Category: Economics

What will a voucher buy?

I have often wondered what an educational voucher will buy. How large need vouchers be to give students access to decent education? A recent Cato study, by David Salisbury, attempts to answer this question.

Here is part of the Executive Summary:

“Government figures indicate that the average private elementary school tuition in the United States is less than $3,500 and the average private secondary school tuition is $6,052. Therefore, a voucher amount of $5,000 would give students access to most private schools. Since average per pupil spending for public schools is now $8,830, most states could offer a voucher amount even greater than $5,000 and still realize substantial savings. A survey of private schools in New Orleans; Houston; Denver; Charleston, S.C.; Washington, D.C.; and Philadelphia shows that there are many options available to families with $5,000 to spend on a child’s education. Even more options would be available if all parents were armed with a voucher or tax credit of that amount.”

Salisbury admits that the cost figures do not include all capital outlays or pension liabilities. On the other hand, vouchers could introduce more competition, lowering costs.

I worry about how vouchers themselves will affect prices and costs. Private schools for poor urban students are cheap, in part, because the school knows the parents cannot afford much more. If the first $5000 is free, the price could go up considerably. In addition, if the schools can somehow coordinate on yet higher prices, there will be political pressures to raise the voucher amount.

Mixed public-private systems are not always cheaper than more public systems, in part because private firms are often skilled in extracting resources from the public sector. The American health care system, for instance, has considerably higher administrative costs than does the “single-payer” Canadian system, read here for a recent comparison. I don’t favor national health insurance by any means, but these figures should give pause to voucher advocates.

The research of Harvard professor Caroline Hoxby suggests that increased school competition brings increased school quality. But her work does not clear up the most difficult questions about vouchers. If you imagine the system in place, on a large scale, for lengthy periods of time, and subject to pressures for rent-seeking and regulation, what would it look like? Would it truly serve parent demands for good education, or would it look more like the American system of health care, a crazy-quilt mix of bad incentives, high costs, and increasing levels of intervention?

Galbraith II

James K. Galbraith (son of John K.) has a strange review of William Greider’s The Soul of Capitalism in today’s Washington Post. He doesn’t say much about Greider’s book but does offer the following:

More deeply, we may question the book’s premise. Has the United States really solved the scarcity problem? That may have been more true five decades ago when a tract called The Affluent Society first made the case. Then, the United States was the world’s dominant industrial power. Today, our material abundance rests on fragile strands: our military reach, the willingness of the world to export cheap goods to us and to lend us the means to pay for them.

In the past 50 years real GDP per-capita has almost tripled (and this doesn’t account for improvements in the quality of many goods and services) and yet it may have been more true 50 years ago that the scarcity problem was solved?!! This is taking family fealty too far. The explanations for our fragile abundance are not too convincing either. Put aside the fact that the US is less dependent on trade than most other industrial nations. More interesting is that Galbraith thinks that the hundreds of billions of dollars we are spending on military adventures in Iraq, Afghanistan and elsewhere are a net positive for the economy. Why? Later he suggests that the Iraq war is about a “tenacious drive for oil.” Where then is the oil dividend? Has Galbraith filled up at the pump recently? In truth, Empire rarely pays and whatever the political case for war it will never turn a profit.

The Cost of a Sibling

Having siblings costs you money over the course of a lifetime, just ask Ohio State sociologist Lisa Keister.

How much? Holding a variety of relevant factors constant, individuals with one sibling have an average net worth of $62,000. If you have another sibling, it drops to $49,000, then to $40,000, then to $24,000. Seven or more siblings, you have on average net worth of $6,000. Keister suggests, consistent with the research of Gary Becker, that parents invest less in each child when they have more children.

Keister herself has three brothers. See this summary of the research.

I am surprised that the effect from one child to two, or from two to three, is so small. And how much stems from a change in parental investments? Some fraction of the parents with more kids did not expect the pregnancies but rather made planning mistakes. If you think that planning/execution capabilities are carried in the genes, you would expect the offspring to be worth less for genetic reasons. So the Becker effect may be weak rather than strong, at least for the first few children.

Keister’s research also argues that much of the black-white wealth gap is due to the lesser willingness of African-Americans to put their money into stocks and mutual funds. It has long been a puzzle to economists (see here for one account) why individuals do not invest more money in the stock market, given that American stocks have outperformed bonds by significant margins over all previous twenty to thirty time horizons. Keister’s research both deepens the puzzle and hints at the relevance of psychology and context for understanding investment decisions.

Endowment effects and trader experience

The Economist has a good write-up on the work of experimental economist John List. As you may know, an endowment effect arises when you value something more, simply because you own it. In the context of laboratory experiments, often people will value a coffee mug more, much more (say five times more), once someone gives them the mug as theirs. In contrast, economic theory suggests that your willingness to pay for the mug should only be slightly less than your willingness to give up the mug for money (willingness to be paid). Here is a piece by recent Nobel Laureate Daniel Kahneman on the same topic.

List had the ingenious idea to see which traders were most subject to this ownership bias. So he took people who traded sporting cards and gave them other sporting memorabilia. The key result is this: the more real world trading experience a person had, the weaker the ownership or endowment effect. Professional dealers hardly seemed to be biased at all. The lesson is simple: asset markets work well when traders have the necessary experience. List also showed that sellers learn how to trade properly, without much of a bias, more rapidly than buyers do, which may explain why neophyte buyers get taken advantage of in stock markets, and why upward-moving bubbles may start. (Researchers have found that other distinctions may matter as well, you may value the mug more if you won it in a tough competition, as opposed to receiving it as a gift.)

Al Roth has a good general site on experimental economics, as does Vernon Smith’s ICES group, who are colleagues of ours at George Mason.

Road pricing, taken to an extreme

Iain Murray reports on the new London five pound fee (about eight dollars, and enforced by a penalty), charged to each car entering central London. It turns out the fee has been set too high, and traffic has fallen by more than the projected fifteen percent. Nor does the fee appear to be maximizing revenue. Mayor Livingstone wants to continue the high fee, however, because he likes the environmental effects of much lower traffic, despite a serious hit to London retail sales.

By the way, over 100,000 people are refusing to pay their penalty notices.

Addendum: Transportblog.com, an excellent source, offers some follow-up and commentary.

Is Alan Greenspan underpaid?

If you look at what different central bankers earn, Alan Greenspan is way down on the list with his $172,000 a year. Is the Finnish central banker really worth more money?

The deeper question is whether we need to pay American central bankers more. How many of you have heard of Matti Vanhala? Well, he is the Finnish central banker. Greenspan earns a greater fame (and power) return. The head of the Hong Kong central bank makes over a million dollars a year. High public sector salaries are useful for limiting corruption, but this is not an obvious danger in the case of the American Fed. The head of the New York Fed makes $315,000, almost twice what Greenspan does, but how many of you could produce the name of Bill McDonough at the drop of a hat?

Virtual economies

What does it mean to have property rights and prices in the virtual world of computer games? Did you know that you can buy a “virtual sword” on ebay? Did you know that the male avatars sell for more than the female avatars, despite having the same capabilities? What are virtual economies all about? Read this article, fascinating but sometimes incoherent as well, for a take on these new developments.

How high are transportation costs?

“Cities, Regions and the Decline of Transport Costs”, a 2003 working paper by Edward Glaeser and Janet Kohlhase, provides stimulating reading. They build a model, overturning standard location theory, under the assumption that transportation costs are zero.

Does that sound crazy? They estimate that for machinery, electrical equipment, and transportation equipment, transportation costs are no more than 1.2 percent of the value of the product. 36 percent of all shipments, measured by value, fall into this cost category. Transportation costs for goods have been falling for a long time, and will continue to fall.

It is moving human beings that is expensive, not moving goods. Traffic congestion is an increasing problem. It is now less important to live near natural resources, and more important to live in good weather and under good government. Plus people want to live near other people, leading to greater population concentration in SMSAs. But within metropolitan areas, people are dispersing themselves more, they want to be close but not too close. Don’t buy real estate in Duluth (once a vitally important port) is, I think, the final lesson.

A contradiction in my (previous) views

I used to (i.e., last week) believe the following two claims:

1) Taking the government policies of country A as constant, more trading opportunities with country B will make country A better off.

2) International competition will force countries to improve their economic policies, otherwise they will be “left behind.”

I know many classical liberals who believe both propositions, as did I. But it is not so easy to square the circle. If 2) is true, that must mean that if country A faces greater international competition, and does not improve its economic policies, it must be worse off (admittedly the phrase “left behind” is vague, but what else could it mean?). Which means that 1) cannot be true as stated.

You might argue for a different version of 2): “2a) International competition will force countries to improve their economic policies, competition benefits the citizens no matter what, but it will starve the government of revenue, presumably because of resource mobility.”

But 2a), while possible, is a funny claim. If the citizens are better off, you might think that gdp is higher, and thus you might think that tax revenue is higher as well. Rising standards of living tend to produce rising tax revenue. You could spin a scenario where capital flight, combined with goods reimportation, raises living standards while lowering tax revenue, but it will be hard to find this empirically.

Alternatively, you might argue for a better version of 1): “1a) More trading opportunities are good for country A, in part because they force country A to improve its economic policies.” This will work, but it is a weaker argument for free trade for country A than we are used to.

So what gives? I suggest two adjustments. First, free trade can sometimes make country A worse off, even if it benefits countries A and B in the aggregate. Second, international competition may motivate countries to make reforms by threatening a loss of relative international status, but it won’t make the citizens in country A worse off in most plausible cases. My views are thus revised.

How different is Canada?

I’ve been enjoying Globalization and the Meaning of Canadian Life, by William Watson. His main point is that globalization does not prevent countries from increasing the size of their governments, if they choose to.

As late as 1958, the U.S. and Canada had similar percentages for government spending and taxes. Canada then increased its size of government, although the two countries moved economically much closer over the same period of time.

The book is full of interesting facts, although they do not always fit together into the same picture. What are the ten most generous states or provinces in terms of welfare benefits, in the U.S. or Canada (p.146, note that the book is from 1997)? Surprise, all ten are in the U.S. They include New York and California, hardly small parts of the country. If you are curious, Quebec comes in at number 38 on the entire list. The author argues that Canadians are not always as different from Americans as they like to think.