Category Archives: links to my essays

MOOC spelled backwards

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Hollis Robbins writes,

Thousands of qualified, trained, energetic, and underemployed Ph.D.s are struggling to find stable teaching jobs. Tens of thousands of parents are struggling to pay for a good college education for their children. Home-schooling at the secondary-school level has proved itself an adequate substitute for public or private high school. Could a private home-college arrangement work as a kind of Airbnb or Uber for higher education?

Read the whole thing. Pointer from Tyler Cowen.

I could do this. I could easily teach college-level courses in economics, statistics, history, and philosophy. This would be the opposite of Massive Open Online Courses. It would be College Of One Mentor, or COOM. As Robbins points out, higher education used to work this way.

Education does appear to be ripe for unbundling and disintermediation. However, just as with banking, there is a tight link between education and the state.

Karl Smith’s Question

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As reported by Tyler Cowen.

Name the period or event in economic history where we looked backed and said “hmm, money was less important than we thought at the time

Of course, the trend over the past fifty years has been to assign a large role to money in economic history. I believe that this trend in thinking is wrong-headed.

Let me digress for a moment. A few days ago, I watched “Money for Nothing,” a documentary about the Fed that was sent to me to review. On the positive side, I would say that

1. It includes excerpts of interviews with an outstanding and diverse set of experts, including Allan Meltzer, Alan Blinder, and Janet Yellen.

2. Its rendition of the history of the Fed is well done.

On the negative side, I would say that I have never walked away from a documentary feeling satisfied. That is an understatement. Every documentary, regardless of whether I am sympathetic to its point of view, leaves me feeling swindled. I think the format is suited to leaving people with impressions and illusions, not with genuine understanding.

For example, “Money for Nothing” devotes about 15 seconds each to Brooksley Born and Ned Gramlich. If all you knew about them came from this documentary, then you would have not sense of the ambiguity that surrounds their alleged farsighted desire to increase regulation.

Born was fighting an unlikely turf war, attempting to get the dealer markets in financial derivatives to be overseen by the Commodity Futures Trading Commission, which has expertise in a very different area–standardized contracts traded on organized exchanges. Now, if you abolished the dealer market in derivatives and forced them onto an exchange, then you could place derivatives under the CFTC’s jurisiction. First, there has to be a debate over whether or not this is a good idea (in the wake of the crisis, many people think it would be a good idea. I do not.) But if we take as given the existing dealer market, Born’s claim of turf was untenable.

Gramlich was worried about consumer protection issues in mortgage lending. There were a lot of mortgage brokers behaving like old-time car salesmen, always trying to make customers pay more than necessary. As the housing boom accelerated, more and more borrowers were on the lower end of the scale in terms of income and sophistication, and the abuses and exploitation by lenders tended to increase. (Keep in mind, however, that down payments were so low that the bulk of the losses from the crash were born by investors, not borrowers. The phrase “predatory borrowing” is not unjustified.) To the best of my knowledge, what Gramlich was not doing was warning that the whole financial system was vulnerable because of what was going on in mortgage markets.

Also, the issue of how money affects the economy is too deep and controversial to be captured in a documentary. “Money for Nothing” appears to claim that both high interest rates and low interest rates are bad for investment. High interest rates choke off investment, while today’s low interest rates choke off saving–which is supposedly hurting investment. Maybe they do not mean to make the latter claim, but, again, it is a format that lends itself to leaving you with impressions, rather than helping you think through an issue. The documentary does not raise the issue of the distinction between short-term inter-bank interest rates (which the Fed can affect) from other interest rates (where the effect of the Fed is in doubt among many economists). It does not bring up the issue of the “zero bound,” which some economists (not me) make a big deal out of.

Finally, and this gets back to Karl Smith’s question, I think that “Money for Nothing” vastly overstates the Fed’s role in the economy. Going forward, the big issue is fiscal policy. Remember the ad from Hillary Clinton’s campaign for President where she played the role of Santa Claus, handing out gifts to various constituency groups? Well, going forward, given the excess of the government’s promises relative to its ability to pay, politicians are going to be playing a lot less Santa and a lot more Scrooge. That is going to cause a fraying of our politics, which is already taking place.

In the coming drama, the Fed is a bit player. If we end up with hyperinflation, it will be the result of a total breakdown on the fiscal side, in which the monetary authorities are given no choice but to try to meet the government’s revenue needs by collecting the inflation tax. Not the most likely outcome, and even if it were to take place, the fault would not lie with the Fed.

More broadly, my inclination in macroeconomics is to get away from aggregate supply and demand. I think that the obsession with money and the Fed is one huge attribution error. It is human nature to look for simple causes and scapegoats. I think we should lean against that.

So I would like to see us place less blame on the Fed for the Great Depression. I would like to see us assign less blame to Arthur Burns for the inflation of the 1970s and assign less credit to Paul Volcker for ending it. I think that we may be over-emphasizing the role of money in all of these cases.

Karl Smith is correct to imply that over time we have come to assign a greater role to money than contemporaries did at the time. That does not necessarily mean that we are wiser.

The Macro Wars: Inside-out vs. Outside-in

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I remember reading once that it is still not understood how the giraffe manages to pump an adequate blood supply all the way up to its head; but it is hard to imagine that anyone would therefore conclude that giraffes do not have long necks. At least not anyone who had ever been to a zoo.

—Robert M. Solow

Solow wrote those words at the height of the macro wars. I was very much on his side at the time, and this post will explain the sense in which I am still on his side.

Think of the task of macroeconomics as completing a mineshaft between the “outside” (what we observe in the world) and the “inside” (a mathematical model that is “pure” in its microfoundations). The Old Keynesians, including Solow, took an outside-in approach: let’s work from what we observe, build a crude model to handle that, and maybe eventually we can dig deeper and find the microfoundations. Start from the fact that there is a giraffe, and try to figure out how it maintains its blood supply. Do not start from a model of blood supply that precludes the existence of giraffes.

For the Old Keynesians, macroeconometric models were a tool with which to observe the world. They provided the starting point for the outside-in approach. Then Robert Lucas came along with his “critique,” which said that if you took an inside-out approach that included rational expectations, macroeconometric models would break down. The Lucas Critique launched the macro wars.

Lo and behold, macroeconometric models did break down. However, I do not think that the Lucas Critique had much to do with it. You can get more on my perspective by reading this paper and by reading my macro book.

The New Keynesians took up Lucas’ challenge by adopting an inside-out approach. Stan Fischer’s course at MIT was 100 percent inside-out theory, and I viscerally hated it. At the start of one class, I stood up, proclaiming loudly and sarcastically to Fischer and my fellow students how much I enjoyed the topic of “monetary growth models,” which was the particularly pointless mathematical, er, self-abuse that he was teaching us that week.

I chose Solow as my dissertation adviser, and I wrote an outside-in thesis, working backwards from what we observe to a theory of price rigidity. Not having a thesis that focused on rational expectations and not having Fischer plugging for me were career-altering. I was doomed to failure if I tried academia, and so I wound up on a different track. I don’t think I was the one who lost out on that deal.

So if you are trying to follow the methodological discussions among Mark Thoma, Paul Krugman, Noah Smith, and others, you will find me still on the side of the Old Keynesians. I still despise inside-out macro, and I still prefer the outside-in approach.

What has happened to me since I left MIT is that I no longer think that macroeconometric models provide a valid lens into observing the real world, and I no longer think that Keynesianism is the One True Way. The real world is still out there, and I still think it should be our starting point for digging the mineshaft. I still respect the Old Keynesian approach of starting with observations about the world rather than starting at the bottom of the mine with a “pure” model. However, I am willing to entertain theories that differ considerably from the Old Keynesian one. Hence, PSST, which you can also read more about in my essays/papers.

Trends in Faculty and Administration

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Timothy Taylor comments on a recent report.

When it comes to employment, colleges and universities have tried to hold down faculty costs in dealing with the expanding numbers of students by the use of time-contract faculty and part-timers. The nonprofessional staff are dealing with the increased number of students by using improved information technology and other capital investments, without a need for a higher total number of staff. But the number of professional staff is rising, both in absolute terms and relative to the number of students…

I’ll only add that institutions are defined by their people. As the full-time and tenured faculty become a smaller share of the employees of the institution and the professional administrators become a larger share, the nature and character of the institution inevitably changes. In this case, colleges and universities have become less about faculty, teaching, and research, and more about the provision of professional services to students and faculty. As far as I know, this shift was not planned or chosen, and the costs and benefits of such a shift were not analyzed in advance. It just happened.

My comments:

1. Perhaps this parallels shifts in other sectors of the economy. That is, we have fewer front-line production workers and more people working on building organizational capital.

2. The value of the organizational capital provided by non-teaching staff in education seems particularly nebulous because the measure of value in education is particularly nebulous.

3. In other sectors, the number of production workers per unit of output probably is falling faster than in higher education.

4. In other sectors, information technology has had more profound effects on the process of providing goods and services. People suspect that bigger changes are in store in education, once people figure out the best ways to apply information technology. I offered my guesses here. Some of these possibilities could lead to a dramatic reduction in the number of professors per student and also in the number of professors per organizational-capital builder in education.

Government and Scale

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Don Boudreaux writes,

– the number of citizens per each of the 50 states in the U.S. is today, on average, 6,300,000 (or more than 27 time larger than in 1789);

– the average number of citizens represented by each of the 435 members of the U.S. House of Representatives today is about 724,000 – meaning that the typical member of the U.S. House today represents a number of citizens 13 times larger than was represented by his or her counterpart in 1789;

– – the average number of citizens represented by each of the 100 members of the U.S. Senate today is 3,150,000 – meaning that the typical member of the U.S. Senate today represents a number of citizens 23 times larger than was represented by his or her counterpart in 1789.

For a long time, I have made an issue of this. I believe that as government scales up, it gets worse. My recent essay offered international evidence for this. I discuss it in the widely-unread Unchecked and Unbalanced. Michael Lotus and James Bennett in America 3.0 also suggest that a country with more states, each less populous but with more governing autonomy, would be a desirable future. Almost ten years ago, I wrote We Need 250 States.

Claude S. Fischer vs. Libertarianism

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He writes,

using the Human Development Index, which measures a population’s well-being in terms of health, education, and wealth. The HDI, corrected for internal distribution (the Bill Gates-makes-all-Americans-look-rich factor), is typically higher in OECD nations where governments are relatively large.

In fact, the HDI is very highly correlated with the Fraser index of economic freedom, and in that sense it supports libertarianism. I like to group countries by population size. Take countries with population size between 5 and 10 million. Of the top ten of these countries according to the Fraser Index, seven are also in the top 21 in the HDI. The only three that are not are Jordan (ranked 100th in HDI), United Arab Ameriates (ranked 41st), and Slovak Republic (35th).

Next, consider the 18 countries with a population over 76 million. The top three in terms of the Fraser index are the U.S., Germany, and Japan, and they are ranked 3rd, 5th, and 10th respectively in the HDI.

In an earlier essay, I suggested that large countries in general have poorer governance, as measured by the Fraser index. The HDI shows the same thing. Apart from the U.S., Germany, and Japan, the next highest-ranking large country in terms of the HDI is Russia, at 55th. 10 out the 18 largest countries are ranked 101 or worse in the HDI.

In fact, the correlation between the HDI and the Fraser index is sufficiently high that I could have written my essay using the HDI as my measure of governance and shown the same results: government tends to be poorer in countries with large populations, which is consistent with a libertarian view that centralized power is a bad thing.

Turning back to Fischer, the piece is not really worth reading, unless you enjoy grinding your teeth over another attack on libertarianism that is based on the idea that dislike of government is crazy and anti-social.

Suppose instead that we say that what libertarians oppose is the use of centralized, coercive power. Does that still make us seem crazy and anti-social? To me, it seems as if progressives appear to believe that centralized, coercive power is a great boon, an endless source of social betterment. Am I being uncharitable? Do they believe something else? Alternatively, if they do wish to extol the virtues of centralized, coercive power, am I really crazy for having doubts?

Personal-Brand Journalism

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The Washington Post (hardly a disinterested spectator) looks at the phenomenon, focusing on Andrew Sullivan.

It’s not clear that Sullivan’s relatively slow start as his own boss says much about the prospects for others who want to do the same, says Rick Edmonds, the media-business analyst for the Poynter Institute, a journalism education organization. Greenwald, Silver, Mossberg and the others, he notes, have deep-pocketed backers who can afford to sustain years of losses and experimentation.

I have thought about the issue of “Information wants to be free but people need to get paid” for close to 20 years now. Here are my views, as articulated in 2001.

One alternative that cannot be exhausted soon enough is banner advertising. I have been eager to see this concept die since it first was introduced in 1995. Another alternative that I believe should be euthanized is the subscription model for individual periodicals. The marginal cost of distributing the publications online is zero, so subscription models are very difficult to sustain. Finally, there is the alternative of micropayments, meaning small payments for access to particular slices of information. I am now persuaded by Clay Shirky’s argument that the mental transaction costs involved in micropayments are too high to make micropayments workable.

Ultimately, I think that a new form of content aggregator might get away with charging for subscriptions. The Washington Post is a content aggregator, but it is based mostly on its legacy model. On the Internet, you could become a very different aggregator. You could negotiate with individuals and publications around the world to obtain the ability to bundle their content into a subscription service. As a consumer, I might pay $10 a month to a service that offers me everything I like to read. But I am unlikely to pay even $2 a month to read just on blogger or to get behind one newspaper’s paywall. As I put it in 2001,

For an economic model, I continue to recommend the idea of “clubs.” A club would provide content aggregation, recommendation, and annotation services. Journalists would be paid by clubs, rather than by individual publications. For a consumer, joining a club will provide access to value-added services relative to online content. Most of the articles that you are able to read when you join a club may be freely available without joining the club. What your membership fee would give you is better access to individual authors, as well as to indexing tools and cross-reference tools. Some of these tools would be provided by community members, as in the Amazon book lists. The raw content is not what you are paying for. The haystack is free. But if you want help finding the needle, you have to join the club.

Over the years, I have become a bit less optimistic about the “club” model and more inclined to predict an outcome in which journalists require patronage for support. In some sense, Andrew Sullivan is using a patronage model. However, I think that patronage is most likely to come in the form of support from a few wealthy donors than from a broad base of subscriber-donors.

The Gift of Health Insurance

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Megan McArdle writes,

There may be something seriously wrong with our understanding of who the uninsured are, and what they are willing and able to buy in the way of insurance. I don’t know exactly what the fault may be in our understanding. But if the numbers [of previously uninsured signing up for Obamacare] stay this low, I’d say we need to reassess the state of our knowledge about the uninsured — and the vast program we created to cover them.

This reminds me of an essay that I wrote over 10 years ago, called Health insurance do-nots.

In America is Crazy, I wrote that our health care policy reflects mental illness. The fundamental problem is that we believe that health insurance is something that only should be received as a gift — never obtained for oneself. Thus, we immediately assume that when a family does not have health insurance, they are to be pitied for not having received the gift, rather than being blamed for not having taken responsibility.

After the Census report was announced, the evening News Hour on PBS featured a young man (he appeared to be about 30) without health insurance who had been diagnosed with melanoma. The focus of the feature was the financial hardship that the man was going to have to undergo, including putting his family deeply into debt.

While I truly feel sorry for this man, I have so say that the worst of the financial burden of his illness was avoidable. When he was healthy, he could have obtained health insurance. Instead, he chose to spend his income on other things. He was a health insurance “do-not.”

However, the thrust of the story was not, “Let this be a lesson to you. Buy health insurance, because you never know when you may need it.” Instead, as in the Times editorial, the PBS story treated the man as a victim because he did not have employer-provided or government-provided health insurance.

To deal with the problem of health insurance do-nots, I wrote that

some form of catastrophic health care coverage ought to be mandatory

I was naive at that time, thinking that the government could mandate basic catastrophic coverage. The political process instead works in the direction of mandating gold-plated coverage. It works in the direction of rewarding politicians who make the most outlandish promises (“it will lower cost, you can keep your doctor,” etc.), rather than in the direction of rewarding politicians who tell people the truth about the cost of health care or who dare to raise the issue of individual responsibility.

Larry Summers on Sectoral Productivity Disparities

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He says,

people with higher wages now work more hours than people with lower wages. The time series tracks the cross section. Over time, as we have all gotten richer, the number of hours worked for many people has risen

and also

the simple fact is that the relative price of toys and a college education has changed by a factor of ten in a generation

Pointer from Timothy Taylor.

How do you connect these dots? One way is to scream “We need more government!” Because look at the inequality! Look at the low productivity in education and health care, and we know government ends up running the low-productivity sectors!

I had another way to connect the dots. You could say that the cost of living has gone way down for people who do not measure their self-worth by the prestige of the college to which their kids go and the breadth of their health insurance coverage. Many people can now afford what they think is a decent lifestyle without earning so much in the labor market. However, the anointed look at such people and say, “But you must attend an elite college. But you must have health insurance that covers all manner of medical services, not just major medical.”

My Case for Radical Federalism

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In this essay, I document the negative relationship between the population of a country and its economic freedom.

Overall, 43 percent of the small nations are in the highest group for economic freedom. Only 20 percent of the middle-sized nations are in that group. And just 17 percent of large nations have high levels of economic freedom.

After you read that essay, you might want to look at this version, where I use a controversial measure of national average IQ as an additional variable to predict economic freedom.

Think about what it might mean to have responsibility for something like Medicare or unemployment insurance devolved to the state level. Would someone who is born in Missouri and moves to Maryland be considered a citizen of Missouri who then is a guest worker in Maryland? When would that person become a citizen of Maryland? etc.