Rethinking the Morality of Our Economy

As we continue examination of last month's surprising election results and the transition to a new Presidency, there is a lot of writing and thinking about the role of the economy and different people's places in it. Many have pointed out the strong rural-urban divide (see this Brookings Institution piece, for example) and the apparent chasm between well-educated city-dwellers (who voted overwhelmingly for Clinton) and less well-educated rural folks (who largely voted for Trump). At least some of what fueled Trump's victory seems to have been a desire for jobs that once existed but are now gone, along with a perceived decline in living standards.

A lot of our national conversation about jobs and the economy rests less on economics than on a surprisingly deep and unexamined bed of moral assumptions. Consider, for example, this article:

Driverless 18-Wheelers Coming to Ohio

In many ways, this is a familiar story of automation displacing human labor. We have seen the same thing in heavy manufacturing, in coal mining, in the steel industry, in farming. Plants, factories, and farms than a few decades ago employed thousands now employ a few hundred - and are more productive than they used to be. Nearly 20 years ago Paul Kennedy identified robotic automation as one of the major forces that would reshape the world in Preparing for the 21st Century.

Every time we go through another cycle, there is always concern for the workers "left behind". There have generally been two answers to this problem. The first is "benign neglect" - let folks figure it out on their own, often by moving to places where there are more jobs, and/or sinking into poverty and despair. The second has been some variation of job training/education, to "retool" workers so that they are qualified to do jobs that haven't yet been eliminated by automation.

Deep underneath all of this is a root assumption far more moral than economic. If we start asking "why", we get a chain of logic that looks something like this:

Why do workers need to retrain? So they can get new jobs that pay well.
Why do they need jobs that pay well? So they can enjoy a good standard of living.
Why is a job necessary for a good standard of living? Because that's the way we distribute resources in our economy.
Why do we distribute resources according to the use of labor? .....

This is where we hit the moral bedrock - which automation technology may eventually cause us to reexamine. We assume that wealth must be attached to labor because ... well, because wealth distributed any other way would reward laziness. Why give people money they haven't earned? We can't imagine doing it any other way.

This notion that wealth or resources must be earned is fundamentally moral. It is based on a statement of what "should" be. It is entirely possible to distribute resources in other ways and on other bases, as the "basic income" movement argues. Many objections to that argument amount to moral repugnance rather than reasoned debate, which is why I suspect it hasn't gotten very far.

It should be pointed out that, even in our present labor-market-driven system, we are not purists about "earning". Children under the age of 14 or 16 or 18, for example, don't "earn" their keep by producing, yet few people would argue that they should. That was not true 150 years ago; we once had a system in which child labor was not only allowed but expected, and children as young as 5 or 6 were held to the same moral standards of earning as adults. We do not lack for alternative ideas, we just haven't thought about them much.

So why are driverless trucks important? Because the trend lines here are clear, even if their precise measure is difficult. We will continue to find more efficient ways to produce goods and services with less and less labor input. At the same time, our population isn't declining - it's growing, if slowly (speaking here solely of the United States - in some places, like Russia and Japan, it's shrinking). At the very least, we can expect population to level off and remain steady, which in the US means ~320 million or more people.

So what happens when those curves cross - when automation means that there simply aren't enough productive jobs for all of our workforce? Some "products", like art or music, can be produced in more or less infinite quantities, but the current labor market in those areas means that the more musicians or artists there are, the poorer all of them will be as they compete for a finite market.

The economic challenges that have surfaced through the US election are real. Promises to turn back the clock and "bring jobs back" aren't going to solve them - the trend lines aren't going back. Youngstown, Ohio is never again going to have thousands of steelworkers, no matter what kind of deals President Trump thinks he can cut.

Eventually, these curves will meet and we will be forced to rethink our most basic assumptions. We will have to stop defining people's value, in economic terms, on the basis of what they produce economically, because there will not be enough work for everyone to be productive. And that will require a moral shift, so that we cease to put "earning" at the center of our moral universe. That won't be easy, and maybe we won't manage it at all (although the alternatives are far more dystopian). But we need to start thinking about this now.

Two Visions of Economics

In watching the first Presidential Debate earlier this week, I was intrigued by the first half hour or so. The discussion, rather heated at times, focused on issues of economics: how we (government and/or society as a whole) can make the economy better, with more jobs, better wages, and rising prosperity for everyone.

What struck me about the candidates' exchange on this subject was not their policy differences. Truth be told, neither one offered much to actually answer the question, "How would you as President create more jobs?", and some time was spent actively evading questions like "How would you bring jobs back that have gone overseas?" If you were looking for solid policy proposals, it was not your night.

But what the candidates did say was quite revealing. While short on policy details, each candidate did make clear their views on how economics works. The contrast was remarkably stark.

In her opening answer to the first question, Clinton talked about cooperation and sharing - investing in workers, sharing profits, working together. The how wasn't there, but the basic idea was clear: economic progress comes from cooperation. Wealth is created by working together.

Trump's answer to the same question was all about competition. He talked about losing, about winning, about fighting. He framed the economy as us (the United States) against them (Mexico, China). He talked about jobs being stolen. In his view, the economy is a zero-sum game: either we win or they win. Whatever they gain, we lose. Jobs are a fixed commodity.

The thing about this contrast is that it isn't just a matter of differing philosophies or differing ideologies. Economics may be derided as "the dismal science", but a social science it is. Questions like, "what generates more wealth - cooperation or zero-sum competition?" are not philosophical quandaries, they are empirical puzzles with real-world answers.

In this case, in the broadest terms, the answer is clear. Zero-sum competition makes everybody poorer, both through lost opportunities ("opportunity costs", to economists) and through wasted and inefficient efforts. Cooperation, by contrast, generates wealth.

This is obvious from even a cursory glance at the history of human development. At every stage, wealth has increased where people have come together to cooperate in greater and greater numbers. If all we had was zero-sum competition, we'd still be living in small tribes throwing sticks at each other.

This is not to say that healthy competition doesn't have a role to play. But the vast majority of the interactions that drive our economy are cooperative ones. When we sell someone a good or a service, both sides come away better off - the provider gets money, the consumer gets something they need. That basic cooperation - the exchange of values - is the fundamental basis of the free-market system.

Economists disagree on many things, but this isn't one of them. There isn't a single economist anywhere who thinks that an economy based on the competition of all against all is a good idea. Indeed, the very notion of economic growth belies the possibility of zero-sum economics. How can we create new jobs and new wealth if all we're doing is passing the same jobs and the same wealth around?

On this issue, Trump is not merely misguided on policy, he's fundamentally wrong. He's like an astronomer trying to model the solar system with the earth at its center. The world just doesn't work that way.

This is one dimension of the presidential campaign that has both policy and moral dimensions. Policy driven by zero-sum economics will make everybody poorer. Insisting that the world is a dog-eat-dog place will make us morally poorer as well. Small wonder the world's markets regard a Trump presidency as a disaster of the first order.

Trade and the Presidential Race

Much to the surprise of many policy wonks, international trade has emerged as a major issue in this year's Presidential campaign. The surprise comes partly because at this point, it's amazing that any issues can grab attention from the mud-fest that Presidential campaigns have become. But it's also surprising because for at least two generations there has been broad bipartisan consensus on trade policy. We argue over details, as we did during the Cold War, but in general we have understood the broad thrust of strategy: more and freer trade.

Donald Trump has broken that consensus by convincing a group of voters that their troubles (real, perceived, or some of both) are because leaders in Washington have been signing "bad deals" in international trade. "Free Trade", which used to stand beside mom and apple pie as inherently good things, is now used as an epithet. In short, trade has become a real political issue.

This is unfortunate, because both sides are at least partly wrong on this issue - although one is more wrong than the other.

Trump's position on trade is almost completely wrong. He frames international trade deals as zero-sum exercises in which one side always wins and the other side always loses. Apparently he slept through the classes at Wharton in which he would have learned that every economist going back to Ricardo and Adam Smith agrees that international trade increases wealth for both sides. Indeed, economic exchange - whether across or within borders - is how the human race has managed to create as much wealth as we have, which is a pretty impressive amount. If all economics were as Mr. Trump describes, we'd still be bartering with rocks and hunting our dinner daily with sharp sticks.

Moreover, government trade deals are not business deals - they create the conditions under which business deals are made, which is not the same thing. This is not to say that governments can't agree to bad terms - that's certainly possible. But it's relatively rare. And the overall effect of increased trade - backed up by every shred of international economic evidence we have - is that more trade increases wealth. Less trade means less wealth. This isn't debatable, and it doesn't get more true just because Mr. Trump gets louder and angrier when he says it.

What is true is that the benefits of that wealth can be unevenly spread - and this is where the "establishment" (Democrats plus what used to be the internationalist Republican party) drops the ball. All changes create differential effects - in Mr. Trump's terms, winners and losers. NAFTA may create more jobs net in the United States (most evidence says this is true), but that doesn't mean that some people in the US won't lose their jobs to competition in the neighboring countries - just as some Ohio jobs may get destroyed because we have "free trade" with Indiana and Alabama.

The consensus approach, the one championed by Bill Clinton when he pushed for a NAFTA negotiated by his Republican predecessor, was that government would step in and help those displaced by change. Put more bluntly, government's role would be to redistribute some of the wealth created by trade to make sure that those hurt by shifts in the economy could recover and get back to where they where, maybe even be better off. Clinton sold this as part of his "Bridge to the 21st Century" argument, and for the most part people bought it.

This is the piece missing, so far as I've heard to date, from Hillary Clinton's rhetoric. The internationalist establishment is right that trade creates more wealth. But they need to acknowledge that it also causes pain for some people, pain that needs to be mitigated by making sure that the benefits of the new wealth are shared around.

Over the last 20 years, freer trade has created vast amounts of wealth in the United States. Unfortunately, at the macro level that wealth has been concentrated in the hands of the few - largely, New York financiers, most of them well-known to Mr. Trump. As someone who claims to "understand the system," Mr. Trump should understand all of this. His rhetoric to date suggests that he doesn't.

Abandoning trade is not the answer - we will ALL be worse off for it, and Mr. Trump is not going to "bring jobs roaring back to America" by tearing up trade deals. Right now, the Clinton campaign doesn't have the whole answer either. Secretary Clinton needs to reach back into her husband's toolkit and bring back the "bridge". Because in the end, the election isn't about whether you're right or wrong in reality. It's about whether people think you can solve their problems.

The New York Times and Why the Ivy League Won't Fix Socio-Economic Inequality

Last January Frank Bruni of the New York Times wrote a piece on how many elite colleges are rethinking their admissions processes. You can read the piece in its entirety here; it's informative reading if you have any interest in college admissions at highly selective schools.

Unfortunately, Bruni wants this to be a piece not about the narrow technical world of college admissions, but about the much broader goal of fixing the nation's social and economic inequality problems. In so doing, the article suffers from the myopia typical of everything that the NYT publishes regarding higher education. In Frank Bruni’s world (and, to be fair, that of most of his colleagues), “higher education” means the Ivy League and a handful (no more than 100) of other institutions that actually get mentioned in national newspapers. These are name-brand, prestigious schools - like UNC-Chapel Hill and Michigan (which, along with Harvard, Yale, and MIT, are the only schools he mentions by name). 

It is true that the admissions systems in many of these schools have been pretty messed up for a while, with weird incentive structures that lead prestige-seeking families to sacrifice a lot of money, time, and sanity in a desperate attempt to get their kids into Harvard or Yale. The fact that the families doing so are overwhelmingly upper middle class (and who are likely to read the NYT) reinforces the information flow here, since the Times annually publishes stories about how much harder it is to get into Ivy-level schools today than in the past.

It is also true that the vast majority of the kids who go to these schools are from privileged backgrounds, which does tend to reinforce inequalities in society - but not nearly as much as you’d think. Take the top 80 schools and assume that each one, on average, admits 1000 students per year (some smaller ones, like Williams College, rather less, other larger ones somewhat more). Assume further that those schools could, if they stretched their resources, each afford to give full-ride scholarships to 300 out of those 1000 students (they need varying levels of tuition from the rest in order to keep operating). That’s 24,000 kids from disadvantaged backgrounds per year that will get to go to elite schools (keep in mind, some fraction of that number already does).

That sounds great, and it certainly would be for the individuals lucky enough to hit the jackpot. But in a country of over 300,000,000 people, where the middle class is shrinking, the lower classes are expanding and falling farther behind, and the rate of college degree holding is 35% among adults, how much of a dent is 24,000 going to make? Not much.

So I think there are probably a lot of good ideas in this effort to redo Ivy-level admissions policies. I just don’t think they’re going to matter very much in the grand scheme of things. If higher education is the answer to society’s inequality problems, Harvard, Yale, and Princeton aren’t going to be part of the solution - they’re too small. The real solution lies in public two- and four-year institutions across the country where the vast majority of Americans go to college. In those institutions (my employer included), this conversation about hyper competitive admissions is irrelevant. The real conversation is about funding - states have been de-funding higher ed for many years, and that’s unlikely to change. The problem isn't that people can't get in, it's that we can't afford to provide a good education to as many students as we could serve.

I’ve been frustrated for years that Frank Bruni and his NYT colleagues don't seem to understand any of this. They don't get that the secret to solving the social mobility problem isn’t letting more poor kids into Harvard. If you really want to make a dent, do what we did the last time we had real social mobility in the 1950s and 1960s - make public higher education a serious investment and put resources into it. Tinkering with the way Harvard and UNC admit their students is just rearranging deck chairs on the Titanic.

Greece: Politics Not Economics Redux

A great deal of the public bandwidth - that part not dedicated to well-deserved shout-outs to the USA Women's National Team - is being taken up with Greece and its future. This past Sunday's "No" vote took a lot of people by surprise, it seems, and has set off plenty of speculation and finger-pointing.

I'm not a good enough prognosticator to say how this is going to turn out. I'm also not a good enough economist to know whether the No vote was a "good idea" or a "bad idea", which seems to be what's driving much of the discussion. In short, I don't know whether the Greeks will be better off or worse off in the short or medium term - and neither does anybody else, whatever they may say.

But there are a couple of dimensions of the situation I haven't seen discussed yet:

• I heard a debate yesterday about whether the referendum in Greece would strengthen or weaken Greece's position in future negotiations. This is one of the few things I can comment on with authority, since I teach this stuff. It is incredibly rare that one side in a negotiation over unidimensional concessions (more vs. less austerity, to be simplistic) gets to make an almost ironclad commitment to its position. This is the proverbial "throw the steering wheel out the window" move in Chicken. Every game theorist will tell you it's a brilliant strategic move if you can make it genuinely credible.

So Greece has laid down a marker that says, this far and no farther. What if the rest of Europe won't agree to terms that are acceptable to the Greek public? What if the German public, or some combination of European power centers, refuses to meet the Greeks where they now stand immovable? Then from a negotiation standpoint the negotiations were always going to fail, because there was never any acceptable agreement there anyway. Bargaining is about revealing information to discover whether this is an agreement acceptable to both sides. We will soon find out. If the answer is "no", then there's no deal - because one never existed in the first place. Sometimes the sides are too far apart and you just can't create an agreement out of nothing. 

So what Greece did, by holding its referendum, was insure that either they get an agreement acceptable to their own public (and therefore the stability of their government), or no agreement at all. That's smart bargaining, however much some folks might not like it.

• Amidst all the argument about whether Greece should vote No or not, or whether they should stay in the Euro or not, we've lost sight of one very important thing: the whole debate is about politics, not economics. 

Much of the public discussion is focused on the economic impact of various scenarios, including the "Grexit" (Greece leaving the Euro), where "economic impact" is generally measured by GDP. But the aggregate size of an economy, or even the mean GDP per capita, is only one way of measuring outcomes - and not necessarily the most important one. While an economy generates wealth, it also distributes that wealth. And distribution is a fundamentally political, not economic, question.

It may well turn out that the outcome of the present crisis is that the Greek economy (GDP) shrinks by more than it would have had they accepted terms from the rest of Europe. But if, at the same time, the remaining economic wealth is shared more evenly across the population then that outcome will look far better to most Greeks than one in which the GDP is higher but the benefits flow only to a few. Voting for the former over the latter would actually be the most individually rational thing most Greeks could do, were they given the choice.

I have no idea if a Grexit will spread wealth around better, or if it will reduce Greek GDP farther than the alternatives. I'm not a good enough economist to be able to predict the outcomes of these various scenarios. What I do know is that the economics don't matter nearly as much as the politics do. If the choice is being poor and free vs. being rich (collectively) but enslaved through debt to others, what would you choose?

• Finally, I see some interesting parallels between the Greek situation and the collapse of the US housing market a few years ago. Both were driven by massive, unsustainable levels of debt brought on by extremely unwise borrowing. In the US, we had something of a debate (though with little real consequence) about whose fault this was - the borrowers who took out mortgages they couldn't afford or the banks who lent money knowing that the borrowers would never repay, only to repackage that debt and sell it off to other suckers. There was some blame on both sides, but the power (and therefore the greater responsibility) seemed to rest clearly with the banks.

I don't see a similar discussion with regard to Greece. There is plenty of agreement that the Greeks have borrowed way too much money, and plenty of finger-pointing at them for having done so. But who lent them that money? At what point did those lenders cross the line between responsible and irresponsible lending? The IMF apparently figured out that Greece will never be able to repay all of its debts; where were the other lenders when that calculation should have been done? It's easy to point fingers as the "lazy" Greeks, but somebody (mostly Germany, by most accounts) lent them the money. What responsibility do lenders have to do their homework and lend responsibly?

In all of this, I have a great advantage - I live far enough from Greece that the impact on my circumstances is likely to be small whatever the outcome, and I'm not so attached to any particular ideological tribe that I feel compelled to have a strong opinion about the situation in order to bolster my own views. Most Americans commenting on the situation share the former condition but not the latter - there's a great deal of self-serving going on as different people weigh in. For myself, I am content if the Greek people end up being able to influence their own future, even if it's not a future I would necessarily choose. For me, it's easier to celebrate freedom and popular sovereignty in action than to cheer for the growth in abstract numbers. As for the outcome, we'll just have to wait and see.

Back from the Brink: Sweet Briar and the Changed Conversation About College Finances

I blogged a while back about the announcement that Sweet Briar College would be closing its doors this summer. At the time that news sent shock waves through higher education. It was the first time in recent memory (ever?) that the Trustees of a respected institution with a good reputation, a beautiful campus, acclaimed programs, and $80 million in endowment still in the bank had decided to shut down for financial reasons. Despite these apparent advantages the Trustees were convinced that closure was inevitable, and they chose to try to wind things down with some order and dignity.

It turns out that Sweet Briar may have a few years left after all. A deal has been reached with the Virginia Attorney General's office to change the leadership of the institution (new president and a largely new Board) and keep the operation going. Alumnae, many of whom were distressed and outraged by the decision to close, have raised some $21 million in pledges to help the college continue to operate. The AG has also agreed to lift restrictions on some $16 million in the college's endowment, allowing that money to be spent for any purpose that will help keep the college running (rather than on whatever specific purposes the original donors had intended).

This is certainly a happy day for those alumnae who have fought to keep the institution open. Sweet Briar still faces massive challenges, not least seriously diminished student and faculty populations (many have already transferred elsewhere). The college has been doing essentially no recruiting during the peak of recruiting season, so the incoming class is likely to be small. Whatever operations start up again in the fall are likely to be a shadow of the former institution, which was not that large to begin with. Nevertheless, the college now has a second chance at life.

The larger issues that led the Trustees to decide to close the institution still remain. The $12.5 million that alumnae have pledged initially is roughly equal to the college's operating deficit last year. It's great that former students are willing to lay out that kind of money, but what about next year? The year after that? One would guess that the $21 million in pledges raised by the organization Saving Sweet Briar represents a substantial proportion - perhaps nearly the entirety - of the giving capacity of the alumnae base. When that is tapped out, what next? The college was already burning off its endowment at 10% per year - that $80 million will disappear pretty quickly even if the state AG agrees to lift all restrictions on it.

The question here isn't whether the college will stay open for next year. The question is, can Sweet Briar build and run a sustainable financial model? Given the competition for students, the challenges of finding families who can and will contribute significant sums to their kids' educations, and the weakened borrowing power of those same families, where is the money going to come from? There isn't a clear answer. But if the new Board and president don't come up with a solution within the next year or two, we'll be having this same conversation in two years' time. If they do, this will be one of the greatest success stories in higher education and could pave the way for a lot of new thinking at institutions across the country.

One thing I do want to applaud the outgoing Trustees for: they have changed the conversation by calling the question. For too long, people both inside and outside higher ed have assumed that "real" colleges and universities - those with good reputations, status, and name recognition - could never really close down. Faculty and administration have always assumed that "we'll find a way" - even when that way involves shell games or unsustainable financial practices, hoping that "it's just for a few years". Now we know that failure is an option.

That knowledge should cause all of us, especially administrators and faculty inside the walls of academe, to take these matters much more seriously. Universities are mission-driven institutions where decisions should never be made "just to make money". But the money constraint is very real, and if we can't find a way to fulfill our missions in a financially sustainable fashion we too will ultimately close our doors. The message to the rest of us in higher education is clear: don't wait until the wolves are at the door. We should all be thinking about sound financial practices and models now. Because if we don't do it now, someone else will surely do it for us later.

It's Not the Economy, Stupid: Politics is Fundamentally about Power

When Bill Clinton ran for President back in 1992, his campaign had a few simple phrases that they used internally to stay on message. The most famous of these became widely cited: "It's the economy, stupid." Clinton's success propelled that phrase to almost mythic status: elections are won or lost on economic or "pocketbook" issues.

This is relevant as we start the serious, above-board portion of the next Presidential election cycle (yes, it's still early in 2015 and we're talking about the 2016 campaign - so it goes these days). Candidates are emerging from the woodwork (few of them surprises) and already starting to argue about the agenda. Economic issues are featuring prominently already, and probably will throughout.

A lot has been written (including in this blog) about the growing level of inequality in America. The phrase "the 1%" now has a lasting and universally-understood meaning, which itself is an indication of how skewed things have become. I still believe that the question of economic distribution is one of the fundamental issues of our time, because it opens the door to the wider question of what kind of society we want to live in.

Unfortunately, the economic argument has become mired in our usual tribal politics and bumper-sticker sloganeering. And here I have to give props to the conservative side of the argument, because they have managed to fashion a couple of closely related trump cards. One is the argument that "Liberals care about equality of outcomes, conservatives care about equality of opportunities." The other is the nearly universal revulsion the conservative movement has instilled towards the notion of "economic redistribution". Robin Hood (taking from the rich and giving to the poor) no longer has much legitimacy in America.

Leaving aside the sincerity of either of these arguments (and I believe that many conservatives are sincere, especially about the opportunity vs. outcome side of things), this whole "debate" misses the point. Focusing on money and economic distribution is trying to treat the symptom instead of diagnosing the disease.

The real issue - indeed, the fundamental question of all governance no matter what kind of political system you have - is distribution of power. We talk a lot about money corrupting politics, and it clearly can and does - but that's a back-end reinforcement mechanism. Money follows power far more than it leads it. Take a look at folks who got rich outside the usual power structures - Bill Gates is a good example. Gates has more money than the Koch Brothers will ever have, but that doesn't make him more powerful. His wealth has had very little, if any, impact on American politics. Most people don't even know what his political views are.

So when we argue about whether our political system should be redistributing wealth, we are barking up the wrong tree. What we should be talking about is the redistribution of political power. We have forgotten that such redistribution is exactly what democracy is designed to do. Political power always and everywhere tends naturally to accumulate over time in the hands of a small elite - this has happened in every human society, everywhere, at every stage in history. The whole point of the American revolution, the Constitution (and before it, the Articles of Confederation), the Magna Carta, and all of what we regard as the best political experiments in history have had this one thing in common: the goal of intentionally taking power away from the few and spreading it out among the many.

In this, our current political system is failing spectacularly. I've cited before the study by Gilens and Page showing remarkable evidence of oligarchy stretching back decades. Other studies have been done, and other evidence collected, pointing in the same direction. The growing concentration of power in the United States isn't a debatable point - all the evidence we have points to the same conclusion.

This will sound to some like a partisan argument, and in a certain sense it is. The Republican Party, from its policy positions to its core ideology to its funding sources, seems to have aligned itself some time ago with the existing dominant bases of power in the United States. A message that rejects wealth redistribution is a message in defense of the status quo - that is, the current distribution of power in the country. So far as I can tell, the Republican Party on most fronts seems content with the existing concentration of power.

But mine is not necessarily an argument in favor of the Democratic Party in general, or Hillary Clinton (the presumptive nominee at this point) in particular. Clinton is very much a part of the existing power structure (as are nearly all of the other potential Democratic candidates), and has never shown a great deal of fervor for the mission of redistributing power back out, though she does adopt some of the lingo. The Democratic Party in general, going back probably the late 1960s and the Chicago debacle, has largely accommodated itself to the existing power system as a means of remaining relevant.

Recently some friends of mine on the left have been cheering as wealthy private individuals (Warren Buffet, George Soros) with more left-leaning views have begun talking about jumping into the political fray to push back against the power of conservative money. And while such a struggle would appear to make the system more "balanced", in reality it simply turns American politics into an argument among rich white guys. The famous Swahili proverb seems to fit: "When the elephants fight, it is the grass that gets trampled."

Some have turned to the growing Libertarian movement as an antidote, and on its face it would seem that Libertarianism - with its message of shrinking the power of government and pushing decisions back to the local level - is consistent with the notion of redistributing power. But in this, Libertarians are terribly naive. They focus entirely on official government power and ignore the significant power in the hands of private players (the Koch Brothers, Buffet, or otherwise). A weak central government is an extremely fertile ground for an oligarchy - look at Russia in the 1990s under Yeltsin, when the oligarchs ran roughshod over the country and gobbled up nearly everything of value. Believing that you can shrink the power of government and wind up with a freer and more democratic outcome - or even a place that people like living in - flies in the face of the evidence.

So where to turn? As usual, I don't have any good solutions - if the answer were obvious somebody else would have found it already. But I do argue - as I always have - that asking the right questions and focusing on the right issues is far more important that having the answers. Right now our political system is largely asking all the wrong questions. We have for the most part abandoned the central mission of democracy in favor of some of its trappings. If we start asking the right questions, I don't know what will happen - but I think the outcome is likely to be better than the path we are on.

Why Does College Cost So Much? Beating the Same Dead Horses

Frankly, I almost hate to write this. I've written plenty of pieces before about the rising cost of higher education and the increase in administration within universities. There are too many to link them all here; try this one for starters, it points back to several of the others.

So why rehash this subject again? Because Paul Campos, a law professor at the University of Colorado, somehow managed to get an op-ed published in the New York Times - in the Sunday Review section, no less - that beats this dead horse one more time with a bizarre series of not-quite-comparable almost-statistics that sound vaguely like an argument. You can find lots of writing picking his article apart piece by piece, from his misuse of analogies to his simple misstatement of facts. I'll assume that ground has been crossed already and so won't go over it again here.

Unfortunately, the visibility of Campos' piece has given new life to an argument that ought to have been disposed of a long time ago - that the rising tuition cost of college if really a function of evil, greedy, grasping, ever-multiplying administrators. Perhaps Mr. Campos pictures us sitting around in our office twirling our mustaches and petting white fluffy cats. But because he got his nonsense published in the NYT, we have to go over this again.

Are there more "administrators" on campuses? Yes, absolutely - although the first challenge you confront when you try to verify that is defining the line is between "administrator" and "staff". A lot of the "administrators" that Mr. Campos points to as the source of the problem are people who do things. Many of these things, as I have pointed out many times before, were things that universities were not expected to do two generations ago (he seems fond of comparisons to 1960) but are today.

In many if not most instances, universities did not choose these things for themselves - both society and government have thrust a great many mandates onto universities and colleges in that intervening 55 years. Faculty can't both be faculty and also do all of these other things (Title IX compliance; online education authorizations; demonstrating a bewildering array of accreditation standards; outcomes assessment; workforce development; student success for a vastly more diverse student body; etc, etc, etc). One of the few things to get bipartisan agreement among some members of Congress recently is the assertion that regulation of higher education has gone a bit too far in many areas. On this point, Republicans have been standing on solid ground for years: regulation has costs. Mr. Campos apparently doesn't want to talk about that.

There's also a gratuitous reference in Mr. Campos' piece to "seven-figure salaries for high-ranking university administrators". I will freely concede the point that such salaries are ethically and economically indefensible. But to suggest, as he apparently wants to do, that these have any measurable impact on the cost of tuition is absurd. The vast majority of universities (my current employer included) have nobody earning anywhere near that amount. Schools with those salaries are mostly restricted to the handful of top-tier research & NCAA Div I/BCS institutions, and even at those places only a small handful of people are making a million dollars or more. Slashing their salaries in half would make only the tiniest dent in those institutions' budgets. I don't think football and basketball coaches should get $3 million a year either, but pointing to that as the cause of the tuition problem simply makes Mr. Campos look like he can't do math.

The reality, as always, is more complicated and would require a more complex conversation to really deal with. Mr. Campos' assertions aside, we DO invest less as a society in higher education than we used to. For a while (in particular, in the 1960s and 1970s) spending did rise as the number of students going to college rose as well. The cuts (measurable on a per-student basis, something Mr. Campos doesn't want to engage with) have come about in the last 20 or so years. It is also true during that time that tuition has gone up for a variety of reasons - some having to do with more student aid being available (a phenomenon which doesn't surprise economists, price inflation is a natural consequence of flooding a system with more money), some having to do with the increased cost of doing business for universities and the rising societal and governmental demands on those institutions, some having to do with cost-shifting based on a reimagining of higher education as a private good as opposed to a public good.

All of these things matter, and all of them have a hand in creating a problem that is in fact very real. As a parent of a college student who looked at both private and public university options, I agree that the affordability of tuition has gone wildly out of control just between my generation and my daughter's. I wonder sometimes how some of these smaller, less well-known private institutions manage to stay in business (the announced closing of Sweet Briar came as little surprise on that front). Even public institutions are less affordable than they once were.

So I agree with Mr. Campos on one point: we have a real college affordability problem. At a time when having a college degree is increasingly becoming THE path to a middle-class life, it is becoming harder and harder even for middle-class kids to get one. We should think seriously about this as a society, and together come up with changes that will help move us closer to the kind of country we want. But flogging dead horses and pinning everything on overly-simplistic, monocausal theories doesn't get us anywhere - even when you do it in the New York Times.

Growing Inequality: Is This the World We Want?

We are just at the beginning of the 2016 (yes, 2016) US presidential campaign. Because of this, I suspect that the quality of public discourse about the most important issues of the day will get steadily worse between now and November of next year.

This is a shame, because there are some significant issues that we're either not addressing, or addressing badly. One that has been much on my mind lately is the wide and growing gap of inequality in the United States. This is not only an inequality between rich and poor, but the gulf that has opened between the very wealthy (the top 1%, in popular parlance) and everybody else. The statistics on this are too numerous to mention, but even a cursory search of economic data will show you this picture no matter how you slice it.

Simply pointing out the existence of this problem (or labelling it a "problem") is enough in some circles to get you labelled a hippie commie liberal. I'm not sure that I understand the knee-jerk response in some conservative circles to deny that the United States has moved much farther towards a highly stratified oligarchy, although I suspect it's because this "inconvenient truth" gores a few sacred cows. Nevertheless, I don't think this is - or should be - a partisan issue.

Early rumors in the presidential campaign are that some Republican candidates are going to make an issue out of this, using it as a cudgel with which to beat up on Obama (even though he's not running again you can always run against the sitting President, much as Obama ran partly against Bush in 2008). And there is some truth to the accusation - certainly inequality at all levels and of all types has increased over the last seven years, and it's not clear that the Obama administration has done much to halt that trend or even paid much attention to it. On the other hand, the same was true of the previous (Republican) administration, so there's not much help there. All in all, I suspect that I will be quoting Dickens a lot this campaign season:

'Oh, Man. look here. Look, look, down here.' exclaimed the Ghost. They were a boy and a girl. Yellow, meagre, ragged, scowling,wolfish; but prostrate, too, in their humility. Where graceful youth should have filled their features out, and touched them with its freshest tints, a stale and shrivelled hand, like that of age, had pinched, and twisted them, and pulled them into shreds. Where angels might have sat enthroned, devils lurked, and glared out menacing. No change, no degradation, no perversion of humanity, in any grade, through all the mysteries of wonderful creation, has monsters half so horrible and dread.
 'Spirit. are they yours.' Scrooge could say no more. 'They are Man's,' said the Spirit, looking down upon them. 'And they cling to me, appealing from their fathers. This boy is Ignorance. This girl is Want. Beware them both, and all of their degree, but most of all beware this boy, for on his brow I see that written which is Doom, unless the writing be erased. Deny it.' cried the Spirit, stretching out its hand towards the city. 'Slander those who tell it ye. Admit it for your factious purposes, and make it worse. And abide the end.' 

I think our politicians will likely make things a great deal worse in pursuit of their factious purposes in the coming years.

Dickens, being of an earlier century and another country, is safe for both Republicans and Democrats. And the half-truth that Republican politicians are now seizing upon is that the gulf between the rich and powerful and everybody else is owned by both parties, perhaps because both parties are owned by the rich and powerful.

A significant study by Princeton professors briefly raised eyebrows last April in asserting that in the US, political outcomes are not significantly influenced by what the population at large wants but by what the rich and powerful want. In a study that is as clinical as it is chilling, they demonstrate with a significant pile of data that the output of the American political system is largely a function of an economic elite and the interest groups (corporations, business associations, and the like) that they control. The study briefly gained news attention - it might have lasted 48 hours in the news cycle - before being buried in the crush of day-to-day events and forgotten.

Global climate change has faced similar resistance and skepticism, but it has also had its passionate defenders who have pushed back, piling evidence on evidence. The climate change "debate" is now a part of the national conversation and slowly the science is winning out, insofar as those who would deny that climate change exists are being driven ever farther into dark corners as their numbers thin. This does not, of course, have any effect on policy because policy outcomes are determined by something else entirely.

But the observation that the US is becoming an oligarchy, and that our society is becoming both radically unequal and increasingly unjust, has no such passionate defenders. Al Gore will not make an award-winning documentary about it. Hollywood celebrities will not take up the cause. There are no equivalents to Greenpeace, no analogs to the photos of stranded polar bears, that can capture the public's imagination with the reality that they - we - are being slowly but surely isolated from both wealth and power.

Briefly, it seemed at the Occupy Movement might provide a visual center of gravity around which a counter-effort could coalesce. But that Movement was widely mocked, scorned, and at times brutally repressed. Its young participants all went home, many having learned the lesson of a previous age: you can't fight City Hall.

We can argue, of course, about what's causing the gap to grow. Certainly the widespread adoption of the creed of privatization, and the concomitant belief in private goods over public goods, has helped. In my own field of higher education, a study was just released showing that the share of higher education paid for by students and their families has risen from about 30% in 1980 to over 50% in recent years. I've blogged about this before - but this is just one fragment of the much larger iceberg.

That's part of the problem - we tend to view things as small, isolated fragments, separate puzzles rather than pieces of a larger whole. Yet societies and economies are organic things (as F.A. Hayek, a darling in some conservative circles, liked to point out), and in organic systems you cannot neatly separate out one piece from another and deal with them in isolation. Falling state support for higher education is related to the shooting of Michael Brown, and the responses to it, in Ferguson, MO. It's all a part of the same tapestry.

So the question we really need to ask ourselves is, What kind of society do we want to live in? Except for briefly addressing issues of race, President Obama has largely avoided this question. President George W. Bush never went anywhere near it, perhaps because like his father he was never very good at "that vision thing". Bill Clinton liked to govern largely by small to medium-sized policies - the Wonk-in-Chief. You have to go back to Ronald Reagan to find a President willing to use the bully pulpit to articulate a vision, not of what government should do but of what our society should look like. Not everybody agreed with his vision, but at least he tried.

Waiting for our politicians to break their silence and start talking about the big questions that matter is, I expect, simply wasting time. The current status quo is largely to the liking of the powers that seem to control that system - see how quickly the upper echelons on the financial world recovered after the crash that they themselves caused, taking the rest of us with them on the way down but not on the way back up. Perhaps politics, or at least the standard mechanisms we have come to think of as politics, isn't the right venue at all.

So here's a radical wish: that rather than participate in the bitter, petty tribal squabbling that defines the American political landscape over the next 18 months, I hope that Americans can come together to talk about the things that really matter: what kind of society we want to live in, and how we (not the politicians, but us) can get there. I don't think that this is terribly likely - I'm too old to be an optimist anymore. But wouldn't it be a wonderful thing if it did?

For-Profit vs. Non-Profit Universities: Mostly an Accounting Trick?

This news story caught my eye this morning:

Milwaukee for-profit Herzing U makes the jump to non-profit

There has been a wave of regulation aimed at the for-profit higher education sector, much of it in response to perceptions that those institutions are getting rich off the backs of their students (and the government) without delivering much of value. There is certainly plenty of data to back up that assertion, as John Oliver pointed out last fall:

Attempts at regulation at the state level, as in Wisconsin where Herzing is based, have been largely ineffective. The Federal department of education, on the other hand, has drafted and imposed some much more stringent requirements on these institutions to prove that they're doing something worthwhile.

Since many of these requirements are specifically aimed at for-profit institutions, it's not surprising that some of them would decide to abandon that ship and recast themselves as non-profit, tax-exempt institutions, as Herzing has apparently done. I've long said that the primary difference between a for-profit institution and a non-profit one is accounting, so this switch may be easier than it seems.

Certainly Herzing will now be barred from doing some things - like taking advantage of venture and investment capital - that for-profit institutions can do. But I doubt that very much will change otherwise, at least in the near term. Herzing will continue to teach the students it teaches, in the ways it teaches them, without a lot of short-term change in outcomes.

It will be interesting to see, over the longer run, if the removal of the profit motive changes the institution. Will it begin to make decisions differently? Will it behave more like a mission-driven non-profit than a bottom-line seeking for-profit? It may be difficult to tell, given that some non-profit institutions have become pretty bottom-line driven themselves, but there may be signs of change. Or the shift may be purely cosmetic, and Herzing may go on doing everything exactly as it has been - in which case, expect more for-profits to follow them.

This illustrates one of the challenges of trying to regulate: imposing a set of rules that solves a real problem without creating new ones. In this case, the real problem is the almost scandalous nature of some of the profit-seeking institutions that amounted to little more than scams that profited (as so many financial institutions did during the bubble last decade) from ignorance and the willingness to take on often poorly understood debt. In trying to solve that problem, you can create unintended new problems for institutions that really are trying to extend the benefits of education to a broader base of the population. I don't know if Herzing is one of these or not - but they certainly claim to be.

I think the Feds were hoping that the for-profit/non-profit distinction would be a way to save the baby from the bathwater. If Herzing's move is successful, that will pretty much eliminate that strategy and send regulators back to the drawing board. What they'll come up with next, I have no idea - but I hope that, whatever rules get promulgated, they do more good than harm.

Quality and Profit in Higher Education Really ARE Inversely Related

One of the long-held beliefs in some corners of our society is the Free Market Faith: that introducing a profit motive (along with appropriate competition) can make anything better. Those who belong to the Free Market Faith are generally found in certain wings of the Republican party, although not all Republicans share this belief and there are plenty of Libertarians (and probably a few Democrats) who do.

In the realm of higher education, this Faith has been one of the few shreds of protection for the for-profit education sector. If it weren't for Free Market Faith folks, the for-profit college industry would be in even worse shape, seeing as how they offer a worse product at a higher price than one can get from existing universities and community colleges (h/t to Steve Greene for spotting that article for me). But there are still enough state governors and legislators who, as Faithful Adherents, want to give these poor free-market upstarts a chance.

In the realm of traditional higher education - that is, our long-standing universities and colleges that are collectively the envy of the world - there has long been a concern that for-profit means "low quality". This argument bleeds over into debates about online education, which is a separate question entirely. But because for-profits are private entities, we don't often get to look inside their books to see if there really is a trade-off between the quality of education and an institution's ability to make money.

Now, thanks to the Securities & Exchange Commission (and some excellent journalism from the Chronicle), we get to peek into at least one of these creatures' books. Some of the highlights:

In 2012 the Western Association rejected Ashford [for regional accreditation], saying the university had a high turnover of students, a vastly inadequate number of full-time faculty and student-support staff members, and inconsistent quality and rigor in its curriculum. 

Since then, however, the university has hired an accreditation insider as its president, slashed its admissions staff, and put more employees to work in areas meant to ensure students’ academic success. Those changes were enough to satisfy the Western Association, which last year awarded Ashford initial accreditation. 

But on Wednesday, financial data in the SEC filing from Bridgepoint revealed just how much the changes had affected the company’s bottom line. 

Instructional costs and services now account for more than half of the company’s expenses, compared with nearly a third in 2011. 

"In the second half of 2012, the company began to increase its instructional costs and services costs in direct response to … accreditation efforts," Bridgepoint said in its filing.
At the same time, operating profits have fallen from nearly 30 percent to less than 8 percent, Bridgepoint reported. 

And the effort to improve quality has had another price, the company said, in declining enrollments and revenue. The company brought in 20 percent less revenue in 2013, compared with 2012—a decline of nearly $200-million.

For-profits are learning what those of us in real universities have known for a long time: providing a quality education is not a cheap undertaking, and the more you cut corners the more you are likely to be stiffing your students to line your own pocketbook. Yes, universities today can be criticized for spending money on things they don't really need, or for having too many administrators, or for slowly walking away from tenure-track faculty. But for all of the arguments about "bloat" in our public universities, legislators should take a good hard look at the alternative at the other end of the spectrum: low quality, high drop-out rates, lousy outcomes, and massive student debt to pay for it all. These supposedly "lean" for-profits turn out to not be such a good bargain.

Someone Else Sees the Online Education Bubble

I've been blogging for a while (here and here and here, among others) about the problems with the for-profit online higher education sector, and how it shows classic signs of a popping bubble. I remain firmly convinced that this is the case.

Now, apparently, after cheer-leading the "transformative" nature of online education for years, someone at Forbes has finally figured this out as well. I don't necessarily agree with all of his reasoning, but the basic notion - that college is about more than a narrowly-defined "education" in terms of mastering facts and skills, but is an experience - is sound. The money quote:

There’s no college-education ‘bubble’ forming simply because teens go to college with an eye on a fun four years, after which they hope the school they attend will open doors for a good job. Online education only offers learning that the markets don’t desire, and because it does, its presumed merits are greatly oversold. There’s your ‘bubble.’

I'll leave my readers (all three of you) to read the rest.

Higher Education as a "Business": We Can't Have It Both Ways

This story in this morning's Inside Higher Ed caught my eye:

Facing Deficit, Ivy Tech May Eliminate Campuses

I worked in Indianapolis from 1999 through 2006, which covers some of the period mentioned in this article. During that time, Ivy Tech expanded enormously and was very much the "toast of the town". Politicians of both parties, business leaders, civil notables - everybody had something good to say about the Ivy Tech system and the wonderful things it was doing for the Indiana economy.

It turns out that all of that great good work came at a price: Ivy Tech was running at a loss. Their business model was a typical one for public higher education in the past: collect tuition below the cost of providing the education, with the difference made up by state subsidy dollars.

This arrangement reflected an historical compromise understanding: that higher education is both a private good (in that it helps the individual better their career and make more money personally) and a public good (in that it creates a better-educated and more skilled workforce, driving economic development). The partial-subsidy model, in which the cost of education is shared by the student and the taxpayers, reflects this balance.

But as I've blogged about before, this compromise has been eroding for some time in favor of a private-good-only approach. This news item from Ivy Tech is just the latest (and one of the most dramatic) instance of what this really means. One implication, of course, is that community college is about to get more expensive in Indiana - and it will now be out of reach for many who were served by those 20 closing campuses who cannot afford the time & money to travel to another one.

For all the concern on Capitol Hill about "hollowing out" the nation's military, we hear very little about the ongoing forces hollowing out the nation's higher education system - and with it, our economic prospects. If Time would stop running cover articles that assume a private-goods perspective (picked up by politicians with ideological axes to grind), it would help move us forward. We need to find a way to have this conversation free from the dogmas currently tearing us apart. Where are Nelson Rockefeller and the Chamber of Commerce when you need them?

Tell Me Again Why We're Worried About For-Profit Higher Education?

Another in a long string of setbacks in the for-profit education sector:

Accreditor Puts Ashford on Notice

It looks a little cheesy that this institution tried to gain accreditation under one region (Southwest, which turned it down) and has now turned around and applied in the midwest. After years of being told by various know-nothing outsiders that for-profits were going to "upend" higher education and do away with existing universities, it's good to see reality reasserting itself.

Higher Education Bubble Bursting

When the housing bubble burst a few years ago, a lot of folks starting to take a long, hard look at the higher education sector. Like housing, higher ed is mostly financed by borrowing, and the "cheap money" bubble that built up during the housing boom had, by some standards, also produced a "higher education boom". Various wags and talking heads wondered about how long it would be before state and private universities started to go bust, while college administrations have been quietly concerned about the same thing for the past several years.

It turns out that there was a bubble in higher education, and it is bursting - fairly impressively. It's just not where we thought it would be. Traditional universities, while things have been lean for a few years, are doing more or less OK. But the collapse in the for-profit university sector is both spectacular and ongoing. Consider this latest:

For-Profit Backlash: Campuses Close in Milwaukee

The case of Everest College is interesting for the spectacular nature of its failure. But notice how many others are retrenching: Kaplan, Sanford-Brown, and Phoenix, some of the biggest names in for-profit education. If this were the automobile sector, there would be a massive hullabaloo in Congress about "saving American jobs".

As it is, we shouldn't be surprised that the "frothy" part of the higher ed bubble landed in the for-profit arena. Bubbles are enabled by cheap money, but they are driven by people looking to use that cheap money to make a quick buck, usually in some market segment that's not being served. In this case, the for-profits picked on underprepared first-generation college students from poorer families - a market segment largely ignored by "traditional" universities, and one ripe for fleecing servicing.

The thing is, there's a reason why many of these young adults weren't going to college before: they weren't prepared, and they couldn't afford it. Fancy debt accounting doesn't make either of those problems go away - it's just a means of extracting some money from them before they fail, just as complex no-doc balloon loans were a way for banks to make money before people went bust in foreclosure.

In a few years we may look back on much of the current experimentation with for-profit higher education with the same eye that we currently view Lehman Brothers, Bear Stearns, and stories of Wall Street vampire squids. Yes, some companies may actually figure out how to run a university sustainably and still turn a profit. But in the meantime, we'll continue to see implosions and investigations across the country as the for-profit higher-ed bubble continues to deflate.

Do You Like Keynes or Keynes?

In this political season, we're being treated to a reprise of that great refrain from the 1992 campaign: "It's the economy, stupid." The two parties are arguing heartily over the state of the economy and, most importantly, what policies the next administration should pursue. Each is trying hard to convince us that their guy has the right answers, and the other guy is totally wrong.

The only problem with this picture is that they're both on the same side in terms of economics. Because they have to pretend to be different, this means that one side (in this case, the Democrats) gets to be honest about it while the other side (Republicans) pretend they believe something else.

The great debate in economics that the Republicans are trying to revive and use is the divide between John Meynard Keynes and Friedrich Hayek. For those not familiar with this argument, you can learn most of what you need to know in two rap videos here and here. Yes, I know that "rap video" and "economics" don't usually go together - but watch these. They're good. Produced by real economists!

Republicans have been talking a lot lately about the debt, and criticizing President Obama's stimulus package and auto industry bailout as having been fiscally irresponsible and counterproductive. This is a classic Hayek/Austrian School argument. Governor Romney got in a dig during his convention speech when he said, "Jobs to [Obama] are about government.".

The problem is, judging by their actions Republicans don't believe in Hayek either. In that very same speech Romney said, "I have a plan to create 12 million new jobs". This is not the kind of thing you say if you really believe that government doesn't create jobs, the private sector does.

This is also the same Republican party that, along with nearly universal support from Democrats, passed the first stimulus package back in the waning days of the Bush administration. The target of that package was the financial sector. To a Keynesian, stimulus is stimulus - you can argue over details, but pumping money into one sector is much like pumping money into another. And there is nary a member of Congress - from either party - who will oppose spending that goes to defense contractors in his or her district, in the name of "creating jobs".

To be fair, there is a wing of the Republican party that opposes all of these Keynesian efforts. That's the wing most consistently represented by Ron Paul. Paul has opposed nearly all stimulus efforts, derided the Iraq war as wasteful government spending, and called for an audit of the Fed. He managed to capture a few delegates through various primaries, but the GOP gave him no platform at the convention and effectively shut his supporters out. It's pretty clear what you party really thinks about Hayek when you would rather give the microphone to an old actor talking to an empty chair than to the most consistent spokesman for Austrian School economics in modern times.

In fact, the usual Republican vs. Democrat economics argument - tax cuts vs. government spending - is a tactical argument among Keynesians. Both tax cuts and government spending represent stimulus, just in different forms. Neither side, of course, is willing to criticize the Fed's "Quantitative Easing", which some have likened (with some fairness) to printing money on a large scale - a very Keynesian strategy.

So when you hear the parties arguing that they are fundamentally opposed to each others' economic philosophies, don't believe it. If you really think that Hayek is right, and Keynes is wrong, you're out of luck - you have no candidate to represent your views. Your choice is between one who is honest about following Keynes, and another who is trying to trick you into believing he's not on that same road. Even Richard Nixon admitted to being a Keynesian. Funny how his successors seem to have trouble being as honest as Tricky Dick.

Politics Makes Idiots of Us All

I'm sure this isn't the last of these kinds of stories we'll see this year - it is an election year, after all:

Stung by gas prices, Obama seeks new oil market crackdown

There is lunacy on both sides of the aisle here. On Obama's part, this is both bad politics and bad economics. It is lousy economics, because the underlying reality is that oil is traded on futures markets on the global stage, and fuel (gas, diesel, etc.) is traded similarly both globally and within the US. You can't eliminate everything that looks like "speculation" from a futures market, because futures markets are essentially gambles - people bet on which direction the price will go. Some win and make money, some lose and lose money. Prices are affected by the sum total of those bets, but only where one actor controls a substantial amount of the supply (creating a monopoly, or a cartel) does it really matter - and there are already laws against that sort of thing.

This may or may not be the most efficient means of distributing these particular resources in the marketplace, but no President or Congress can make "speculation" go away with a wave of the hand. And the chances are good that any real attempt to do so would have all sorts of unintended consequences that will cause lots of pain for other folks, who will then get angry at the President anyway.

As bad as the economics here is, the politics aren't much better. There is a near-zero chance that these proposals will actually get passed by both the House and the Senate - a fact that is patently obvious to anyone paying attention. This looks, therefore, like a typical politician "do something" response - pretend to do something and blame your opponents for blocking it. It's political Kabuki theater. I'm tempted to say that insults the intelligence of the American voter, but that's an empirical question for another day.

Finally, the timing here is terrible. Obama is worried about the election in November. By the time we get to fall and people really start paying attention, nobody will remember this particular charade. Gas prices will do what they will do this summer regardless of this or that form of posturing, and how people feel about that in October is unlikely to be much moved by a poorly-researched press conference in April.

Of course, Obama would be less likely to engage in this kind of foolish pandering if the Republicans weren't already demonstrating their awful grasp of economics. The argument that "gas prices are the fault of Obama's energy policies" makes as much sense as claiming that the Easter Bunny will determine this year's World Series winner. But just as there is a base on one side that will lap up the "evil speculators" argument, there is a base on the other that will eagerly buy the "everything is Obama's fault" nonsense. It's sad to see a political party that prides itself on a free-market ideology throw its understanding of the free market under the bus for its own political gain. But then, that's American politics for you.

It being April, none of this will likely matter anyway. By September and October - the point where people really begin paying attention - things will be what they will be. Obama's ability to influence the trajectory of the economy for the better between now and then is vanishingly small. Luckily, the GOP's ability to trash the economy in the same time frame (and if you don't think some of them would just to gain electoral advantage, go read some Karl Rove) is equally small. In the meantime, it will be a long, hot summer of nonsense.

Real Estate - Stuck Firmly in the 20th Century

There's something that has bugged me a while about real estate agents. Actually, there are several things, but structurally I keep wondering - why do we still have them? Why haven't they vanished from the earth?

One analogy - at least, it seems analogous to me - is travel agents. There used to be lots of travel agents. Once upon a time they performed a basic but important task - they gathered and consolidated a lot of information about airline flights and presented it to buyers. In so doing, they took a small cut of the transaction, basically as market makers.

While this operated, it made sense for buyers - it was much easier to call a travel agent than to call every airline and get their flight schedules and prices for flights from A to B. Travel agencies even built a special, proprietary database of flights, and that product gave them value in the market.

Of course along came the internet, and with it Expedia and Travelocity and silly commercials starring William Shatner, and suddenly travel agents largely vanished. Because the internet is an outstanding means of transmitting information between sellers (airlines) and buyers (us). Yes, travel websites do some consolidation for us, for which they take a small cut (usually about $5 per transaction or ticket). But they have, essentially, replaced travel agents - for a much lower cost.

Along the way, airlines learned that it's cheaper to sell us tickets online, so they've benefited too. Technology cut out the middle man, and the rest of us are better off for it.

So a part of me wonders - why haven't real estate agents followed travel agents into oblivion? The function is essentially the same - RE agents act as information transmitters between sellers and buyers. In the realm of information transmission, the internet is vastly superior to relying on an agent as a consolidator. Even the proprietary database agents have (the MLS system) is now available, at least to buyers, for free.

To be fair, RE agents do perform a few other functions - they have a system that allows access to houses (via lock boxes) to permit secure showings, they (supposedly) negotiate on behalf of their clients, and they run some of the paperwork involved in the transaction. They have the 'keys' to putting your house on the MLS in the first place. These things do have value.

But it is very difficult to see how this value amounts to the 6-7% - thousands of dollars - they usually take out of the transaction. Individually, many of these services can be bought from other providers for a fraction of the cost. A lawyer will draw up a purchase contract for you for a couple hundred bucks - and it's likely to be a contract more suited to your interests than the "standard" form that RE agencies use. For a couple hundred bucks more, the lawyer will even negotiate on your behalf. And websites like Zillow provide as much information - sometimes more - as any MLS listing, for free.

About the only thing that's not replaceable is the lock box system - but surely there's a less costly way of running that service as well. So what keeps RE agents in business?

I think there are three things that stand in the way of the logic of the marketplace here. First, agents have cleverly structured that 6-7% cut so that it appears to come only from the seller. This allows them to advertise what we all know in other contexts to be nonsense: that there is such a thing as a free lunch, because the "services" of the "buyer's agent" are "free to the buyer".

Economists know that free lunches are really illusions, and in this case the slight-of-hand is easy to see. The buyer's agent is paid their slice out of the seller's proceeds. But the seller's proceeds come directly from the buyer. If the seller has to pay a buyer's agent $5000, that simply adds $5000 to the price of the house, which comes back out of the buyer's pocket. All of a sudden that "free" service costs you a pretty penny - but you will never get a RE agent to admit this. (I've tried. Many just don't get it.)

Second, RE agents have managed to make the MLS database system indispensable - and they control access to it. Airlines (the sellers of flights) have direct access to put their flights and prices into databases or websites that buyers can see; house sellers can't do the same with the MLS. You the seller need somebody to put your house into that database, and absent a low-cost alternative you're stuck with RE agents.

I am a little surprised that someone hasn't set up a discount seller's RE service - we'll put your house on the MLS and hang a lock box on it, and that's it. Such a business would be cheap to run, and wouldn't need to take thousands from each transaction. But despite the economic logic, such businesses haven't taken off.

The third factor - the barrier to developing that low-cost alternative - lies in two perceptions. The first is the perception that a seller's agent can actually do something, other than listing a house on the MLS, that will increase the probability of a sale on your house. This is, to a substantial degree, a fiction: seller's agents have about as much ability to affect the market as day traders have to move stock indexes up or down. The market is going to do what it does; buyers who are likely to buy a particular house are either there or they're not. If they find the house, it won't be because of anything the seller's agent did - other than post the house on the MLS database.

The second perception is the "free lunch" fallacy above. Because buyers think that "their" agent is free, most will get one. And so it is buyer's agents who have the ability to influence what buyers do - which houses they see and, to a small degree, how those houses are presented.

This suggests that a low-cost seller's service would be problematic, not because it isn't efficient but because buyer's agents (who are generally drawn from the same pool as seller's agents; many are both) are likely to see such a service as a threat, and steer buyers away from those houses. In other words, RE agents have enough control over the perceptions of buyers and sellers to continue to dominate the market, even though there ought to be better economic alternatives.

Ultimately, none of this is that surprising. For all that we like to praise the "hidden hand of the market", the market is often filled with inefficiencies that keep it from acting in the nice, rational, efficient manner that economists tell us it should. People will do things - perpetuate myths, manipulate others' behavior - that advance their own individual interests, even if the result is inefficiency. Nor is there much of an argument here for outside intervention to "fix" the market - government intrusion would likely be even worse, because buying homes is a highly individual decision not easily reduced to common denominators.

There is a hidden lesson in here about the housing market. Basic economics tells us that the higher the transaction costs of an activity, the less of it you will get. For most folks, the transaction cost of buying and selling a home is higher than just about any other purchase - both in absolute dollars and as a percentage. This is an enormous inefficiency - essentially, a hidden tax that produces few public goods - that clearly hampers a recovery in the real estate market. And it's unlikely to go away anytime soon.

So the next time you're listing the villains of the real estate bust - banks, mortgage brokers, Fannie, Freddie, etc. - don't forget to throw in RE agents. They deserve their fair share, after all.