My debate with Bryan Caplan on education

by  Tyler Cowen in

Bryan writes:

The other day, Tyler Cowen challenged me to name any country that I consider under-educated.  None came to mind.  While there may be a country on earth where government doesn't on net subsidize education, I don't know of any.

…This analysis holds in the Third World as well as the First.  The fact that Nigerians and Bolivians don't spend more of their hard-earned money on education is a solid free-market reason to conclude that additional education would be a waste of their money.

I would first note that many parts of many poor countries, today, receive de facto zero government subsidies for education.  Or put aside the issue of government provision and ask if you were a missionary and could inculcate a few norms what would they be?  Many regions – in particular Latin America — are undereducated for their levels of per capita income.  I view this as a serious cultural failing, most of all in terms of its collective social impact.  In contrast, Kerala, India is very intensely educated for its income level and that brings some well-known benefits in terms of social indicators and quality of life.

If I think of the Mexican village where I have done field work, the education sector "works" as follows.  No one in the village is capable of teaching writing, reading, and arithmetic.  A paid outsider is supposed to man the school, but very often that person never appears, even though he continues to be paid.  Children do have enough leisure time to take in schooling, when it is available.  I am told that most of the teachers are bad, when they do appear.  You can get your children (somewhat) educated by leaving the village altogether, and of course some people do this.  In the last ten years, satellite television suddenly has become the major educator in the village, helping the villagers learn Spanish (Nahuatl is the indigenous language), history, world affairs, some science from nature shows, and telenovela customs.  The villagers seem eager to learn, now that it is possible.

That scenario is only one data point but it is very different than the "demonstrated preference" model which Bryan is suggesting.  Bolivia and Nigeria are much poorer countries yet and they have dysfunctional educational sectors as well, especially in rural areas.  Bad roads are a major problem for "school choice" in these regions, just as they are a major problem for the importation of teachers. 

A simple model is that underinvestment in infrastructure results in a high shadow value for marginal increments of education.  Model = high fixed costs, liquidity constraints if you wish, high shadow values for lots of goods and services, toss in social externalities to raise the size of the distortion.  I read Bryan as focusing on "the fixity of the fixed costs" and claiming it is too costly to get the service through, relative to return. 

Of course Bryan favors rising wealth and falling fixed costs, as do I.  But in the meantime he also should admit that a) education "parachuted" in from outside can have a high marginal return, b) collectively stronger pro-education norms raise demand and can alleviate the high fixed costs problem, c) there are big external benefits, some operating through the education channel, to lowering the fixed costs, d) stronger pro-education norms put a region closer to a "big breakthrough" and weaker education norms do the opposite, and e) a-d still impliy "too little education" is the correct judgment.  On b), some evangelical groups in Latin America do seem to have stronger pro-education norms in their converts and it appears to be much better for the children of these families and no I'm not going to buy any response which ascribes the whole effect to selection.

I believe that Bryan's own work on voting suggests significant positive social external benefits from education, although he is not happy with how I characterize his view here.  I also believe his views on children suggest strong peer effects across children (parental effort doesn't matter so much in his model and the rest of the influence has to come from somewhere), though in conversation I am again not sure he accepts this characterization.

I consider most countries in today's world to be undereducated. 

Signaling models are important but they are not the only effect and of course a lot of signaling is welfare-improving for reasons of screening and sorting and character reenforcement.  The traditional story of high social returns to education is supported by evidence from a wide variety of different fields and methods, including cross-sectional growth models, labor economics, political science, public opinion research, anthropology, education research, and much more.  You can knock some of this down by stressing the endogeneity of education, but at the end of the day the pile of evidence, and the diversity of its directions, is simply too overwhelming.

*Adam Smith: An Enlightened Life*

by  Tyler Cowen in

That is the new book by Nicholas Phillipson from Yale University Press.  I urge all fans of Adam Smith to read this book.  It covers Smith's life and times more than his texts per se.  It is especially strong on Smith and Hume, Smith's work as a customs inspector, Smith's time in France, Smith and Quesnay, and Smith's dedication to his mother.  I like very much what it covers; my main complaint is that the book is not longer.

Here is a James Buchan review of the book.  Here is a John Gray review, more about Gray than the book.  Here is further coverage.  Here is a short piece by Phillipson.  Here is a short bio of Phillipson.

My Buffalo visit

by  Tyler Cowen in

For architecture, it is one of America's best cities.  The Guaranty building, Ellicott Square building, and City Hall are peaks of the art, plus there is lots of Frank Lloyd Wright.  There are hundreds of excellent residential homes, off of Elmwood for instance, but all over town.  Elmwood itself is a fun, walkable area.  There are two good art museums, plus a strong alternative culture scene, low rents, and lots of art galleries.  It feels more like the Midwest than say New England and the people are friendly and relaxed.  Food is not exceptional although meals can be had.  If you're not into architecture I would describe a city visit as optional, but for me it was a must.

In case you have not been paying attention

by  Tyler Cowen in

Here is a tidbit from today's news:

Among other policies, the Obama team has also placed a United States citizen on a targeted-killings list without a trial, blocked efforts by detainees in Afghanistan to bring habeas-corpus lawsuits challenging their indefinite imprisonment, and continued the C.I.A. rendition program – though the administration says it now takes greater safeguards to prevent detainees from being mistreated.

I wish to commend Kevin Drum in particular for continuing to draw our attention to these policies.

The Obama tax plan, or Austro-Obama business cycle theory

by  Tyler Cowen in

Here is one analysis:

Companies combining deductions proposed by Obama for equipment with deductions for borrowing costs would get benefits — including refunds or credits against future taxes – – that exceed the additional income they get from new capital spending, according to a 2005 report by the Congressional Budget Office. For every $1 of additional income from new capital spending, companies may be able to get benefits worth almost $1.88, according to the budget office report.

“The combination of free deductibility of interest to make a marginal investment, combined with accelerated depreciation, would lead to negative tax rates on that new investment,” Kleinbard said.

Is that a good idea?  Here is one commentator:

“It’s an invitation to arbitrage,” said Kleinbard, who now teaches tax law at the University of Southern California in Los Angeles. “You’re putting businesses in the same economic position as if you were inviting them to borrow money to buy tax-exempt bonds.”

Should we let housing prices fall?

by  Tyler Cowen in

Many smart people say we should.  It seems increasingly clear that we must.  For how long can the government prop them up?  Are we never to have a private market in mortgages again?

Yet what happens if we let them fall?  Arguably many banks would once again be "under water."  Enthusiasm for another set of bailouts is weak, to say the least.  Our government would end up nationalizing these banks and it still would be on the hook for their debts.  The blow to confidence would be a major one, especially if along the way we saw a recreation of a Lehman or Bear Stearns or A.I.G. episode.

I increasingly believe there is no easy way out of this dilemma and it is a major reason why the U.S. economy remains stuck.  Housing prices must fall, yet…housing prices must not fall.

Here is a very good Dave Leonhardt piece on two different views of housing.  It's where to go, if you are looking for the case for optimism.  I am more pessimistic than David because I see the private sector interest in mortgage securities as remaining quite weak, which suggests the market knows which way prices have to move.

China (Australia) fact of the day

by  Tyler Cowen in

In markets, speculators, unable to bet on a yuan pegged to the U.S. dollar, use the currencies of China's main trading partners instead.  That has helped make the Australian dollar the fifth-most-traded currency in the world — after the U.S. dollar, the yen, the pound, and the euro — even though Australia is the 18th largest economy.

The full story, on the China-Australia, relationship is here, in the new, revamped, and excellent Bloomberg BusinessWeek.

Should you bet on your own ability to lose weight?

by  Tyler Cowen in

Is that the stakes weren't high enough, or is the whole idea flawed?:

If obese individuals have time-inconsistent preferences then commitment mechanisms, such as personal gambles, should help them restrain their short-term impulses and lose weight. Correspondence with the bettors confirms that this is their primary motivation. However, it appears that the bettors in our sample are not particularly skilled at choosing effective commitment mechanisms. Despite payoffs of as high as $7350, approximately 80% of people who spend money to bet on their own behaviour end up losing their bets.

That's from Nicholas Burger and John Lynham.  Here is further information, from Economics Letters.  A gated copy is here.  A related paper, with similar results, is here.  The wise Alex, on same topic, is here.

Jeremy Stein on securitization

by  Tyler Cowen in

There is an alternative, more behavioral hypothesis for the fragility of the securitization market that does not rely on a predominance of short-term debt financing. This alternative hypothesis begins with the observation that a large proportion of ABS tranches–both in the traditional and subprime sectors–were rated AAA. The AAA rating may have encouraged investors such as pension funds or insurance companies to think of these securities as essentially riskless, and therefore to treat them as being equivalent to Treasury bonds when constructing their portfolios. When the problems in the subprime area became apparent, this premise was utterly destroyed, and investors who were determined to allocate a fraction of their portfolios to safe assets realized that they had to dump their holdings of AAA-rated ABS, and buy actual Treasuries instead. Thus instead of a short-term-debt-driven bank run, we have what might be called a widespread buyer’s strike. In this account, the mechanism of contagion from the subprime market to the traditional consumer ABS market is that the failures of the rating agencies with respect to subprime called into question their credibility more generally, so that any AAA-rated tranche of an ABS, be it linked to subprime or credit cards, was no longer considered to be a virtually riskless asset.

The full essay is here, interesting throughout, via David Warsh's very good column.  Stein also makes the simple yet neglected point that higher capital requirements may simply shift more financial activity into the less regulated shadow banking sector.

The history of the UCLA economics department

by  Tyler Cowen in

I loved this essay-style interview, Dan Klein speaking with William R. Allen, on the glory days of the UCLA economics department, under the leadership of Armen Alchian.

It is taken from the latest issue of Econ Journal Watch, (I haven't read the other pieces yet).  There is also a systematic look at economists' role in signing petitions.