Monday, April 18, 2016

I Guess I Did See This One Coming

About two years ago, I noted that the Los Angeles Superior Court judge in the Vergara v. California case had overreached when he declared that tenure and other job protections for teachers in primary and secondary public schools are unconstitutional. The plaintiffs' logic was that since poor and minority students were more likely to be saddled with ineffective teachers protected by these provisions, there must be a violation of their civil rights. I predicted that this ruling would be overturned on appeal, and last week, that's just what happened.

Echoing the theme of my earlier post, the Appeals Court ruled:

The court’s job is merely to determine whether the statutes are constitutional, not if they are ‘a good idea,’ ... The evidence did not show that the challenged statutes inevitably cause this impact.

Education is like many public policy issues today -- we spend too much, get too little, and either don't yet know how to improve on those outcomes or don't have the leadership skills to implement what we do know.

Friday, January 15, 2016

If I Wanted To Start the New Year Off by Raising College Tuition, I Would Propose This

From yesterday's New York Times:

Lawmakers have proposed requiring that about 90 colleges with endowments of $1 billion or more spend about 25 percent of their annual earnings for tuition assistance — or forfeit their tax exemptions.

Suppose that college costs $65,000 at one of these institutions and that half of the 4,000 students receive financial aid. If the college raises the cost to $66,000, then it gains the $2 million from the students not receiving financial aid and owes $2 million more to the students receiving financial aid. Since the numbers offset, no endowment income has to be reallocated, but the college is now $2 million closer to reaching the lawmakers' objective. "Tuition assistance" is necessarily defined relative to a price that the college controls and not everyone faces. Raising it here confers the double bonus of generating more revenue and more credit against the lawmakers' new requirement.

A minor complication is that some students might qualify for financial aid at the higher cost but not at the lower cost. So the college would owe slightly more than $2 million in additional aid. A more important complication is that colleges cannot raise their prices without facing some market competition, in this case from colleges with endowments under $1 billion who are not subject to the new constraints.

I presume that "annual earnings" here would refer to a multiyear average, since the constraint wouldn't be binding in any year that annual earnings were negative or positive but very small. Or maybe the threshold would be specified as a percentage of the value of the endowment, not its annual income. Better than this policy, I think, would be to place more requirements for overall cost containment on any college that accepts federal funds for particular purposes.

Tuesday, December 01, 2015

Hillary Clinton's Infrastructure Plan

It was almost eight years ago that I started writing about spending on infrastructure as a means of countercyclical fiscal policy. There was an op-ed in The Washington Post, followed by an essay in The Ripon Forum, as the Great Recession was beginning. I returned to it occasionally as the weak recovery and inelegant policy discussions of economic stimulus continued the need for a sensible plan to boost economic activity. This op-ed at U.S. News Economic Intelligence blog is a good example.

In the intervening time period, the American Society of Civil Engineers (ASCE) has updated its quadrennial Infrastructure Report Card. As of 2013, the costs to improve our D+ grade had reached $3.6 trillion. That far exceeds what we allocate to infrastructure investment over a reasonable period, and the additional $275 billion (perhaps coupled with private funds to reach a total of $500 billion) over 5 years that Hillary Clinton has proposed is a small step in the right direction.

What I find interesting about the proposal is less in the details and more in the possible timing. At present, the labor market is cresting. My preferred measure of the labor market is the initial claims for unemployment insurance. The latest estimates are posted each Thursday morning at this page. The latest 4-week moving average of initial claims was 271,000. We have been below 300,000 for over a year now, a threshold which has historically been associated with a growing economy. Between now and 2017, we can expect that series to start creeping back up to values that are less consistent with a growing economy.

So the interesting part of the proposal is that when a new president takes office in January 2017, economic growth will be slowing, and our friends at ASCE will be getting ready to release a new report card showing, I'm sure, an enormous infrastructure gap. Our friends at the Fed will have started to raise short term interest rates (maybe this month?), but they won't be very high by that time and so there won't be much room to cut. We will be relying once again on fiscal policy to smooth out a looming downturn.

I hope that 14 months from now, we are not scrambling around for "shovel ready" projects like we were in 2009. I also hope that our fiscal policy discussions are more elegant than "which expiring tax cuts should we hold our nose and continue to extend?" (correct answer: none, actual answer: almost all of them)

The time to set the stage for better policy options is now. Congress should make a prioritized list of the nation's infrastructure needs from the menu laid out by ASCE and its own objectives for improving sectors like energy, commerce, and transportation. Have the list ready to go in January 2017 when the new president takes office and when the economy will likely benefit most from increased public spending. That we would look like a functioning republic again is just an added bonus.

Sunday, October 18, 2015

Escrow for the Common Good

Years ago, when I was teaching finance more regularly, I read The Squam Lake Report and thought its recommendation to improve corporate governance by requiring deferred compensation (in cash) for top management made sense. Why should a manager with significant oversight responsibility be paid in full today if the firm does not survive well into the future? It is a straightforward approach to moral hazard when the consequences of a manager's actions take some years to be fully realized. Put a portion of the payment in escrow, and hold it there until reasonable performance has been demonstrated.

I'd like to propose two other applications of the same basic idea to areas I have been thinking about for teaching and research of late. Consider the payments that are made by the public sector to organizations that operate prisons. Why should a prison be paid in full today to incarcerate an inmate who recidivates shortly after release? One estimate puts the rate of recidvism at 40% within 10 years. The prison operator has considerable control over the inmate's daily activities while incarcerated. That time should be used to help prepare the inmates to stay out of prison upon their release. If it is not used productively, it shouldn't be just the taxpayer who bears the financial cost to re-incarcerate the prisoner. Why not condition a portion of the payment to the prison operator on the released inmate staying out of the penal system for some period of time? Put the payments in escrow, and release them to the prison operator slowly over time, based on the released inmate's law-abiding behavior. The low cost of interventions like prisoner education and job training compared to the relatively high cost of re-incarceration suggests that prison operators have room to do a better job.

The other example is higher education. Policy makers are currently wrestling with the issue of what to do about student debt repayment. By some estimates, 1 in 6 borrowers are severely delinquent. Why should a university be paid tuition in full based on the proceeds of a loan that may not be repaid? The university has every opportunity to convey knowledge and teach skills that increase the likelihood of repayment. But it does not bear the financial consequences of a loan not being repaid. Instead, put a portion of the tuition payment in escrow, and release it only as the student loan is repaid. This arrangement provides a financial incentive for universities to provide a better education and to avoid enrolling students who are unlikely to be able to convert this education into enough earnings to repay their loans. These two issues are at the heart of our student debt repayment problem. The problem is financial -- the solution should also have a financial component.

Wednesday, January 14, 2015

Diversifying the Workforce, Then and Now

Do you remember what you were doing ten years ago today? Larry Summers was at the NBER, making some remarks as president of Harvard University at a conference on "Diversifying the Science and Engineering Workforce." Those remarks, widely misunderstood in real time and even today, are posted here. Larry lays out his thesis in the second paragraph:

There are three broad hypotheses about the sources of the very substantial disparities that this conference's papers document and have been documented before with respect to the presence of women in high-end scientific professions. One is what I would call the-I'll explain each of these in a few moments and comment on how important I think they are-the first is what I call the high-powered job hypothesis. The second is what I would call different availability of aptitude at the high end, and the third is what I would call different socialization and patterns of discrimination in a search. And in my own view, their importance probably ranks in exactly the order that I just described.

It was the second hypothesis that got Larry into so much trouble. Later in his remarks, he was making a point that is illustrated by the following picture:

The point he made was that if you have two distributions of ability with the same mean but with different variances, then if you look at the extreme tails of the distribution -- here, the ability required to compete for a position in the most selective academic departments -- even a slight decrease in variance will result in a vast under representation of the less variable group. (In the picture above, imagine drawing a vertical line right where the arrow from s2 is placed -- no members from the first group are above that ability level.) Larry's second hypothesis was that the variance of the distribution of female ability was less than that of males. Suggesting in the paragraph quoted above that this had more to do with observed under representation of women in academia than his third hypothesis -- more conventional discriminatory behavior within the professions -- is likely what started the trouble stemming from the remarks. (I blogged about them ten years ago here.)

The broader issues to which Larry was speaking have not gone away.  Ignoring the statistical point in Larry's second hypothesis, his first hypothesis focused on factors that don't favor women that exist across society -- that within households, given current laws and regulations, women tend not to get the same support as men to pursue high-powered careers. The third hypothesis focused on factors that don't favor women that exist within a given profession. On this third hypothesis, my own field of economics is in the midst of some constructive reflection. Some good examples are pieces by Noah Smith in Bloomberg View in November, "Economics Is a Dismal Science for Women," and by Miles Kimball and an anonymous female co-author in Quartz earlier this month, "How Big is the Sexism Problem in Economics?"

Noah, who blogs at Noahpinion, refers to a recent article in Psychological Science in the Public Interest that draws the following conclusions about most math-intensive fields:

We conclude by suggesting that although in the past, gender discrimination was an important cause of women’s underrepresentation in scientific academic careers, this claim has continued to be invoked after it has ceased being a valid cause of women’s underrepresentation in math-intensive fields. Consequently, current barriers to women’s full participation in mathematically intensive academic science fields are rooted in pre-college factors and the subsequent likelihood of majoring in these fields, and future research should focus on these barriers rather than misdirecting attention toward historical barriers that no longer account for women’s underrepresentation in academic science.
However, the paper notes that Economics remains an outlier in a few respects, including promotion and compensation.

Miles, who blogs at Confessions of a Supply Side Liberal, goes on to provide a list of the various, sometimes subtle ways, the path to the top of the profession in economics is still steeper and rockier for women compared to men. I don't think there is a mindset within economics that is unfavorable to women. But a neutral mindset does not always lead to neutral behavior, and as a profession, this is an issue that we should all take seriously.