Wednesday, October 20, 2010

Fiscal Faux-Conservatives...

In a review of a new study published in the journal Health Affairs, David Leonhardt throws down a pretty rigid gauntlet of fiscal challenges for the country, and particularly republican politicians:

"We are now in a political campaign in which everyone seems to talk about cutting spending without offering many ideas for how to cut spending. When the campaign ends, all that talk won’t balance the budget. Neither will cutting waste, fraud, abuse and foreign aid. Nor will ending the war in Afghanistan and the Bush tax cuts for the rich.

Policies like those can help shrink the deficit, yes. Raising taxes and tweaking Social Security can help even more. But you probably can’t call yourself a fiscal conservative unless you are willing to support changes — that is, cuts — to Medicare"

His link goes back to a recent piece he wrote about how unwilling republicans are to own up to the fact that their campaign promises and rhetoric are completely inconsistent.

The Democrats of course haven't offered any huge plans to reduce spending - I give them credit for passing comprehensive health care legislation, but that is truly a baby step towards introducing the powerful incentives the system will require if the subsidy is to remain affordable. Instead, they will surely raise taxes if push comes to shove. This is definitely more honest and responsible than cutting taxes and making superficial changes to spending, ultimately bankrupting the country.

Monday, October 11, 2010

Markets for Education

Today in the NYT, Jeremy Dehn, who teaches film and video production at the University of Denver, the Art Institute of Colorado and the University of Colorado at Denver, makes a pretty convincing case that adding a "gainful employment" rule that prevents for-profit colleges from earning revenue without delivering improvements in economic outcomes for students is a good and necessary thing.

He won't find any disagreement here. Instead, I'll expand on some of his commentary to discuss how markets help and hurt in education. I'm sure a knee-jerk reaction to this issue in the "smaller, less, weaker government" circles is that the government is getting what it deserves for meddling in the market for education. This would be the wrong conclusion.

An important thing to realize about education is that it is usually not a component of consumption. In most cases, education is an investment, not different from an upgrade of physical capital that makes a factory more productive. Of course, some people take courses for fun and don't apply their learning in the workplace, but this is surely an exception.

Consumption vs. Investment is an important distinction to make because generally speaking private markets for consumption goods function well - people know what they want, value it appropriately, and private parties are able to profit from serving these needs. Alternatively, markets for investment and risk do not always function well. Short-sightedness and risk-aversion dominate individual preferences in these markets, so the collective outcome that can be expected from private markets is suboptimal.

Fully factoring the costs of education, many individuals would not be willing to take the risk of financing education, and most investors would be reluctant to offer financing on affordable terms. Who, other than a good parent, would be willing to finance the education of a five year old, who wouldn't be able to pay back any loans for at least 10 or 15 years? And even at the age of 18, many students who would benefit from increased education will avoid school because the costs are too high. This is the basis for subsidies at all levels of education.

Now of course if the government subsidizes something, and there are private markets that expand to take advantage of those subsidies, things quickly get out of control. Look at the housing and health care markets for a recent and ongoing example, respectively. All the capital that as been privately directed to expanding schools, building homes, and advancing the medical industry is used for these purposes because the government has signaled quite clearly that it intends to pay for these things for more people. The government platform for decades has been expanded access to health care, home ownership and affordable education. We have completely overstimulated these sectors, because appropriate balancing mechanisms were not put in place, and policies were poorly designed.

The issue with education is actually quite similar to the health care problem in many respects. Our well intentioned and necessary market intervention to expand access is in no way tailored to the purpose we are really seeking. We pay private providers for education and health care services regardless of outcome. So their incentive is simply to maximize revenue and reduce costs. Quality and outcomes are not direct financial motivators, so we rely on altruism on the part of doctors and teachers to achieve the actual effect we are seeking - be it healthier or smarter people. I might even argue that doctors and teachers are some of the most altruistic professionals, but even still, with all individual and structural incentives directed at market expansion, the subsidy overstimulates, drives up costs, and quickly appears unaffordable and not worthwhile.

So I conclude with a fairly banal point - we can and should privately organize to deliver goods and services that are publicly financed and subsidized, but we must reform the subsidies in all cases to direct profit making activities towards the ultimate purposes of our policies.

Wednesday, October 6, 2010

Can the Government Create Jobs? or Wealth?

This morning at Baseline, a guest blogger, Lawrence Glickman from the University of South Carolina, places a historical context around the state's role in promoting fair markets.

As he highlights, the disconnect between the conservative narrative of the state's minimal role in promoting economic activity and progress, and the historical reality that this role was actually huge and remains so, is of course convenient as a propaganda tool for those who have so far succeeded in claiming a greater share of the national wealth for themselves since anytime since the 1920's.

I completely agree with him, but would challenge him to go further. The minimalist state narrative, false and absurd as it is, actually gives far more credit to the government compared to the prevailing doctrine espoused by the faux-populist Tea Partiers and recast Republicans.

Last night on Lawrence O'Donnell's new MSNBC show, The Last Word, Michael Steele, a traitor to his race and a sycophantic cheerleader, while embarrassing himself by not knowing what the federal minimum wage was, stood by a previous statement he made that "Government has never created a single job."

While demonstrably false - the government created the internet for example, which I hear has created a few jobs - there is a deeper problem with this sort of anti-government rhetoric. In the original exchange, which dates to Jan 31 2009, Stephanopoulos admits he doesn't understand the distinction between a government and a private job. Steele, fool that he is, obviously doesn't either, because he basically claims private jobs last longer. Absurd. I will try to explain for Steele the argument he is unable to make, and then debunk it.

The underlying corollary to the idea that government can't create jobs is that socially organized economic models are incapable of creating wealth. No one would deny that government can spend money and put people to work. What Steele is really suggesting is that in any circumstance where this happens, it is a waste of money and a drain on the nations wealth/utility/happiness etc. Following from this, one must argue that police, firemen, teachers, garbage collectors and the whole host of services provided by the government actually destroy wealth, and generate less benefit for society than their cost.

To be clear, I firmly believe competitive markets, with the right structures and conditions, do a better job channeling labor and capital to achieve desired ends. But as noted in the previous post citing Kaletsky, "markets investors are often short-sighted, fail to reflect widely held social objectives and sometimes make catastrophic mistakes." In these instances, the desired outcome may simply not be independently achievable under current market structures, and an active role for government can certainly create wealth.

Now there are plenty of government programs that are wasting money, or are at best on the margin in terms of wealth creation, and these are in need of reform. However, if you believe that fundamentally the government cannot create wealth, then there is no case for reform, instead one must call for abolishing those enterprises, including the government itself. Maybe Steele believes so much in the power of the market that he thinks it would trump the anarchy which would result from following his assertion to its logical conclusion , but I sincerely doubt he is intelligent enough to realize the consequence of his position. I mean, he can't even make his own argument. He thinks the difference is that private sector jobs last longer and come back.