Tenure

The institution of tenure for school teachers is merely the product of our dysfunctional public school system. It is curious that this practice exists almost exclusively in the education industry. Why is this? Why do we think that school teachers are in need of more protection than any other class of workers? If it is important to protect teachers from the whimsical and capricious actions of their supervisors, it must also be important to protect other professionals. In fact, why don’t we make it impossible to fire anyone after a few years on the job?

The very obvious reason that this practice does not exist in any other industry is that it is horribly inefficient. It encourages good behavior and effort only up until the time when tenure is granted. Afterwards, the rational individual will work just hard enough to not be fired (although certainly there are motivated individuals who will always do their best). In most cases (especially in education), that is very little effort indeed. That is why there are so many complaints about ineffective, tenured teachers that do barely enough to scrape by.

If there ever was a problem with teachers being fired for reasons unrelated to performance, it could only happen because consumers (parents and their children) have no other options. When parents can remove their children from a school if the quality suffers, the administrators have a powerful incentive to keep the best teachers, regardless of whether they like them. Once the public school system removed the consumer oversight that only a free market can provide, administrators could play favorites with teachers with no thought towards losing customers.

Why We Don’t Need the Post Office

The Post Office, along with the DMV, is a favorite target for proponents of small government. The reason I am going to rehash some of those arguments in favor of privatizing the Post Office is that it happens to be a very concrete example of a government program that can be made better and less costly by taking it out of Washington’s hands.

One of the primary arguments for a government-run Post Office is that if it is placed in private hands, there is no guarantee that everyone in America will get mail service. A for-profit company may decide that it is simply not rational to deliver to Nowheresville, Montana. This is undoubtedly true, but not the problem that some believe it to be.

When I send a letter through the Post Office (which holds a monopoly on First Class mail), I pay the same price no matter what its destination is. However, the cost to the Post Office is very different depending on where it is being mailed. Paying a mailman (and an entire Post Office branch) to deliver to a town of 300 people is very expensive. Yet the people living there pay no more to receive or send letters than I do, despite the fact that I live in the eighth largest city in America.

In effect, I am subsidizing the mail service of those individuals who live in these rural areas (and those who send mail to them). A private company would naturally charge higher rates to those who cost them more. This price discrimination would allow them to lower the price for people like me, making First Class mail cheaper than it is now. Mail service would still exist for those that live outside of big cities, but its price would accurately reflect one of the costs or living in the country instead of the city.

One of my favorite arguments for the abolition of the government-run Post Office is the absurd practice of not delivering mail one day out of the week. If private companies were allowed to compete with the Post Office, I have no doubt that competition would immediately push providers to deliver all week long. This would benefit everyone, and the only reason it does not currently exist is because there is a government mandated monopoly.

Making Education More Affordable

There was an article in the State Press (ASU’s newspaper) recently about student groups pressuring congressmen to help make college more affordable for everyone. Normally I ignore everything in the State Press except the crossword and the word jumbles, but this one caught my eye because this argument is made quite often. It goes: a college education is getting more and more expensive; therefore, Congress, or state legislatures, must give more money to young people (and of course, taxes must go up).

What puzzles me about these arguments is that there is a very simple alternative to taxing some people to let others go to college: pressure the universities to lower their costs. This changes the transaction from one involving coercion (government forcibly taking money from some and giving it to others) to one of voluntary agreement (the college/university can lower its prices or risk losing students or bad media attention).

The simple reason why student groups would not utilize this method is that a reduction in the price of something necessitates a reduction in the level of service. Rather than lower the quality of the university they are attending, it is more rationale for the student groups to pressure government institutions to spend other people’s money to help still others pay for college.

Paying Interest For Nothing

One of the classes I am taking this semester is Public Economics. It examines the role of government in the economy, and how its goals can be accomplished with the least amount of economic efficiency lost. I’m really excited about the class, not the least of reasons why being that my professor describes herself as “fiscally right of Genghis Khan.” Nice.

Anyways, the first few days we have mostly focused on historical trends in government spending, taxation, and Gross Domestic Product. There was one trend in particular that I noticed and wanted to comment on.

One of the economic stories that we are constantly bombarded with is the fact that America is borrowing hoardes of money to finance its deficit spending. Far be it from me to argue with that, and I think it’s undoubtedly true. However, the amount of interest that we pay on our debt as a percent of GDP is at almost the same level that it was in 1959. It has increased only 2%, from about 8% of GDP to about 10%, in the last 50 years.

However, interest payments by themselves are nothing to be concerned about. In fact, I will be paying a very large amount of interest on the loans that I have taken out to pay for college. I cannot afford to pay for college myself, therefore I must borrow money and pay for the privilege of  doing so. This doesn’t bother me because I know the returns from going to college and to law school far outweigh the amount that I will pay in loans. More generally, borrowing money is not a problem unless the capital borrowed isn’t generating as much value as you pay in interest.

That seems to be the position that the federal government is in. In 1959, when interest paid was 8% of GDP, government was spending 60% of its revenue on consumption (actual goods and services). If the government is receiving good value for its money, (i.e. high quality infrastructure, planes for defense, returns on healthcare, etc.) then the interest payments are worth the price.

What we see now though is that government spending is 60% transfer payments. These are payments to individuals where the government requires nothing in return. Social security, welfare payments, and Medicare especially are just transfers from the the government to its citizens. Therefore, the government does not receive any return on the money that it spends. It can’t possibly recoup the interest that it must pay in order to spend this money.

The main point of this is while the amount that we pay in interest as a percent of GDP is relatively unchanged, the return for the government’s investment was much higher 50 years ago than it is today.

 

[So I am not entirely sure about my arguments here, anyone think I'm way off? Anyone agree with me?]

Education for the Poor

This is a long one. Originally it was supposed to be my speech for the Koch policy presentation, but I ended up taking mine in a different direction. I had this left over, and thought I would share. You might want to read it in several parts, or just carve out fifteen minutes or so to read the whole thing.

 

It is a sobering fact that the foremost reason most of us are sitting in this room is we were fortunate enough to be born in a country that is able to educate its children well. For all of the problems with the American education system, it is a beacon of excellence compared to much of the world.

 Lack of human capital is the primary reason why poor people stay poor, and why poor countries stay poor. Despite technological advances around the world, these third world countries cannot achieve the growth in standards of living they so desperately need. An inadequate education system is a stone ceiling above the heads of citizens trying to improve their lives.

 Recognizing this, the United Nations created the Millennium Project, an ambitious venture headed by economist Jeffrey Sachs. One of the explicit goals of the project is universal primary education by 2015. This should be applauded. No country gains by having others languish in abject poverty. In fact, all nations can gain by having new markets for their goods and increased competition in a global economy.

 Unfortunately, the development experts are attempting to achieve universal education in the wrong way. They insist that government-run schools are the only way to bring about this revolution of education. In many countries around the world (especially developing ones), private schools are seen as pariahs in this quest. According to education experts, private schools can play no role in educating the poorest members of society. Only government-run schools, and the requisite billions of dollars in international aid, can ensure that everyone receives an adequate education.

 While this happens to be the pervasive view in most every country on Earth, it also happens to be completely wrong.  To be sure, the posh private schools located in the middle of the Hamptons or Bel Air would not be much help to the poorest people of India or Africa. Unfortunately, most people cannot envision a private school that serves the needs of anyone else. James Tooley’s book, The Beautiful Tree, details at length his experience with private schools for the poor in the poorest areas of developing countries.

 When one typically envisions a private school serving the poor, what comes to mind is a filthy hovel with a few emaciated children crowded around a dilapidated chalk board without textbooks or writing materials and taught by a teacher who can barely read or write himself. Whatever the proprietor is charging for tuition is going straight into his own pocket, while he provides the lowest level of care for his charges. This is the view held by the same experts that demand government-run schools. No one will deny that a private school for the poor will not have expensive buildings, up-to-date computers, and fancy textbooks. But to assume that these materials are necessary to a quality education is to completely miss the point of education.

 The reason Westerners assume all schools should have the resources mentioned above is because Western schools have them, and Western schools have them because it is believed they will lead to a higher quality education. But what if that isn’t necessarily true? What if the attitude of the proprietors and the quality of the teachers are what really affect student achievement? Tooley’s survey of public and private schools in developing countries confirms this to be the case. Despite spending a fraction of what public schools spend per pupil, private schools have better results on standard examinations.

 For an economist, the reasons for this discrepancy are readily apparent. In most countries, government-run schools are controlled by powerful teacher’s unions and corrupt bureaucrats. This leads to considerable deference to teachers, a large many of which use the latitude to sleep during class, read the newspaper, or just not show up at all. Since principals and administrators must go to incredible lengths to fire them, a large amount of students are left with apathetic instructors.

 Contrast the above situation with what we know of private schools. While they may not have the best equipment, they have dedicated teachers and administrators who ensure that everything possible is done to aid the pupils. Why is there such a difference between private schools and public schools? Because the owner of a private school knows that if his teachers do not show up for work or his students are not learning, parents will take their children to another school. This accountability is sorely lacking in public schools.

 It is not surprising that poor and developing countries rank among the lowest in international measures of educational achievement. We should all be concerned by this, and the global economy can only gain from universal primary education. But we should also be very skeptical of the claims that only government-run schools can provide this education. The same development experts who recognize the short-comings of government-run schools are the first to insist that they are the only way forward. But if private schools can provide better results at a fraction of the cost, shouldn’t the governments do more to support private schools?

 In fact, private schools can be most helpful in rural areas, which constitute a large part of developing nations. The reason for this is that the government simply does not have enough money to put a government-run school in each village, and the villages can be many miles apart. Thus, any place that the government puts one of its schools will only reach a handful of students. Private schools are erected with very little infrastructure. Many times it is simply the home of the proprietor, or perhaps an addition to the home. No government funds are necessary, and every structure is a potential school.

 These private schools allow the villagers to gain some measure of education, since oftentimes walking to the nearest government-run school is not an option. By banning such schools, or subjecting them to regulations that the owners have no way of complying with (large playgrounds, expensive equipment, teacher certification, etc.), the government is denying education to vast swathes of its rural population.

To be fair, many of these private schools do stay in existence despite government bans or overbearing regulation. But the only way for them to operate in such an inhospitable regulatory climate is through bribes. Many of the private schools that Tooley encountered in India and Africa are forced to pay hundreds or even thousands of dollars (in local currency) in order to stay open. This exacerbates the problems of trying to provide education for the poor, since the owners of the private schools must charge more in tuition in order to cover the bribes.

 Quite possibly the most compelling reason to support an increased role for private schools is often used as a criticism: they undermine government-run schools and therefore the government. Poor countries are usually not poor because of a lack of money. Billions of dollars in aid flow out of developed countries and into developing countries every year, with few noticeable results. Yet we are constantly told that the problems can be solved if only we give more money. (Sound like the public school system?)

 Why does this happen? Because the charitable efforts of the developed nations are thwarted time and again by the corrupt and inefficient governments that handle the aid money. Without a paradigm shift within developing nations everywhere, there is no reason to think that billions more in aid for government-run schools will do anything meaningful besides enrich the administration in power.

 This same logic applies to any country, not just poor ones. Government officials have every incentive to siphon money into pet projects or to family members, rather than actually directing them towards the purpose they were designated for. The United States happens to have some of the most honest officials in the world, so we find it shocking that all of our aid money is diverted to those in charge, instead of those in need. A true solution to education and development problems should not involve large sums of foreign money.

 Instead, it should create incentives for institutions like private schools. Private schools need no outside aid whatsoever. Loans would certainly be helpful, but this can be accomplished by microfinance organizations operating outside of government interference. Using companies, as opposed to governments, would ensure not only that the schools and villagers are self-sufficient, but also any aid that does flow into the country actually reaches those who need it.

 As detailed above, most countries are not supportive of private schools. The schools are subjected to unreasonable demands by government inspectors, intrusive and overbearing regulations from the state, and ridicule and contempt from the education “experts” of the West. This presentation should not be interpreted as a call to overthrow public education in developing nations, or anywhere for that matter. Instead, it is merely a proposition in support of a greater role for private education in serving the needs of all those that need educating.

Airport Terror

Hello loyal readers.

Sorry about the week-long hiatus. I was in Washington D.C. for a while for the closing of my internship. It was a great time, but I was so busy that there was no opportunity to write. I have some great ideas for entries though, and I’ll ease back in with a short one.

In the course of my travels to and from D.C., I spent some time in four different airports: Sky Harbor (Arizona), JFK (New York), Atlanta, and Reagan (D.C.). In several, I remember hearing an announcement about the current TSA threat level: orange. No context was given for why it’s orange, why orange is bad, or what we should be doing differently than if it were one color lower (yellow?) or higher. So in my opinion, here’s what the announcement should actually say:

“Attention passengers, the TSA would like you to know that today’s threat level is orange. We really don’t know what that means, and neither do you, but it sounds sufficiently menacing ennough to make you wonder if you are in danger. But despite the apprehension you might feel at the moment, we certainly would not want you to change your behavior in any way, and for God’s sake don’t stop flying. Ceasing to do that would be helping the terrorists destroy the freedoms that they hate about us. Therefore, go on with your lives as usual, but with the nagging fear of a catastrophic attack and the certainty that only the government can save you from it. (Oh, and to do so, we’re going to need more money and more control over your life.)”

What are the chances the TSA steals this post and uses it for their next script?

Property Rights

Lately I have been struggling with a very basic philosophical question. Are individuals obligated to respect the property rights of others? Put another way, is there any reason to not steal/kill/rampage besides the threat of retribution? Jeff’s recent post led me to write all this down, but the impetus for this inner monologue was a Saturday afternoon at the movies. Here’s what happened:

A friend and I were talking about seeing The Hangover, which she had never seen. Our plans happened to coincide with  the opening of Bruno, so I suggested we purchase tickets for Bruno (they would be checking stubs, since it just came out) and then afterwards just walk into The Hangover. Thus, two movies for the price of one.

My rationale was simple: the movie theater has the burden of keeping us from being dishonest. If they were really concerned about this practice, and conceivably we could have walked from theater to theater all day, they simply have to post an attendant at each theater at all times to check stubs. Problem solved. The reason the movie theater owners do not do this is it is cost-prohibitive. They are counting on each of us to be honest, and they recognize that the policy is only necessary on a popular movie’s opening weekend.

It cannot be denied that the movie theater has the right to prevent me from stealing movies in this manner. They pay the costs of distribution, and they are entitled to determine who is allowed to see the movie. If we want a more theoretical example, let’s imagine a simple society where you only have two rights, the right to yourself (no one may kill/hurt/imprison you without your consent), and the right to your property (no one may take it without your consent).

It is generally agreed that if you have a legitimate right to something, you can defend it by force. For example, if someone is attempting to kill me, I can stop him. This is all well and good, and I have no disagreements. But in this situation, the primary reason I would have for not attempting to kill one of my fellow men would be the possible consequences of my actions. Or if we consider stealing, I would only respect his property rights so long as he was watching me. There would certainly be a dilemma if I found a valuable item unattended.

So does he carry the burden of protecting himself and his possessions? Or do I carry the burden of respecting his personal and property rights? I believe the former to be true. Property rights exist only so long as we are willing to defend them. A man that abandons his property, or abandons himself (suicide bombers, hunger strikers, etc.), is not entitled to them anymore. While the cost to society is higher in the first situation (think of all the time and energy spent on defended yourself and your property), it is precisely this reason that government comes into being.

To believe the latter would presume too much of individuals. Enforcement mechanisms work better on some than on others, but generally the fear of retribution is what drives behavior. I do not believe that a world in which this mindset dominates would be incredibly violent, as some of you might be thinking. The deterrent against theft and murder, the forfeiture of your own life or property, still exists. There is just no presumption of saintliness on the part of the individual.

New Car: Rational or Unprincipled?

As I mentioned in my last post, I took advantage of the “cash for clunkers” program – a program I completely disagree with. As the Wall Street Journal explains, this program is crackpot economics. It will not increase net wealth and amounts to “destroy[ing] a perfectly serviceable asset in return for something he might have bought anyway.” So am I a hypocrite because I took advantage of a government subsidy I completely disagree with?

Before any decision, it is always important to ask “what is this going to accomplish?” If I chose not to take advantage of this program, would my defiance have had any effect? No. The allotted money was spent in a week and if I didn’t take that money someone else would have. The Journal piece also makes a very important point: Americans are not stupid. I was going to buy a new car next summer anyway, and now I got one for significantly cheaper.

There are a lot of things the government does that I disagree with, and it would be nonsensical for me to avoid every one of them. I don’t think the government should give me subsidized student loans, but I take them. I don’t think the government should have given me a stimulus check last year, but I spent it. It boils down to the fact not taking these things would hurt me significantly, while having no effect on the overall policy.

That does not mean I would advocate for these programs. In fact, I advocate against them. While my advocacy may not make economic sense, this is where I feel principles do play a role. When my actions start to have an impact (even minor) on the policy, that is where I draw the line.

Right to a Home?

Regardless of how you believe the financial crisis came about, Congress’s insistence on providing incentives for all Americans to own a home played a large role. Even while the housing market crashed due to the large amounts of buyers that simply could not afford their homes, large tax rebates are offered to first time buyers. My question is: Why?

A specific house is just another good available on the market. Those that cannot afford them should not have them. We apply this logic to all other goods; we don’t subsidize people who get expensive televisions from rent-a-center, nor to we typically offer large subsidies on car ownership (cash for clunkers being a very specific instance).

Now, only a very cruel individual would say those without any housing at all deserve no support. My heart goes out to the millions of Americans who lack shelter each day, and I think that government may even have a legitimate role in providing housing (although public housing is a dismal failure). But I do not understand the sentiment that these people should own a home rather than rent it.

Renting exists for a reason. Some people simply do not have enough money to make a large purchase at one point in time (home, car, etc.). In order to enjoy these goods, they borrow them from someone who does have them. They then compensate the original owner for the privilege of using the product. This is a completely natural arrangement and has existed for thousands of years.

But when Congress decides that home ownership is a policy that should be promoted by the government, and when they disburse money to further that policy, individuals do not feel the full costs of their decision. The large number of dubious loans that were promoted by Congress to allow people to “own” a home who otherwise could not afford one exacerbated the housing bubble, eventually contributing to many of those same people losing their homes. Just another example of the law of unintended consequences.

Nonsense from the Treasury

Articles like this one: http://online.wsj.com/article/SB124934399007303077.html make me wish I was actually in a position to change things.

In it, Tim Geithner, the Treasury Secretary, is described as unleashing an expletive-laden tirade at several of the current financial regulators, including Ben Bernanke and Sheila Blair. Their offense? Stalling the new financial regulatory overhaul that Obama is making such a top priority.

Like good bureaucrats, the heads of the Federal Reserve, Federal Deposit Insurance Corp., and the Securities and Exchange Commission are all worried about the implications of the regulatory overhaul. Specifically, will it diminish the amount of power that each of them wield?

An increase in overall regulation seems a foregone conclusion at this point, but who gets the new power? Many of the proposals center around increased authority for the Fed, while some call for an entirely new board of regulators. None of this is surprising considering the misplaced blame for the financial upheaval, but what is surprising is Geithner’s reaction in the meeting.

Apparently he expects each of the individuals in power now to willingly cede some of their power to a new entity. This view directly contradicts all available evidence regarding bureaucrats and politicians. Each agency is desperate to increase their power, not give it away. To hope for anything else is willfully ignorant on the Treasury Secretary’s fault.

But wait, there’s more.

Further down in the article, White House Chief of Staff Rahm Emanuel is quoted saying: “We need to make sure we don’t slip back to risky behavior where the institutions have all the upside and the taxpayers have all the downside, which is why we need regulatory reform.”

He conveniently fails to mention that is was the government that began this process of privatising profit and socialising risk. Without the bailouts of the auto groups and the banks, the taxpayers would not have the downside that he is so quick to condemn. If the Administration could just let go of the mistaken belief that they can regulate all fluctuations in the market away, the socialising of risk would vanish.