Market Failure? Academic Departments
The Angry Professor describes a new budgeting system at LSU:
Several years ago LSU moved to a business model budget. Under this
model, each department has control over its own funds. We might choose,
for example, to give everyone a big raise. Or, we might choose to hire
new faculty. We might purchase equipment, or furniture.As
with all such schemes, the administration makes sure that they will get
money from somewhere to sustain their bloated salaries. Each department
pays a "tax" to the college, which is determined by enrollments and
indirects as earned in "Year Zero" (the year before the new budget took
effect). If the department fails to generate at least the enrollments
and indirects earned in this year, the college will take the shortfall
out of the departmental budget. We’re not talking about that funny fake
money that colleges usually shuffle around, but real dollars: my
raises.
Some good things have come out this arrangement:
My department and several others have taken
advantage of the new model by "firing" the custodial staff provided by
Physical Facilities and hiring a private contractor to keep the
bathrooms looking spiffy. I must say, the bathroom has never looked
cleaner, and my office carpet has been vacuumed for the first time in
several years.
But, of course, the Angry Professor is angry.
In the social sciences, every department is trying to offer
statistics courses in house, so we now have about 8 courses titled
"Introduction to Statistics in [insert department name here]."
But why doesn’t the Coase Theorem and comparative advantage apply? The problem here can’t be the budgeting. I suspect a lack of property rights.
Each department is now in direct competition with every other for undergraduate enrollments.
Sounds good to me but the Angry Professor has a rebuttal:
The marginal departments, the ones with the
lowest possible academic standards, are pulling in vast numbers of warm
bodies and the tuition dollars associated with them. The departments that formerly only provided degrees to the football players are now thriving.
But grade inflation and the incentive to take easy courses in easy departments is nothing new, the only difference is that now the easy departments have funding commensurate with enrollments. The bottom line, therefore, is that the angry professor is angry at the students for not choosing classes more wisely.
A better grading system that takes into account the fact that some departments and professors grade easier than others would help students to make better choices. It’s not obvious to me, however, that on the whole the students aren’t making rational choices.
Thanks to Tom Slee for the pointer. I hope to say more about his interesting new book, No one Makes You Shop at Wal-Mart, in the future. Contrary to the title it’s about how markets fail, not a defense of Wal-Mart!
Markets in Everything: Police
Serbs seeking a bit of extra
protection or perhaps a helicopter for the weekend can now turn
to the police, which from this month will be renting out its
personnel, transport and even animals for private use.
More here. Of course, there is a history of private firms hiring police in Washington, DC.
Thanks to Carl Close for the pointer.
Adverse Selection among the Kiwis
The Unknown Professor points us to Pay Peanuts and Get Monkeys? Evidence from Academia a clever paper on adverse selection in academia. In New Zealand academic salaries are mostly independent of discipline so someone from a high-flying field like economics or finance is giving up a big American salary to teach in NZ compared to say a professor of literature. As a result, we ought to expect that the greater the salary in the U.S. the lower the quality in New Zealand.
…discipline research performance is indeed
negatively related to the value of outside opportunities: the greater a
discipline’s average salary in United States universities, the weaker
its research performance in New Zealand universities. The latter
apparently get what they pay for: disciplines in which the fixed
compensation is high relative to opportunity cost are best able to
recruit high-quality researchers and/or motivate their researchers to
be productive. Paying (relative) peanuts attracts mainly monkeys.
It’s a good paper, thus I expect the author will soon leave New Zealand.
Libertarians and Government Quality
Tyler is very wrong to say that libertarians assume that government quality is fixed. On the contrary, I always assume that government quality can go way down.
Seriously, however, a large part of the libertarian/classical liberal program has been about designing institutions to improve government quality just look at Hayek’s the Constitution of Liberty or Buchanan and Tullock’s the Calculus of Consent. The classicals, Montesquieu, Locke, Madison et al. were primarily focused on increasing government quality through constitutional design, things like democracy, division of powers, federalism, an independent judiciary and a bill of rights. The libertarian program of improving government quality has been remarkably successful, and far more successful than any other program.
Are there other methods of increasing government quality? Yes. In my post on Fiasco, I wrote, "Should we be surprised that delays, errors and incompetence are more prevalent at the INS than at bureaucracies which must deal with citizens or which face competition from the private sector?" which implicitly gives two methods for raising government quality – giving customers a vote and creating a competitive benchmark.
Contra Tyler, libertarians are on the forefront of offering
ideas to improve government quality. Term limits, flat tax (as a way
of reducing corruption not just an economic improvement), different voting methods, a balanced
budget amendment, openness and transparency, competition, increased
federalism, and unrestricted media are just a few ideas.
Tyler, in contrast, doesn’t give any hint of how to improve government quality and his examples are not very good. Tyler likes Finnish architecture. Well it’s no surprise that if a lot of governments promote architecture one of them will produce something that Tyler likes. I think this is very cool but I don’t advocate bringing back the funders. Same thing with the highway system or the Internet. Sure, these were good investments but does government investment pay as a rule?
The grand libertarian program has improved government quality tremendously – so much so that we are well into the realm of diminishing returns but we can do better and libertarians are among the leaders in suggesting how.
Addendum: Glen Whitman replies to Tyler also.
WashingtonWatch
WashingtonWatch.com is a new website that presents estimates of the costs or savings per family or person for a variety of bills. Here’s the latest DOD budget cost:
S. 2766 would authorize appropriations for fiscal year 2007 for the
military functions of the Department of Defense (DoD), for activities
of the Department of Energy (DOE), and for other purposes, including
operations in Iraq and Afghanistan.Cost Per Family: $5535.19
The website is a useful collection but be aware that there is no attempt to do any cost-benefit or incidence analysis. The numbers are just brute government estimates of the total program spending or tax reduction divided by the number of families or persons. I can guarantee you, for example, that the following calculation for the "average family" is way, way off the mark.
H.R. 5638 makes the estate and gift tax permanent; increases the
estate and gift tax credit to a $5 million effective exclusion amount,
making any unused effective exclusion amount portable between spouses;
and reduces rates, as well as making other changes in tax law.Savings per average family: $1896.79
Does the Sugar Quota make you Fat?
I don’t know whether High Fructose Corn Syrup (HFCS) acts more like fat than does sugar (compare here and here) but it’s worthwhile pointing out that HFCS is a child of the sugar quota. The import quotas raise the US price of sugar well above the world price (~24 cents per pound compared to ~9 cents per pound) and encourage consumption of HFCS. Reflecting this fact, the main defenders of the sugar quota are no longer Florida sugar growers but rather mid-West corn growers.
Fiasco II
Henry at Crooked Timber challenges me to provide more background on why the fiasco in Iraq is another instance of government failure. I do so in the comments to his post and expand somewhat here.
Government founders on problems of incentives and information. On incentives: Should we be surprised that delays, errors and incompetence are more prevalent at the INS than at bureaucracies which must deal with citizens or which face competition from the private sector?
Of course not – but then what incentives does our government have to prevent abuse of foreign
citizens? Democracy in this case provides no checks and balances because of
anti-foreign bias, the ease with which the public can ignore the deaths of
innocents abroad, and the fact that foreigners lack representation in
our legislatures or the courts. Thus, Abu Ghraib and the routine shooting of innocents is no surprise – this is what happens when government is unconstrained.
What about the incentives to
start wars? Government is bad enough when we all have access to
information. What are we going to do when the major source of
information is the government itself and they ask us to trust but not verify?
Is it a surprise that wars
are much more likely to be started when the economy is doing badly and
the President is low in the polls? Not to me but I am dismayed that people continue to be surprised when Presidents lie to make war, as if this had never happened before.
We are not about to send American boys nine or ten thousand miles away from home to do what Asian boys ought to be doing for themselves." Lyndon Baines Johnson, October 1964.)
It’s naive to only blame particular people (Bush, Cheney et al.) and depressing when people at CT claim that if only "our guys" had been in power everything would have been ok. When you see the same behaviour again and again you ought to look to systematic factors. And even if you do believe that it is all due to Bush, Cheney et al. it’s not as if these guys came to power randomly, they won twice. The worst get on top for a reason. As a result, government ought to be designed (on which see further below) so it works when the knaves are in power and not just when the angels govern.
One response in several comments at CT is that these are arguments against democracy and not against government. If only we had followed the experts at the Pentagon we would have been ok. Frankly this response, which is an argument for Fascism, sickens me. Factually the argument is incorrect, the Pentagon and not just the civilian leaders share much of the blame for our current fiasco. Moreover, had we listened to the experts in the past, Curtis LeMay and his type would probably have sent us to nuclear hell by now. I believe in democracy but I believe in it as a constraint on government.
Governments also founder on problems of information. Whereas the market makes use of highly dispersed information in the minds of millions of individuals thousands of miles apart the government bases its information on curveball and the musings of a cabal of neo-conservatives busy counting the chapters of The Prince for gnosis. Yes, this case is especially ridiculous but have people not heard of the Gulf of Tonkin? More generally, an economy cannot be centrally planned and neither can a society (let alone can a society be centrally planned from another country by people who don’t even speak the language). The idea that our government, however competently run, can export democracy is simply the fatal conceit applied to foreign affairs.
Am I arguing that the market could have done it better? No, believe it or not, my goal is not to efficiently kick the shit out of foreigners. If something can’t be done well that’s an argument for not doing it – or at least not doing it often. I will take the unusual opportunity to agree with John Quiggan who writes at CT that in war "the likelihood of disaster is so great that the bar needs to be set very high." How high should the bar be set? Well we could begin by taking the Constitution seriously when it states that Congress alone has the power to declare war. (I know, the Constitution is a dead letter.) And, if we really get ambitious, how about making the Department of Defense live up to its name?
Fiasco
In Fiasco, Thomas Ricks says the war on Iraq and subsequent occupation was ill-conceived, incompetently planned and poorly executed. I have no quarrel with that. What dismays me is that anyone expected any different. All wars are full of incompetence, mendacity, fear, and lies. War is big government, authoritarianism, central planning, command and control, and bureaucracy in its most naked form and on the largest scale. The Pentagon is the Post Office with nuclear weapons.
If this war has been worse on these scores than others, and I have my doubts, we can at least be thankful that the scale of death and destruction has been smaller. At the Battle of the Somme there were a million casualties and 300,000 deaths over the course of a few months. If we remember previous wars more fondly this is only because those wars we won. Incompetent planning and poor execution are not fatal so long as the other side plans and executes yet more incompetently.
Is this a suggestion to put the current war in context? Not at all. It is suggestion to put government in context.
Markets in Everything: Butts
Producers often hire body doubles to save money on insurance. It
might cost a huge amount in risk coverage to have a high-priced star
dangle her leg off a ladder, for example. Instead, the production
company could pay a few hundred bucks for a much less valuable actor to
put her leg in harm’s way.When a movie needs a parts double for a "celebrity insert," the director or casting agent submits a notice to a set of casting services known as the "breakdowns." Talent agents
can supply doubles for very specific age ranges and body sizes, or for
skin tones like "peaches and cream," "warm vellum," and "golden
caramel." They can also send talent with special skills. For example, a
commercial director might want a hand model with "tabletop
skills"–someone who can pour a glass of beer at a constant rate or cut
a tomato into perfectly even slices.
That’s from Slate. I also liked this from Anita Hart the new bum of Slendertone:
They checked out my CV and saw that I had doubled for some of the greatest bums in Hollywood. I guess if I was good enough for Pammy and Liz, I was good enough for them. I sent them photos of my bum and the rest is history. It’s a real honour, lots of people have been the ‘faces’ of various products – no one has ever been a ‘bum’, so it really is a great privilege. If I continue to use their products, I hope to remain the bum of Slendertone for many more years.’
Thanks to Carl Close for the pointer.
Price Discrimination Thermometer
When customers call Cingular threatening to switch to another firm or asking for discounts operators see a handy thermometer that tells them the life time value (LTV) of the customer to the company. The higher the meter reading the more discounts the operator is allowed to offer the customer. The Consumerist has the details including excerpts from company documents explaining the system.
Dollars for Dialing
Guess how much would it cost a farmer to get telephone service in a small rural county far from a major city? Let’s say $800 for satellite service.
Now guess how much the government subsidizes rural phone carriers to provide this service. The answer? As much as $13,000 per line per year.
That litte gem is from an excellent report by my new colleague, Tom Hazlett, on where all the money from those little telephone taxes ends up going.
How to Unemploy Immigrants
In a shocking op-ed in the NYTimes two well known liberals, Michael Dukakis and Daniel Mitchell (a former price-control Czar), acknowledge that the minimum wage creates unemployment. Nevertheless, they are in favor of raising the minimum wage. Why? Because it will create even more unemployment among immigrants than among natives.
The mean-spirited, Machiavellian nature of their op-ed is chilling but I will give Dukakis and Mitchell this, their logic is impeccable. The minimum wage creates unemployment among the low-skilled. As a result, the minimum wage tends to create disproportionate unemployment among teenagers and young African Americans.
Similarly, since many immigrants have lower-skills than natives, Dukakis and Mitchell are correct that a well-enforced minimum wage will put immigrants out of work reducing the pull of the American economy to workers in foreign countries.
I wonder if the NYTimes would have printed an op-ed that advocated minimum wages as a way of creating unemployment among
African Americans and raising white wages?
(Long-time readers will know that the original proponents of the minimum wage had in mind exactly that so Dukakis and Mitchell are true progressives.)
Got subsidies?
Name a white powder that is consumed by millions, generates huge profits, and is smuggled in and out of the United States. Nope. It’s milk. Here’s another classic story of how our farm program wastes billions.
For years, the government has periodically purchased powdered milk
— as well as butter and cheese, the other byproducts of raw milk — as
part of a congressionally mandated price-support program for milk
producers. By 2003, the Agriculture Department had accumulated a record
1.4 billion pounds of powdered milk in warehouses and in a huge
limestone cave in the Kansas City area.The bulging stores
coincided with a drought that left livestock pastures burned in about a
dozen states. Some livestock owners were faced with selling their
herds, Farrish said. Giving them the powdered milk as an emergency
source of feed seemed like a good way to help out….In 2003,
the government released 390 million pounds of powdered milk for the
ranchers, giving it to the states for $1 a truckload.
The true value of the milk was somewhere on the order of 3 thousand dollars a truck load (the article is a little unclear) so you can imagine that the milk did not long stay with the ranchers.
Thanks to Ramin Seddig for the pointer.
How a proto-Economist Runs for Charity
Back in high school we had a run for charity, x laps around the track for so many dollars per lap. I forget the charity but showing early signs of an economic mind, or perhaps a lazy body, I decided that it would be much more efficient to get the money and avoid the running (today, I would say avoid the rent seeking). Thus, I solicited donations with the promise that I would run just one lap.
Unsurprisingly, the other students were most displeased when I sauntered around the track finishing just as everyone else was beginning to work up a sweat. More surprisingly, the charity organizers didn’t like my methods even though I raised a lot of money.
I had to go to graduate school in economics before I really began to understand why. Eric Crampton, subbing for Bryan Caplan at EconLog, has the details.
By the way, its been said that crazy people go to graduate school in psychology in an effort to understand themselves. Perhaps the socially obtuse go to graduate school in economics for reasons that are somewhat similar. See here on yours truly and also Greg Mankiw’s related comments.
Google Pork
Sometimes an idea comes along that is so neat you wonder why no one
thought of it before. In that vein, Sen. Tom Coburn, an Oklahoma
Republican and chair of the Homeland Security Subcommittee on Federal
Financial Management, has introduced a bipartisan bill to create a
Google-like online searchable database of all federal spending.
Currently, said Coburn, there is no way for taxpayers to find out what
the government is paying individuals, groups, localities, and
contractors. "This bill will empower citizen investigators to root out
waste, fraud, and abuse," said Coburn, a leading opponent of pork. The
bill has some heavyweight sponsors, including Republican Sens. John
McCain and Rick Santorum and Democrat Barack Obama.
From USNews.com. Thanks to Carl Close for the pointer.