if it is that obvious how come it doesn’t happen?”  Michael’s sensible recommendations are they we reform the FDA’s drug review policies:

And finally, we can inject more consumer choice into the health-care system by expanding health savings accounts and transitioning Medicare to a system of premium support. Nothing more effectively disciplines a market and forces down prices than engaged consumers spending their own money.

We should also recognize the pricing problem built into the economics of drug production.  Generally, drugs have enormous fixed costs that are paid upfront but the variable or additional cost of producing the drug is modest.  As long as one market (usually the USA) pays the full cost then everyone is better off if the maker sells the drug above variable cost in markets that can be separated from the main market.  Thus, other countries can get the drugs for less than the USA.  The market USA benefits because it becomes more likely that drugs are developed and prices would be even higher if there were no outside sales.  It would be nice if consumers in other countries were paying full price but at best that will happen sometimes.

Remembering Venezuela

The NYT reports:

To add insult to injury, the Venezuelan government has been forced to turn to its nemesis, the United States, for help.

Just to remember, Venezuela has the largest oil reserves in the world.  Despite this, it is buying oil from the United States!  It is hard to say if this is good news.  The citizens are suffering terribly but this disaster might lead to regime change.  Speaking of regime changes that we’d like to see:

But those profits have evaporated with mismanagement and the drop in global oil prices over the past two years. Now, even Venezuela’s subsidized oil shipments to its vital ally Cuba are slowly being phased out, oil executives with operations in Venezuela contend, forcing Havana to look to Russia for cheap oil.

The citizens of Cuba and Venezuela have had to undergo the awful application of socialism.  Perhaps the failure in one country will lead to changes in both.  We can hope.  It seems unlikely that Putin and Russia have oil to sell cheaply so Cuba will have even more problems.  We wish we could see the current President (mi amigo) or the next President helping the citizens of these two countries but the current President is out of the question and the two candidates for the next seem highly unlikely to have the leadership necessary.

Strange Lede

The Hill reports:

In a blow to the healthcare law, Aetna — one of the largest health insurers in the country — announced Monday that it will significantly scale back its presence on the ObamaCare marketplaces next year. [emphasis added]

The lede has it exactly wrong.  Aetna is reeling from trying to comply.   The healthcare law, which one is that now, is forcing higher prices and lower profits.  A bit later on:

The mix of ObamaCare enrollees has been smaller and sicker than expected. Some experts say that insurers also set their premiums too low. Premiums are expected to rise more sharply in 2017, which could help insurers address some of the losses.

That is a neat trick.  But Aetna’s decision is not the blow to the healthcare disaster named after our current president.  It is a disaster because it was set up poorly causing decisions by the policy sellers, policy buyers, and regulators to cause this mess.  Aetna did not do it to Obamacare.  Obamacare did it to Aetna and the rest of the country.

Funding Sports

Those of us that remember when a $100,000 ball player was a big deal are accustomed to sports salaries and prices increasing at phenomenal rates.  Clay Travis has a thoughtful column on why it may end soon.

Sidebar: According to Travis every cable/satellite subscriber, like MWG, is paying $30 a year for the NBA.  Since we watch no basketball of any kind in the house ( we know it exists because we see it elsewhere) we are interested in a different pricing model.  If we could trade handball for basketball it would be a deal.  End Sidebar.

The cause of the shortfall is that ESPN has gone from 101 million to 89 million subscribers over the past five year.  Travis uses an idea from Sports TV Ratings that identifies the losses in three area: death (us old folk are likely to subscribe), cord cutters, and cord nevers.  The demographics make sense to us.  Therefore, the extrapolating the drop in ESPN revenues is not as unreasonable as most extrapolation is.  ESPN’s Monday Night Football contract expires in 2021 when they are estimated to be down to 73 million subscribers.  Something will have to give at that point.  We don’t have the price elasticity data on subscriptions but we are of the belief that a sharp increase in prices will lose lots of subscribers.  So the reckoning on sports revenue will could come in the next five years.  It will be ugly if it happens.  Nobody wants less.

We think Travis’ vision is pretty likely but there are a couple of reasons to think it won’t happen.  We could go to a world-wide model where the numbers in emerging countries like China and India allow for a cord solution. ESPN could have many channels if it had a billion subscribers.  Rational economic policies cannot be taken for granted (see USA).  Another alternative is that teams will find a new revenue source that is not tied to the cord.  It is not our area of expertise but it is certain the teams will find new sources of revenue.  One issue is the amount.  Will the additional revenue make up for losses to the cord?  The other issue is control.  If you have the cord you have seen the Real Madrid advertisement.  Will teams control the revenue or will leagues control the revenue.  We might end up with three or four real teams and a bunch of teams that provide competition.  Travis is right big changes are ahead.  They might be the ones he envisions or they might be very different.

 

Paying College Athletes

Howard Chudacoff says Let’s Not Pay College Athletes at the WSJ.  He has an interesting argument that they are already treated like royalty.  They have special food, tutors, and almost everything that money can buy except money because cash payments to athletes are forbidden by the NCAA.  For example, at Oregon:

The center furnishes each student athlete with a laptop encased, like the auditorium seats, in Maserati leather.

Chudacoff is making the envy argument.  We envy the athletes for their food, rooms, and Maserati leather so we shouldn’t care if they are exploited.  It is the argument from 50 years ago about baseball players: some were making more than $100,000 a year and all are making good money for playing a game.  Therefore (?) they don’t deserve their freedom.  We don’t find the envy argument convincing in either case but the relationship between players and schools Division One college athletics is an over regulated hornet’s nest that makes rational analysis more difficult than it was in baseball.

Let’s consider three issues related to paying Division One college athletes (CA): what each CA is worth, the effect of the current regulations, and what to do.  First, if we were to pay CA what they are worth, there would be massive income inequality among CA.  Many sports generate little or no revenue while basketball and football generate almost all of the revenue.  If we applied economics and each player earned his marginal revenue product, then, roughly, basketball players might earn X, football players X/5 (many more football players than basketball players), and everyone else zero.  Would women’s basketball exceed zero or would all women’s sports earn zero?  We have a difficult time believing that seven figures for a few athletes and zero for most of them will be the solution.  If there is payments to CA then it will be some kind of a union solution with relatively small payments to all CA.

Regulation by the NCAA and the federal government make it difficult to find a market solution for CA.  The inability to pay CA means that the money has to go somewhere.  Much of it goes to the coaches and other folks that the university can pay.  In most states the highest paid state employee is a coach.  Since CA cannot be paid, they can receive laptops in Maserati leather.  We might suspect that they (the CA) would prefer cash.  The regulations mean that the coaches, athletic directors, and such get lots of cash while the players get everything but.

Besides the NCAA, college athletics is also regulated by the federal government and, in particular, Title IX.  Title IX has led to mostly reductions in men’s sports as well as some expansion in women’s sports.  The economics are simple.  To make the bureaucrats happy it is cheaper to kill some non-revenue sports for men rather than add non-revenue sports for women.  A related way to solve the problem is to reduce the size large men’s sports.  This almost always means the football team.

We prefer market solutions but the relationship between players and teams in Division One college athletics is as far from a market solution as any system can be.  Creating a market solution would require a systematic change.  We would have lukewarm support for a small fixed (all teams and all schools) stipend for all Division One athletes paid by the NCAA so schools would not have an incentive to eliminate non-revenue sports.  It is far from a market solution that we would prefer but the current set of regulations make that difficult to get to quickly.