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We don’t need no (free) education! (Or do we?)

February 17, 2011

Waiting for SupermanEveryone is talking about the costs and problems of education these days. The kids who need it most can’t get it and university costs are skyrocketing. Two documentaries came out last year (Waiting for Superman and The Lottery) following families in their attempts to get better education for their kids via local charter schools and the struggles they encounter in that quest. Waiting for Superman was the most popular of the two. Needless to say, education is just as much of a hot-button topic as ever. However, decades ago, economist Milton Friedman and author Robert Heinlein popularized the phrase “there ain’t no such thing as a free lunch” or TANSTAAFL in Heinlein’s The Moon is a Harsh Mistress. Likewise, there is no such thing as a free education. Someone is paying for it, so what is the cost?

The free-market approach to education

Most people discussing what they consider more free-market solutions to education want to see more competition in the education market. This is something touched upon in the documentaries mentioned above. More charter schools means more choice, and if students had the ability to move freely between school zones, this would hurt the “business” of the worst schools in the area.  Another problem brought up in the documentaries is the fact that unionized teachers are infamously hard to fire. In the long run, this raises the costs of keeping people on the payroll and it keeps the public paying for teachers who may be ineffective.

Austrian economists, the hyper-free marketeers that they are, go further than simply asking for more charter schools. They say the entire education system needs to be privatized in order to become truly solvent. Austrians see public education as another bubble. A recent article by Joshua Fulton at the Mises Institute uses Egypt and Tunisia as an example:

Fifty-Seven percent of young Tunisians entering the labor market are college educated. This is while only 30 percent of Americans earn a college degree by the time they are 27. Recent Tunisian college grads have an unemployment rate approximately three times higher than the national average of 15 percent. This is up ninefold from 1994… Of Tunisia’s GDP, 7.2 percent is spent on education, more than any European or North American country beside Denmark and Iceland, which also spends 7.2 percent of its GDP on education.

[...]

In Egypt, enrollment in tertiary education increased from 14 percent in 1990 to approximately 35 percent in 2005. Yet this has not helped the unemployment rate among recent grads. The national Egyptian unemployment rate is 9.4 percent, comparable to the United States, but the unemployment rate for people between the ages of 15 and 29 is 87.2 percent. College graduates, largely because of their age, have a ten times higher unemployment rate than for those who did not attend college.

To Austrian economists, all public education is unsustainable and we do not get back what we put in. Earlier today Mises writer Douglas French blogged that the University of Nevada Las Vegas is bordering on bankruptcy and the state is looking at introducing a law that would allow the school to fire tenured professors. Music to the ears of an Austrian economist.

Why public education is good–i.e. what we are paying for

There are a lot of unknowns in the world of education. It is not an industry built primarily on turning a profit, so gauging the success of the industry as a whole in terms of what society gains from it is hard to tell. Arnold Kling at the EconLog blog writes:

Educators do not know what, if anything, actually adds value. For all we know, test scores are determined by the backgrounds (mostly genetic) of the students, with remaining differences that are random and irreproducible.

People have unrealistically high hopes and expectations for education, health care, financial services, and government. Studies by economists tend to raise doubts about the validity of those hopes: educational experiments almost never show a durable, reproducible gain; as Robin Hanson emphasizes, health care economics is notorious for cross-sectional studies showing that more care does not lead to better outcomes; money managers perform worse than index funds; and government’s failures are well documented.

Even with such poor gauges of success, Nobel Prize-winning economist Paul Krugman claims:

In the 19th century, America led the way in universal basic education. Then, as other nations followed suit, the “high school revolution” of the early 20th century took us to a whole new level. And in the years after World War II, America established a commanding position in higher education.

So our education system used to be really something! What happened? According to Krugman and every international test meant to gauge the knowledge of countries’ youths, the U.S. is lagging these days.

Even so, the primary argument for public schools still stands: society’s return on investment (ROI). Even with his gloomy outlook at our education system’s current state of affairs, Krugman does not want to eliminate public education. This is because it is assumed that we as a society benefit by having giving education access to kids who would not otherwise have it. They turn around and give back to the economy far more than what we paid for that individual to go through school, the argument goes.

There is no reason to dispute this happens, but there is also the possibility that some individuals make for a bad investment. The Center for American Progress did a recent study analyzing this specific topic. It comes complete with an interactive map for many of the nation’s school districts. What it found is that some districts get a better return on investment than others. The good news is that there may be a means of fixing bad educational ROI without spending more money:

An Arizona school district, for example, could see as much as a 36 percent boost in achievement if it increased its efficiency from the lowest level to the highest, all else being equal.

Whatever the solution to our nation’s educational woes, it is clearly a debate that is without an easy answer and not likely to die down any time soon.

It’s all about the yuan, baby. Is its manipulation hurting us?

February 10, 2011

For the better part of the last decade, a debate on China’s currency manipulation has been raging among economists in the United States. Much of this debate has been pretty one-sided, with the conclusion being that China’s currency manipulation hurts U.S. commerce and that something must be done about it. This is not the whole story, though. Some people disagree with this assessment, claiming that in the long run, depreciation of the yuan hurts the Chinese more than it does us. The latter argument is mostly made by Austrian economists and some other more free market economists.

In this case, it can be hard to peg a specific view to one economic theory or another. Keynesians are traditionally in favor of currency manipulation in as much as it helps dig a country out of recession. Modern Keynesians such as Paul Krugman, however, take umbrage with how the Chinese peg the yuan to the dollar, claiming it costs the U.S. in jobs and exports.

How does this manipulation work?

The Chinese manipulate their currency by not allowing supply and demand in the world market to determine the yuan’s value. Instead, China buys and sells their currency in the market in order to peg the yuan’s value to the dollar.

Why it is bad and must be stopped (the Krugman argument)

Krugman, the Keynesian he is, concedes that China’s currency manipulation was not always a bad thing. In a 2009 op-ed for the New York Times he wrote:

There’s nothing necessarily wrong with such a policy, especially in a still poor country whose financial system might all too easily be destabilized by volatile flows of hot money. In fact, the system served China well during the Asian financial crisis of the late 1990s.

The problem, he claims, is that the Chinese continue this policy even during recession. By pegging the yuan to the dollar, the Chinese have devalued their currency by virtue of the fact that the U.S. dollar has declined in value, as well. This creates a trade surplus, which according to Krugman (and many policymakers), siphons jobs from the rest of the world. Krugman claims in the same op-ed:

The biggest victims, by the way, are probably workers in other poor countries. In normal times, I’d be among the first to reject claims that China is stealing other peoples’ jobs, but right now it’s the simple truth.

China’s currency should be getting stronger. Compared to how the yuan would stack up against the dollar were it floated, it takes more yuan to buy a dollar. This makes American goods more expensive in China, meaning we import more from them than they do from us.

China’s large trade surplus is the reason Krugman find’s China’s currency manipulation to be unforgivable. The United States, on the other hand, has a large trade deficit with China, so it is O.K. for us to manipulate our currency to get our economy back on track.

Why it’s potentially good for us and bad for them (the Austrian argument)

Instead of focusing on trade deficits and surpluses from country to country, Austrian economists take a more microeconomic view. Taking aim directly at Krugman, Jonathan Catalan at the Mises Institute claims:

For the individual Chinese entrepreneur, the undervalued yuan has brought disaster. China’s central bank is not subsidizing the Chinese exporter but the American importer.

Austrian economists claim that instead of looking at the fact that China buys fewer goods from us because it takes more yuan for each dollar, we should be looking at the fact it takes fewer dollars to buy more yuan. We have a trade deficit because it benefits consumers to buy goods for less money overseas.  Catalan claims “Krugman fails to realize that the Chinese are selling their goods at a loss.” To free market economists, we have a trade deficit because we are getting smoking-hot deals from China.

Comparison to the Japanese yen

Free marketers also like to draw comparisons to the Japanese Yen in the 1980s. The U.S. had a large trade deficit with Japan when they pushed the country to appreciate its currency, which they did. However, this did not decrease the trade deficit. According to the New York Times:

The trade deficit with Japan actually widened to $108 billion in 1987, from $94 billion in 1985. The rising yen wasn’t enough to halt the growth of companies like Sony and Toyota. They had too many advantages, including lower labor costs.

The Japanese soon thereafter went into a decade-long economic slump, but this policy did nothing to help the U.S.

The final word

The world cannot avoid inflation forever. For this, I will give the final word to the esteemed Economist magazine:

…a real appreciation in China will sooner or later feed into American inflation, in one of two ways. First, it can be achieved via a controlled nominal appreciation of the yuan. Second, in the absence of such an appreciation it will come via inflation in China, since—as Paul Krugman bluntly  puts it—inflation is merely “the market’s way of undoing currency manipulation”.

No matter what China does, sooner or later something will have to give.

Competing Economic Theories: What’s the Difference?

February 1, 2011

Before diving into the nitty-gritty and telling you why Austrian economists think China’s devaluation of the yuan is no big deal and why Keynesian economists think we haven’t been spending enough money to pull ourselves out of recession, I think it’s best to have an introduction to the theories I will discuss in this blog.  This blog will analyze various current and historical events mainly through the lens of the two largest and competing economic theories: Keynesianism and the Chicago school.  From time to time honorable mentions will go to the Austrian school and Marxism.

Below, I am providing a brief synopsis of the two theories so the uninitiated might better be able to follow later posts in this blog.  (For those who are already well-versed in economics, I invite you to add to and/or criticize or debunk anything said on this blog.  This blog is not meant to be extensive, but I’d like it to be as accurate as possible.)

Keynesianism

Keynesian economics is named after John Maynard Keynes, who is greatly responsible for modern macroeconomic theory thanks to his book The General Theory of Employment, Interest and Money. Keynesianism supports a regulated economy and money supply.  The krux of the theory is that a lack of aggregate demand is what leads to unemployment and thus economic recessions.  To combat this, Keynes proposed increasing the money supply during recessions.  More money would increase demand and keep unemployment stable (or at least keeping it from becoming as bad as it would have otherwise).  Keynes did note some limitations on this being an effective method of controlling the economy.  As the popular Keynesian Nobel Laureate and New York Times columnist Paul Krugman pointed out in 2008:

The key to Keynes’s contribution was his realization that liquidity preference — the desire of individuals to hold liquid monetary assets — can lead to situations in which effective demand isn’t enough to employ all the economy’s resources.

However, Keynes was widely criticized in the 1970s during a period of stagflation (a period of both high inflation and unemployment), which he posited could not happen.

Chicago school of economics

That stagflation criticism of Keynes allowed a new school of economics to gain popularity in the 1980s (in conjunction with the rise of Reagan).  This school of thought took its name from the University of Chicago, as many of the economic theories falling under this umbrella were developed by certain faculty members of the university.  This school of thought is generally used synonymously with supply-side economics, which is a free-market economic theory.  This theory promotes removing barriers to stimulate economic activity, such as lowering tax rates, allowing businesses to spend more by way of more investment and employment.

Milton Friedman is perhaps the most widely known and influential economist of the Chicago school.  Unlike Keynesian policy, Friedman and other Chicago scholars argued for a neutral monetary policy to promote long term economic growth.  Prices, Friedman claimed are based on the money supply.

Adjacent theories

Austrian and Marxist economics are two theories that may be touched on in this blog but they are largely considered more fringe.  I mention them because they have had some resurgence in recent years due to the current global recession.  The Austrian school has seen a rise in popularity due to promotions of Friedrick Hayek’s The Road to Serfdom and Karl Marx’s  Das Kapital became a bestseller again in Germany just a few years ago.

There is a lot of overlap between the Austrian school and the Chicago school, as they both promote free market economics.  Where differences occur in specific instances, I will try to elaborate in the post for that topic.  Marxism is an exception all on its own as it has largely stopped being developed.  However, some people have continued to try to apply and develop the theory to some extent, which I will try to use where appropriate.

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