The Education Bubble?

A couple years ago, my colleague Mike wrote an entry called something like "Does Education Still Pay?" At the time, I wrote comments stating that graduates still earn more than non-graduates over their lifetimes, plenty enough to pay for the cost of school, and that, as long as it continued to make economic sense, people would still pay. I stick to that analysis, because I find it is pretty hard to argue with it, but nuances can get lost in the general statistics, and bubbles can happen even with continued demand (people still buy houses, after all).

A bubble happens in economic terms when something pushes up demand to unsustainable levels, causing rising prises, the expectation of future rising prices, and investment in expanding supply. The bubble pops when demand suddenly fails to grow as rapidly as supply, and too much of the product or service is being sold to too few people, causing the price to fall precipitously.

The housing bubble, for example, was caused by cheap mortgage rates and banks from areas where no one was building buying mortgages from places where people were, keeping rates in booming places lower than before. (It's not important to understand why or how that all happened, just know that rates, due to myriad factors, even having to do with China's trade surplus, were lower than normal for a long time in booming places.) In addition to low rates, banks, encouraged by the government, were lending money to less credit-worthy people than ever before. This meant that as prices rose, more and more potential home buyers showed up as banks loosened their lending standards. That meant more demand and higher prices.

Well, we know what happened next: at some point, the houses were so expensive that more people decided not to buy. The market slowed, and builders had nothing to do. To get rid of the excess houses, prices were slashed. People who'd bought at the peak of the boom were now sitting in houses worth less than their mortgages. The bubble had burst.

So, is there an education bubble? Let's count:

• Steadily rising demand for places at universities? Check.
• Rapidly rising prices for higher education? Check.
• Steadily rising demand for graduates with specific skills, leading to the expectation that education will continue to become more important? Check.
• Government policies that support demand? Check. (I'll explain in a bit.)
• Education has a finite value, beyond which it would not be worth one's while to buy it? Check (like all goods).
• There is a limited number of potential buyers (students)? Check.

It seems we certainly have the basic ingredients needed to have a bubble. But that's not enough. All this could happen, and then prices and demand could level off smoothly. This does sometimes happen. It's hard to spot a bubble while it's forming, even though it seems obvious after it bursts. There are three ways I see this ending.

The non-bubble scenario: demand increases begin to slow, and the supply of university places begins to come in line with demand. At the same time, more universities put in cost-saving measures, like reducing administrative costs, using technology, etc. Universities begin to have to compete more for students in general, not just the good ones. Their budgets get a bit squeezed, and they begin to compete on price.

Bubble scenario 1: Similar to the above scenario, but supply outstrips demand more rapidly, causing tuition fees to drop fast.

Bubble scenario 2: This is the scarier one, and it could be starting now. Former students with lots of loans to pay find they are unable to get jobs that pay well enough to pay back loans. The government has set up loan forgiveness programs for public sector and non-profit workers and whatnot, so many take advantage of this (my plan for myself, actually). In fact, many more than the government intended. Amid continued economic weakness, budget deficits, and battles in Congress, the cushy student loan provisions are cut. Prospective students are suddenly unable to finance their future studies. Demand falls off precipitously. Tuition fees stabilize or fall. There are more unskilled workers as a result, causing further wage stagnation or even declines in the services and retails sectors. At the same time, the skilled workers companies want are even harder to find, increasing wages in those areas, widening income inequality and sewing unrest.

So, there are at least these three possibilities. The current spiraling prices are in part fueled by government programs to allow students to borrow money on good terms to go to school (much like the cheap mortgages for poorer people that fueled the housing bubble).

When going to college doesn't pay off, or doesn't pay off enough to make the extra work and risk worth it, students will stop going. If this were any other market, this would be no big deal. We would call it a correction and it would mean the price of education had risen to reflect its value to its consumers. There's a problem, though: education has a wider value to society, too, which is not captured entirely by the student. This means that society is better off with more students, and that education is worth more, on the whole, than the additional money or job satisfaction received by those who take it on.

Take one of the most obvious areas: engineering. An engineer may love her job and be paid well. But engineers are also vital to society. If an engineering degree became so expensive that not that many people got one, society as a whole would suffer. We also, of course, benefit from scientists, music majors, linguists, and, of course, international relations specialists, even if its harder to see. This all means that subsidies for education make sense. This is why it's not wrong that government does this, because education is worth more than what the educated get out of it themselves.

But demand-side approaches, like giving students access to cheap loans on nice terms, fuels price increases. These increases may actually negate the effect of the loans. It might be better to act on the supply side of things. State universities already do this, using taxpayer money to reduce tuition fees. I don't know if these are in place, but there should be cheap loans for university expansion, grants for measures that save money, and inducements for offering well-priced, high-quality education.

I will probably end up only paying 1/3 of my student loans back, depending on what Congress decides over the next 100 years while I'm finishing up. That's a big hit the government will take. Multiply that by the loads of others doing it, and it's massive. I wouldn't be able to afford to study without it, though. Nonetheless, the debt pile I'm building causes sleepless nights, something shared by a lot of students out there. So maybe switching things to the supply side to drive down upfront university costs would be more sensible. Then, students would get unforgivable private-sector loans, but have much less debt to pay off. At the same time, the increased supply of places would insure that the country gets the graduates it needs, and that these, with lower debts, can start getting mortgages and things like that earlier on, helping to boost the economy.

Would all this mean higher taxes? Well, probably, a bit. But I'm actually proposing shifting the costs from one place to another, subsidizing the universities (per student, dependent on quality and tuition fees, etc., to create good incentives) rather than subsidizing the students with scary and uncertain loans.

There will only be a bubble when there are too many graduates. From the looks of things, we have quite a ways to go before that happens. The global economy is changing, and rich countries need to change, too. We have the benefit of capital and education, so we need to invest in the latter. That and infrastructure in the US, as I've said before. Overfilled highways, slow trains, patchy internet and cellular connections, and bridges that collapse and kill people from time to time can really crimp business. These are the areas where we should be spending money, not on random tax loopholes and overly expensive health care (my post on what we might start to do about that).

We need to invest in the future (infrastructure and education), not the past. We started doing that in the early 20th century, and rode the boom throughout the rest. Towards the end, gains came from deregulation (much, but not all, of which was a good idea) and more and more debt. That can only go so far. It's time to start at the beginning again.

How to fix America's healthcare system - without nationalizing it.

I'm writing this from my phone to see if the additional annoyance helps me to keep this short. :o)

One of the biggest problems with healthcare in the US is that doctors get paid according to how many procedures and tests they do. This is not the case in countries with national healthcare systems. There, doctors are salaried, like regular workers instead of like lawyers or contractors

I'd argue that this can be done with private insurers, too. Why not pay doctors a set amount for seeing a patient, plus covering 99% of costs arising from additional procedures, plus a bonus for a good outcome?
Good doctors might be willing to switch to such a plan. Indeed, some already have: Kaiser Permanente uses a similar system. Let's try some pilot projects on a more national level. If it works, maybe we can scale it up, requiring insurers and doctors to do it. This would go some way towards cutting down on unnecessary procedures.

I envision doctors getting bonuses according to outcomes AND patient ratings! Insurance companies would set pay amounts in collective bargaining with doctors on their plans. Cheaper plans would attract fewer doctors, but patients would pay less and be ensured good care, in no small part because they get to rate their doctors' performance and this determines a portion of doctors' pay!

A couple more steps would be needed, too. Legislation to protect doctors and hospitals from unreasonable lawsuits would be good. Another step would be to move people off plans provided by employers. This would keep people covered between jobs, encourage them to shop around for the best rates, and make sure they know what it all costs, getting consumers more control over cost-cutting decisions.

These three things combined would help a lot. Other countries pay a fraction of what the US does for healthcare, but for equal and sometimes even better outcomes. Something's gotta change, because that's just not right.

I'm pondering education, too, but this seems tougher. Any good ideas?

UK Riots: An Outsider's Perspective

Lots of people have been writing me asking if I was all right "in London." It's my fault, because I told everyone I was to be studying in London and didn't mention so often the name of the actual town where I was moving -- since no one has ever heard of it anyway. I really like this little town, and am glad I am quite a ways from urban unrest.

I have a trial subscription to The Guardian and Observer, can now watch BBC news shows, and have read private blog pages on the subject as well. There are lots of different perspectives, so I'll give them a run-down here.

1. Police and politicians: A few violent individuals got things going, changing a peaceful protest over a police shooting in Tottenham (in London) into a violent riot. Opportunistic and greedy youngsters drunk on power then used the mayhem to allow them to loot stores and take whatever they wanted. The bottom line: illegitimate, opportunistic criminality -- no excuses.
2. The Guardian, a leftish newspaper: Reports this line, but also asks whether recent government cuts to social programs could be a deeper cause -- without actually answering that question.
3. Leftist bloggers, some people on the streets (though some young people from the affected areas seemed to concur with the first view above): Years of social exclusion, police bigotry, and, now, cuts to social services have pissed people off, and the only way they can get attention is by doing this. It's not nice, but there's no other choice if they don't want to be ignored.

That pretty much covers the viewpoints. I won't comment too much because I'm an outsider, but I will say that, as usual, I think the truth lies somewhere in between. I remember being young and getting swept up in moods and just not giving a damn about what other people thought, like when we had loud parties on weekday nights and our neighbors' small children couldn't sleep. I have no patience for such people today, but I was one of those anti-social assholes just a few years back -- but only when swept up in the moment. I am sure many, probably most, of the looters are just along for the ride and enjoying feeling powerful and being able to steal what they want with impunity.

At the same time: These things don't happen all the time everywhere. One has to ask why all these people can get so swept up and why they care so little about their own communities, which they've set about destroying. There is a disconnect from civil society here that is worrying and real.

So that's my two cents on that.

One last thing: the police. I've heard and read criticism of the police on both sides, but most are angry that they've done too little to stop the mayhem. Coming from America, where police use rubber bullets and tasers with what seems to me like reckless abandon, I find it interesting that the police here are still debating whether to use rubber bullets. This is even after nights of violence have left parts of London and other cities looking literally like war zones! Water canons have been discussed in the media, but they are apparently not under discussion by the police, who reiterate that they do not use them outside Northern Ireland. Even at a small, peaceful protest in (peacenik) Germany I went to, there were armored vehicles with water canons at the ready. Perhaps their mere presence helped deter any would-be rioters. In any case, the Metropolitan (London) Police say rubber bullets are to be used only in extreme situations and the go-ahead can only be given by someone high up in the chain of command. Apparently burned-out shells of buildings are no extreme enough yet.

The British police are actually well-known for their restraint, and this shows it to be true. Rubber bullets can also sometimes kill if you hit the person just right (or wrong). I've been reading reports of hatred towards the police in these poorer districts of London. There's been talk of selective stopping and searching (racial profiling, anyone?). So this violence has partly been just to stick it to the police. The police are in a bind, criticized for being at once too harsh and too soft. I don't envy them.

My personal view: buildings, cars, and shops are being set ablaze and the police did nothing for a long while. It's time for water canons and rubber bullets. This is ridiculous. Afterwards, it's time to think, once again, about the social issues in these places. The problem is: people think about that all the time, and no good solutions seem to come out. What do you think?

A Libyan Ceasefire: What It Would Take

The Libyan conflict continues. The UN has proposed a ceasefire. NATO and the Libyan rebels are dubious: Gaddafi is still there, after all, and is not yet defeated. He could easily take advantage of a ceasefire to stage a comeback. The Economist interprets an announcement by Britain's Foreign Secretary William Hague as meaning that Britain may be open to reconsidering the idea of a ceasefire. Far from looking for a quick exit, Hague asserts that Britain is in it for the long haul.

All of this is actually good news. It seems that everyone's heads are in the right place (except perhaps for the UN's, but this is no news -- at least its heart seems to be in the right place). A ceasefire agreement is possible, and, unless we're ready for a long siege of Tripoli with possible ground troop involvement and loads of casualties, it may be the only realistic way this can all end.  But still: this cannot be cut-and-run, which is why Hague's assurances to the contrary are comforting.

Libya is not Iraq or Afghanistan. NATO is providing air support for a native rebellion. Time is on the coalition's side, not Gaddafi's (I have pointed out previously that time is on the Taliban's side, which is why I have little faith in a positive outcome for Afghanistan). NATO must make use of both of these aspects. Any ceasefire must be on terms decided by the coalition. In particular, these terms must be decided by Libya's National Transitional Council, as representatives, however tentative, of the Libyan people. They must set the guidelines by which this can happen. Compromise may happen in other areas, but these principles are not up for negotiation.

For example, one stipulation would surely be that Gaddafi is removed a long way from any power. A second one, that the West must strongly support for reasons of morality and political credibility, is that Libya holds elections and builds institutions like independent courts all that. The areas where compromise is possible: pardoning Gaddafi and going easy on current members of his regime. Those closest to him must not be allowed near power. Ones lower down may need to be left on for practical reasons -- only they may have experience in civil service.

It sounds awful to let Gaddafi get away scot-free, but let's not lose sight of the goal: getting him out of power and freeing up Libya for a brighter future. If Gaddafi can be enticed to give up the fight, this will save hundreds, possibly thousands of lives through reduced fighting, as well as lots of money, time, and Western leaders' political capital.

And what if Gaddafi doesn't accept? As I said: time is not on his side. Don't negotiate further. Return to the current war of attrition, and wait for him to come around or for the regime to utterly collapse around him. This is not as nice as a quicker ceasefire, but it is the only option. All in all, there is plenty of reason to be optimistic about Libya, at least over the medium term. Kind of refreshing after ages of Middle Eastern quagmire.

America's Debt Deal: Political (and economic) collapse retreats

Just over two months ago, I asserted here that the negativity surrounding America's political system and its ability to function and keep the country going was overblown (see post). The current debt deal, which passed the (more tricky) house yesterday evening, provides more evidence of this. I admit to only having partial details on it, but it thus far looks sensible. The pain is spread evenly and is mostly being delayed until later, allowing time for the economy to recover. These two aspects are very sensible: with divided government, cuts needed to affect parts of the budget both parties hold dear, and with the economy in its current fragile state, cutting too much too soon could have been calamitous. Economists and rating agencies had been calling for a credible deficit reduction plan, not an immediate reduction itself.

OK, fine, so disaster hasn't struck, is that the best we can expect from the US Government these days? This seems like a good point, and sometimes I feel it myself, but it again focuses too much on the negative. Congress over the past few years has passed a revolutionary (for America) health care plan, nationalized student financial assistance programs, changed environmental regulation, and accomplished many other things to boot. This seems to get lost among the noise of insanely partisan politicians screaming at each other (usually figuratively only) and egging groups on who call one side or the other things like "fascist," "Nazi," or "socialist." The absurdity of it all is enough to make the strongest stomach queasy.

But it still works.

American politics is noisy and partisan. That's the way it is. The REASON it is that way is because Americans vote for it to be that way. In particular, republican voters tend to want representatives in government who stick to their guns and don't compromise (see chart). So republicans are loud, obstructive, and stubborn. It's irritating. But that's the way their constituents want them to be. That's a sign that American democracy is working well, not poorly.

The problem, then, is not with America's democracy or even its political system, but rather with Americans themselves. No one likes to hear that they themselves have gotten themselves into a pickle, but they have. Once again, though, let's not be overly negative. I'm a realist, not an optimist by any means, but people on the liberal side of the isle with me tend to be overly negative. It's hard sometimes, I know. But take a closer look at that chart. Not only do most democratic voters prefer compromise to get things done, the majority of ALL voters does, too. As long as that is the case, we ought to be all right, even if compromise comes at the last minute and is a noisy, shameful spectacle every time.

I'm not trying to make all this seem completely harmless: it wastes time and money, and smaller things that need to be done may get lost in the process. What I'm saying, though, is that the system still works. If people start to pay attention to politics more and educate themselves, then people will vote for politicians with sensible policies who are ready to get things done. As long as people are aloof from politics and continue to rely on ideology to provide their compass points, things will be irritating and suboptimal, as they are now. Any suggestions for that systemic problem? Education system?

Can Francis Fukuyama teach us something about corporate governance?

I recently finished reading a fantastic book: Francis Fukuyama's Origins of Political Order. He discusses the ways that political organization has taken place throughout the world, and this got me thinking about organizational structures in business, and their varying levels of quality.

There are several levels of organization from band, to tribal, to chiefdom, to state-level organizations. Building on the work of others before him, he describes such organizations according to three elements: the strength of the (central) state, rule of law, and accountability. A state with the right combination of all three elements is one that will generally function well. There are examples of states that lack one or more elements, and the effects can be seen.

India, for example, has always had a very strong rule of law (this is discrete from elements like corruption as he defines the terms; read the book!), so much so, in fact, that a strong state has never been able to form in India. Even today, a weak central state is one of India's problems. Political accountability, too, leaves something to be desired, though it is more apparent than in China.

China was the world's first modern state in that it had a strongly centralized and meritocratic bureaucracy long before these arose elsewhere. The rule of law and accountability, however, have never been present. Even today, the communist party sees the law only as a tool to be wielded or changed at the party's will, not as something that could ever restrict the party's power (as constitutions and courts in other countries do). Accountability is limited only to long-standing moral ideas about the responsibility of rulers to their people. There is no structure that supports this officially; no path for citizens to address grievances.

Business people often praise how well China (and places like Singapore) are run and may think China's system is preferable to India's. This is only true, however, if the current people in power are doing a good job. You will also only feel this way if you agree with the government. If the government is forcing you out of your home to build a shopping mall with little or no financial compensation, telling you you may not move out of your village to search for work, or restricting your procreation to one child, for example -- and you have no recourse against such actions -- you may feel a bit differently about China's system. Still, India's system is clearly sub-optimal as well. I will avoid holding any system as "just right," because this is hard to say. Heaven knows, America's system seems to have its difficulties as well, even if worries about it are probably overblown (see post), and this is true of everywhere.

So what does all this tell us about corporate governance? Honestly, I see a lot of similarities. Some companies are organized in a very top-down, hierarchical manner akin to China, others, like large conglomerates, may have loads of local fiefdoms and clashing rules and interests, more akin to India. (China's central government has difficulty controlling local governments, too, so this is all a bit oversimplified. Again, read the book!). Structures may also cause a high level of accountability, with clearly defined responsibilities, or a system where no one knows who's responsible, leading to impunity (rogue traders, anyone?). One problem with the "strong state" model, where the CEO and board can basically do what they want is the "Bad Emperor Problem" that China (think of Mao Zedong, whose Cultural Revolution resulted in the death of millions of Chinese peasants as just the most recent example) has had a few times. The safeguard against this is to prevent the concentration of power in one person's hands.

So accountability (and transparency) are good, but must be balanced, together with the rule of law, against central control. Too much "rule of law" could mean CEOs can't change a company. Even too much accountability could be bad news, not allowing leaders any wriggle room to make changes before they are instantly removed from power the moment the mob dislikes an action.

There's one more interesting aspect, though. Fukuyama asserts, quite convincingly, that religions formed the basis of political organization. I think there's something to this in the form of corporate ideologies/identities. What is the role of the CEO? Where are we going? What does the company stand for? What are the roles and duties of managers, workers, and departments? These ideas can form a structure of their own and can also be hard to change, regardless of any structure imposed from the top (a central problem in mergers and acquisitions, in business as well as in politics). If they're good ones, like the central ideas at IBM that have kept the tech company alive and competitive for a century, they are a source of the company's strength. If they're not good, or are too rigid, they may be the company's downfall.

In sum, then, accountability to shareholders and stakeholders balanced off against strong centralized control can be a formula for corporate success, but only if it is underpinned by a strong corporate identity. It's important to note, too, that accountability does not have to take the form of democracy and elections. In the case of public shareholders, this is more or less the case. In the case of most stakeholders, like workers, this is usually not the case. The structures embedded within the company, however, giving power to local "lords" (i.e. managers and vice presidents) and lower-level managers serve some of this function.

Fukuyama also has something to say about this, too. It may make a lot of sense to include regular old workers in the process of corporate governance. Kings were constantly at odds with the vested interests of dukes and local lords, who, through their positions, managed to extract privileges from the central power while reaping the gains of those beneath them. This may sound familiar to anyone who works in a larger company. It therefore makes sense to have ways for "lower" workers to bypass their direct bosses and be able to communicate with higher-ups about problems they see in the lower echelons of management. This decentralization of power can actually lead to a greater centralization, as the CEO and higher managers have a better idea of what's going on. The increased accountability of all levels of management, too, is something to strive for.