Tuesday, December 20, 2011

Housing in China: "Biggest Bubble of the Century"?

China has managed to create a situation in which it has produced both a housing deficit and a housing glut.

In the article Is China a "Colossus" or a Giant "House of Cards"?, we discussed China’s long-term plan to place an additional 400 million people in cities over the next 20 years. Clearly with the stroke of a pen that plan creates a massive housing deficit. One would think that that would be sufficient to keep all known builders busy. An article in Foreign Affairs by Patrick Chovanec tells us that the focus of the real estate market has been elsewhere: China’s Real Estate Bubble May Have Just Popped.

China has experienced an enormous housing boom driven not by the demands of people needing a place to live, but by investors speculating on the assumption that housing prices will continue to rise. Does that sound familiar? Investors are buying multiple units at a time with no intention of actually using them. Rather, the plan is hold them and resell at a later time when demand drives the price up. Why would investors fall into this classic trap?

"The craze for vacant real estate is due in large part to a lack of attractive alternatives. Strict controls on capital outflows prevent most Chinese citizens from investing any real money abroad. Chinese bank deposits earn very low interest rates -- lower, for the past year now, than the rate of consumer inflation. The public sees the country's domestic stock exchanges, which have endured volatile ups and downs over the last few years, as little more than high-risk casinos. In contrast, real estate, which has not seen a sustained downturn since China first converted to private homeownership in the 1990s, has long looked like a sure bet."

The national government has been complicit in fueling this bubble.

"To maintain GDP growth of nearly ten percent during a massive downturn in global demand, China's leaders engineered a lending boom that expanded the country's money supply by roughly two-thirds. Real estate was already the preferred place for the Chinese to stash cash; now, investors had that much more cash to stash. Prices rose accordingly: In many locations, the cost of prime new properties doubled in just two years."

Local governments also participated. They had become dependent on the funds gained from selling public land to developers, and the real estate activity showed up as contributing to the GDP growth demanded by their superiors.

The rapidly rising prices were putting these dwellings out of the reach of people who might actually wish to live in them. This concerned the central government and attempts were made to slow down the building by making it harder for speculators to get credit and buy multiple units, but never having lived through a bubble before, the builders kept on building—or rather, they kept on borrowing and building. Eventually sales slowed and inventory built up.

"Estimates of such idle holdings range anywhere from 10 million to 65 million homes; no one really knows the exact number, but the visual impression created by vast ‘ghost’ districts, filled with row upon row of uninhabited villas and apartment complexes, leaves one with a sense of investments with, literally, nothing inside."

These unsold dwellings come at a cost to the builders. Since they borrowed to build, they had a need to keep borrowing to maintain them.

"As 2011 progressed, developers scrambled for new lines of financing to keep their overstocked inventories. They first relied on bank loans (until they were cut off), then high-yield bonds in Hong Kong (until the market soured), then private investment vehicles (sponsored by banks as an end run around lending constraints), and finally, in some cases, loan sharks. By the end of last summer, many Chinese developers had run out of options and were forced to begin liquidating inventory. Hence, the price slashing: 30, 40, and even 50 percent discounts."

Where does this leave the market and the country?

"In a telling scene two months ago, Shanghai property developers started slashing prices on their latest luxury condos by up to one-third. Crowds of owners who had recently bought apartments at full price converged on sales offices throughout the city, demanding refunds. Some angry investors went on a rampage, breaking windows and smashing showrooms."

"Shanghai homeowners are hardly the only ones getting nervous. Sudden, steep price reductions are upending real estate markets across China. According to the property agency Homelink, new home prices in Beijing dropped 35 percent in November alone. And the free fall may continue for some time. Centaline, another leading property agency, estimates that developers have built up 22 months' worth of unsold inventory in Beijing and 21 months' worth in Shanghai. Everyone from local landowners to Chinese speculators and international investors are now worrying that these discounts indicate that ‘the biggest bubble of the century,’ as it was called earlier this year, has just popped, with serious consequences not only for one of the world's most promising economies -- but internationally as well."

"In a few cities, such as coastal Wenzhou and coal-rich Ordos, the collapse in property prices has sparked a full-blown credit crisis, with reports of ruined businessmen leaping off building rooftops; some are fleeing the country."

Most of the speculators seem to have made their acquisitions with cash, and—so far—have been waiting this out. If they decide it is time to cut their losses and put their property on the market it could be disastrous.

Many countries have made money out of this housing bubble by selling China materials and equipment to support it. The Chinese will not be the only ones who will suffer consequences if this situation is not brought under control.

In principle, the government could just provide the cheap loans that the builders need to maintain their inventory, but that only stabilizes the situation. The builders can’t move their product unless investors are convinced that prices are going to keep rising—which brings us back to inflating the bubble some more.

Stay tuned. As always, there are few dull moments for China watchers.


PATRICK CHOVANEC is Associate Professor of Practice at the School of Economics and Management at Tsinghua University.

Monday, December 19, 2011

Religion, the Constitution, and the Founding Fathers

David E. Campbell and Robert D. Putnam performed an interesting survey. In 2006 they interviewed 3,000 people to obtain information on their political beliefs. They re-interviewed these people over the past summer. One of the intervening events was the rise of the Tea Party. They were able to then correlate the attitudes of those who currently claim Tea Party allegiance with their prior expression of political attitudes. Campbell and Putnam discovered that those who claim Teat Party alliance now are typically traditional conservative Republicans recast, not a manifestation of a new movement. What was most interesting is the finding that the Tea Party types’ major wish was not so much for small government, but for theocratic government.
"Next to being a Republican, the strongest predictor of being a Tea Party supporter today was a desire, back in 2006, to see religion play a prominent role in politics. And Tea Partiers continue to hold these views: they seek "deeply religious" elected officials, approve of religious leaders’ engaging in politics and want religion brought into political debates. The Tea Party’s generals may say their overriding concern is a smaller government, but not their rank and file, who are more concerned about putting God in government."

Clearly, all the Republican candidates wish to demonstrate that their religious beliefs are consistent with the desires of this class of voter. To hear these Republican would-be presidents spouting radical beliefs is rather frightening. To hear them claim to be adhering to the intentions of our founders is rather puzzling.

There is an article in The Economist that reminds us of a bit of our history that is not well known, and places the intentions of our "founding fathers" in an interesting perspective.

As usual, Thomas Jefferson is the most interesting person of the era. He apparently created his own version of the Bible to make it consistent with his view of Jesus, and of history.

"But Jefferson’s approach to redacting the Bible involved something more radical than translation. He literally snipped out everything supernatural: miracles, the Virgin birth, the resurrection. The result was his own, non-mystical account of the life of Jesus."

"He admired Jesus as a moral teacher but like many of America’s revolutionaries, he had a visceral loathing for priestcraft. Jefferson blamed Saint Paul, the early Church, and even the Gospel writers for distorting the mission of Jesus, which, as he saw it, had been to reverse the decadence of the Jewish religion."

The article postulates that Jefferson—and many of the country’s co-founders—were likely Deists who were more comfortable with the existence of a God than they were with the existence of religion.

What had Jefferson to say about the separation of church and state?

"....a famous phrase of Jefferson’s, cherished by secularists, which calls for a "wall of separation" between church and state. Jefferson used that formula in a letter to some Baptists who asked him what exactly the constitution’s framers had meant when outlawing the establishment of a state religion."

The meaning of that phrase seems clear to most, but there are those who would still reinterpret it to suit their purposes. There are those who still believe that the US was, is, and always will be a "Christian nation." David Barton is identified as one of the most prominent and most persistent proponents of this view. Barton’s view is that Jefferson meant a wall that only worked in one direction. The wall would protect religion from government, but would not protect government from religion.

"Among his recent claims are that the founding fathers rejected Darwinism (although they pre-dated Charles Darwin), and that they broke away from Britain in order to abolish slavery. In fact the southern states only joined the Revolution on the understanding that slavery would not be questioned. Strange as his views may sound to most scholars, Mr Barton’s philosophy is taken seriously in Republican circles. When Rick Perry, the Texas governor and presidential candidate, held a day of prayer for the nation in August, Mr Barton was an acknowledged endorser. One of Mr Barton’s admirers is Newt Gingrich, the former House speaker who argues that American history has been distorted by secular historians to play down the role of faith. ‘I never listen to David Barton without learning a whole lot of new things,’ Mr Gingrich has said."

This notion of a Christian nation promises the eventual intolerance and discrimination that is inevitable with a state religion, but it also suggests something equally dangerous. Many with theocratic leanings think of the US as occupying a special place in the order of things. When people throw around the phrase "American exceptionalism," most are referring to a historical uniqueness, but a subset actually believe that white Anglo-Saxon Protestants are God’s "new" chosen people.

To provide insight into what might have been the attitudes and motives of our founders, the article reminds us that at the time of our revolution nine of the thirteen colonies had established state religions.

"Nine colonies had established churches at the time of the Revolution; most of these regimes sputtered on for several decades afterwards. The religious scene in the colonies ranged from the strict Puritan communities of New England to the suffocating Anglican regime of Virginia. In New England, Anglican clergy acted as fifth columnists for the crown; Virginia had an Anglican American culture of its own. Maryland had always been a comfortable place for Catholics."

"It was all a big, volatile mess, to which a regime of religious liberty was the best solution."

If our country began as a "Christian nation," which version of Christianity was it? The above quote mentions three Christianities that despised each other. The point The Economist makes is that the founders knew that they would have enough trouble creating a country riven by political differences. To try to accommodate religious differences would be impossible. Political disagreements are negotiable, religious differences are not.

Virginia was run by the Anglican Church at the time. It had the power to control what was preached and who could preach it. There was a famous case of a Baptist minister who was whipped and jailed for "preaching without a license." One of Jefferson’s proudest accomplishments was to break this control and establish religious freedom in his home state.

"On his instructions, his tombstone records three things: his authorship of the Declaration of Independence, his creation of the University of Virginia (pointedly built around a library, not a church), and religious liberty in his home state."

The dismantlement of Virginia’s state religion and eventually all the others, should have been the ultimate victory for religious freedom in this country. Unfortunately, the Bartons and Gingriches, and Perrys would pander and profess allegiance to those who would today take away our freedom. Their goal is to make all of us beholden to their religious laws.

The article provides this summary of the founders’ motives.

"Regardless of their own views on the spiritual, people like Madison, Washington and Jefferson were intensely concerned for the welfare and cohesion of the new republic. They worried not only about religious wars as such but about political disputes which were "religious" in their intensity. They wanted to create a state and political system to which people with utterly different ideas about metaphysics, and many other things, could offer unconditional loyalty."

Jefferson expressed his concerns in his first inaugural address.

"Let us reflect that, having banished from our land that religious intolerance under which mankind so long bled and suffered, we have yet gained little if we countenance a political intolerance as despotic, as wicked, and capable of as bitter and bloody persecutions."

It is highly unlikely that the US would ever become a theocracy, but the issues raised by religious belligerence have already been politically and socially disruptive. The Republican Party, in the name of the founding fathers, would lead us towards a situation that our founders tried desperately to avoid.

Sunday, December 18, 2011

Finland and Its Approach to Education

There was an interesting article in the New York Times discussing Finland and its approach to education: From Finland, an Intriguing School-Reform Model. The author, Jenny Anderson, took the occasion of a visit by a Finnish educator and author, Pasi Sahlberg, to provide her focus. 

Finland is a very different country from the US, so why should we be interested in the Finnish methods? Anderson provides this quote from an educator.

"Thirty years ago, Finland’s education system was a mess. It was quite mediocre, very inequitable. It had a lot of features our system has: very top-down testing, extensive tracking, highly variable teachers, and they managed to reboot the whole system."

Where is Finland today?  In How Your State’s Students Compare with Those from Other Countries, we presented results from tests of reading and mathematics skills administered by the Organization for Economic Co-operation and Development (OECD) as part of the Program for International Student Assessment (PISA). This PISA test can be used to evaluate the students and school systems as to their status within the body of nations, and with regard to progress over time. In math, Finland ranked fifth (USA, thirty-first), and in reading, third (USA, seventeenth).

One has to conclude that the methods being used now produced a dramatic improvement. Clearly they are worth examining for ways in which our own approach can be improved.

Finland’s reforms started with an attempt to upgrade their teachers’ skills, and to fashion teaching into a desirable career.

"Dr. Sahlberg said a turning point was a government decision in the 1970s to require all teachers to have master’s degrees — and to pay for their acquisition. The starting salary for school teachers in Finland, 96 percent of whom are unionized, was about $29,000 in 2008, according to the Organization for Economic Cooperation and Development, compared with about $36,000 in the United States."

To put those numbers in perspective, consider the following chart which attempts to put teacher salaries in the context of perceived economic value to society.

Finland pays their teachers well by US standards, but not excessively compared to other OECD countries. If the teachers are performing well it must come from the enhanced educational requirements, the ability to attract more qualified people, or merely a better teaching environment.

It is Finland’s approach to education that is the most different and the most intriguing.

"More bear than tiger, Finland scorns almost all standardized testing before age 16 and discourages homework, and it is seen as a violation of children’s right to be children for them to start school any sooner than 7, Dr. Sahlberg said...."

"The first six years of education are not about academic success," he said. "We don’t measure children at all. It’s about being ready to learn and finding your passion."

We discussed this approach of starting school at a later age and avoiding the early ranking of students in Education in Finland: Are We Pushing Children Too Early? Evidence was provided there showing that children perform better if they begin to learn to read at age seven rather than at an earlier age. Finland also refuses to bin their students into fast-learners and slow-learners—in effect, into bright and non-bright—a tactic common in our country that can become a self-fulfilling prophecy.

Wikipedia provides a nice article on Finnish methods that fills in many of the details. The Finns see it as a basic right for children to have a quality daycare and preschool experience.

"Finland has had access to free universal daycare for children age eight months to five years in place since 1990, and a year of "preschool/kindergarten" at age six, since 1996."

While not mandatory, most children participate because the socialization and the learning by playing that takes place are viewed as critical parts of childhood development.

Students spend nine years in what is referred to as "comprehensive" school.

"There are no ‘gifted’ programs, and the more able children are expected to help those who are slower to catch on."

"Teachers, who are fully unionized, follow state curriculum guidelines but are accorded a great deal of autonomy as to methods of instruction and are even allowed to choose their own textbooks. Classes are small, seldom more than twenty. From the outset pupils are expected to learn two languages in addition to the language of the school (usually Finnish or Swedish), and students in grades one through nine spend from four to eleven periods each week taking classes in art, music, cooking, carpentry, metalwork, and textiles."

Teacher provide evaluations of students’ progress, but testing of any sort seems rare in the early grades, and formal "high stakes" tests are avoided.

At age 16 or 17 there is a transition to a higher level of education that is equivalent to the final two years of high school and two years at a community college. In a manner reminiscent of the vaunted German system, there is a bifurcation into a "vocational" path and a pre-university path. Students have a choice, but they must be able to demonstrate capability to follow the university path. The Finnish system appears a bit less rigid than the German, making it easier to switch paths if desired.

What are the lessons to be learned from Finland’s experience, and which might be applicable in the US? The desirability of enriching daycare and preschool experiences are universally recognized. Unfortunately, we are too poor a country, both financially and culturally, to reproduce the Finns’ approach. Quality is for those who can pay for it, either through tuition or by high property taxes. Even the Head Start Program, aimed at a fraction of the underprivileged children, is under siege.

The idea of being less aggressive and starting an intense learning effort at a slightly later age is doable and should be considered. The evidence that capability binning at an early age can have deleterious effects should be also carefully examined. These are decisions that have little cost impact and require only administrative changes.

Schools in the US seem to focus almost entirely on preparing students for college entry. That is not a path that appeals to all students. Incorporating some means of providing familiarity with "vocational" options, and viewing that as a perfectly acceptable option, would probably be beneficial to all. A means of providing the vocational education would, of course, have to follow.

However, one is left with the notion that the major cause for success in Finland is more cultural than administrative. In Finland, reading is encouraged from birth. The family of the newborn leaves the hospital with books to read—one for the mother, one for the father, and one to be read to the child. Reading for pleasure seems to be a national policy that is aggressively pursued. Finland is said to publish more children’s books than any other country. They also have a policy of showing foreign language programs with subtitles so that Finnish children have to read even while watching television. In a country like the US that has regions where ignorance is a prerequisite for election to public office, those strategies are probably not reproducible.

Since most people in the US believe they reside at the apex of civilization, the notion of competition providing motivation for greater success has never caught on. In a lighter vein, Dr. Sahlberg makes this admission.

"Education policies here are always written to be ‘the best’ or ‘the top this or that,’ " he said. "We’re not like that. We want to be better than the Swedes. That’s enough for us."

In an even lighter vein, it is interesting to note that an article in Businessweek identified the Finns as the most prolific coffee drinkers in the world. Their per-capita consumption is said to be about six times greater than that in the US—and they best the Swedes handily in this category also. Perhaps a large, steady source of caffeine keeps those brain cells firing at a high rate and makes reading and studying a more efficient process. How many of our school cafeterias provide coffee? How about the occasional shot of espresso between classes? One can think of a number of good capitalist approaches to this issue.

Friday, December 16, 2011

On the Future of Capitalism: Climate Change Cometh

We continue to explore the potential paths economic evolution might take, and what effect there might be on our conception of capitalism.

Naomi Klein provides a fascinating article in The Nation: Capitalism vs. the Climate. She spent some time "in the belly of the beast," so to speak.

"....Heartland Institute’s Sixth International Conference on Climate Change, the premier gathering for those dedicated to denying the overwhelming scientific consensus that human activity is warming the planet...."

She provides us with some enlightenment.

"Claiming that climate change is a plot to steal American freedom is rather tame by Heartland standards. Over the course of this two-day conference, I will learn that Obama’s campaign promise to support locally owned biofuels refineries was really about ‘green communitarianism,’’ akin to the ‘Maoist’ scheme to put ‘a pig iron furnace in everybody’s backyard’ (the Cato Institute’s Patrick Michaels). That climate change is ‘a stalking horse for National Socialism’ (former Republican senator and retired astronaut Harrison Schmitt). And that environmentalists are like Aztec priests, sacrificing countless people to appease the gods and change the weather (Marc Morano, editor of the denialists’ go-to website, ClimateDepot.com)."

"Most of all, however, I will hear versions of the opinion....that climate change is a Trojan horse designed to abolish capitalism and replace it with some kind of eco-socialism. As conference speaker Larry Bell succinctly puts it in his new book Climate of Corruption, climate change ‘has little to do with the state of the environment and much to do with shackling capitalism and transforming the American way of life in the interests of global wealth redistribution’."

It appears that those who show up for such a conference go through the motions of denying the science, but their agenda and motives are purely political: they think they are protecting "the American way of life." And they think they are winning the battle.

"The Heartland Institute, a Chicago-based think tank devoted to’"promoting free-market solutions,’ has been holding these confabs since 2008, sometimes twice a year. And the strategy appears to be working. At the end of day one, Morano—whose claim to fame is having broken the Swift Boat Veterans for Truth story that sank John Kerry’s 2004 presidential campaign—leads the gathering through a series of victory laps. Cap and trade: dead! Obama at the Copenhagen summit: failure! The climate movement: suicidal! He even projects a couple of quotes from climate activists beating up on themselves (as progressives do so well) and exhorts the audience to ‘celebrate’!"

"There were no balloons or confetti descending from the rafters, but there may as well have been."

Klein tells us we should be concerned by this jubilance because their efforts have, in fact, changed the opinions of many.

"A 2007 Harris poll found that 71 percent of Americans believed that the continued burning of fossil fuels would cause the climate to change. By 2009 the figure had dropped to 51 percent. In June 2011 the number of Americans who agreed was down to 44 percent—well under half the population. According to Scott Keeter, director of survey research at the Pew Research Center for People and the Press, this is ‘among the largest shifts over a short period of time seen in recent public opinion history’."

The opinions of Democrats have held constant over time, but those who lean Republican have moved in great numbers into the denier camp, and they have acquired a passion on the subject nearly equivalent to that seen on cultural issues such as abortion.

"But now there is a significant cohort of Republicans who care passionately, even obsessively, about climate change—though what they care about is exposing it as a ‘hoax’ being perpetrated by liberals to force them to change their light bulbs, live in Soviet-style tenements and surrender their SUVs. For these right-wingers, opposition to climate change has become as central to their worldview as low taxes, gun ownership and opposition to abortion. Many climate scientists report receiving death threats...."

Klein accuses progressives and other responsible players of being intimidated and vacating the field of battle.
"But the effects of the right-wing climate conspiracies reach far beyond the Republican Party. The Democrats have mostly gone mute on the subject, not wanting to alienate independents. And the media and culture industries have followed suit."

Klein’s motivation in writing this article was not so much to vilify the climate deniers, or to laugh at their "science," as it was to castigate progressives and environmentalists for assuming political postures that are ineffective, and inappropriate.

In her opinion, when it comes to the effects of global warming on society and on the economy, the climate deniers are much more correct in their assessment than are progressives.

"But when it comes to the real-world consequences of those scientific findings, specifically the kind of deep changes required not just to our energy consumption but to the underlying logic of our economic system, the crowd gathered at the [Heartland Conference] may be in considerably less denial than a lot of professional environmentalists, the ones who paint a picture of global warming Armageddon, then assure us that we can avert catastrophe by buying ‘green’ products and creating clever markets in pollution."

"Climate change is a message, one that is telling us that many of our culture’s most cherished ideas are no longer viable. These are profoundly challenging revelations for all of us raised on Enlightenment ideals of progress, unaccustomed to having our ambitions confined by natural boundaries. And this is true for the statist left as well as the neoliberal right."

"Here is where the Heartlanders have good reason to be afraid: arriving at these new systems is going to require shredding the free-market ideology that has dominated the global economy for more than three decades."

How one must respond to the challenge of climate change is speculative—and Klein proceeds to speculate at length. The precise details are not what concern us here. What is of interest is the recognition that any response will require planning at national and international levels, and massive intervention by governments in economies around the world. The present balance between capitalism and government would be dramatically altered—perhaps forever.

Capitalism may or may not change under the momentum of its own evolution. It may or may not change under pressure from social evolution. But if Mother Nature gives an order—it will be obeyed.

Wednesday, December 14, 2011

Education in Finland: Are We Pushing Children Too Early?

An article in the New York Times by Jenny Anderson reminds us that Finland has a very different approach to education—and they are very successful at it. There will be an extended discussion of the Finnish approach in the near future. Here we will discuss one attribute of Finnish method that appears counterintuitive.
"Ever since Finland, a nation of about 5.5 million that does not start formal education until age 7 and scorns homework and testing until well into the teenage years, scored at the top of a well-respected international test in 2001 in math, science and reading, it has been an object of fascination among American educators and policy makers."

This suggests that one can be more successful by starting later and by not pushing as hard—how intriguing! Anderson wets our appetite but provides few details. Fortunately, Wikipedia provides a nice article on Finland’s schooling. It has this to say about the policy that is followed with respect to the youngest children.

"The Finnish education system is an egalitarian Nordic system, with no tuition fees and with free meals served to full-time students. The present Finnish education system consists of well-funded and carefully thought out daycare programs (for babies and toddlers) and a one-year "pre-school" (or kindergarten for six-year olds); a nine-year compulsory basic comprehensive school (starting at age seven and ending at the age of sixteen)...."

"The focus for kindergarten students is to "learn how to learn", Ms. Penttilä said. Instead of formal instruction in reading and math there are lessons on nature, animals, and the "circle of life" and a focus on materials- based learning."

"Reading for pleasure is actively encouraged (Finland publishes more children's books than any other country). Television stations show foreign programs in the original languages with subtitles, so that in Finland children even read while watching TV."

"During the first years of comprehensive school, grading may be limited to verbal assessments rather than formal grades. The start of numerical grading is decided locally. Most commonly, pupils are issued a report card twice a year: at the ends of the autumn and spring terms. There are no high-stakes tests."

My interest in early learning was piqued by the assertion that the Head Start Program was a failure because, while it seemed to provide preschoolers an advantage, that advantage seemed to dissipate after a year in a regular school. This issue was discussed in The Head Start Program and Learning to Read. I came to the conclusion that it was way too early to begin trying to measure the academic achievements of first graders and making global socio-economic decisions based on the results. It is encouraging to see that Finland takes an approach that is consistent with what has been learned about early childhood education and has made it work. Let us review why Finland is following the correct path.

Reading comprehension has to be the basis for all formal and informal education. So why not consult an expert? Maryanne Wolf, director of the Center for Reading and Language Research at Tufts University has written a fascinating book called Proust and the Squid: The Story and the Science of the Reading Brain. She provides a description of the process a child goes through in learning to be an effective and efficient reader. It is not a simple process and it relies heavily on family support.

"Learning to read begins the first time an infant is held and read a story. How often this happens, or fails to happen, in the first five years of childhood turns out to be one of the best predictors of later reading."

This is one function that preschool programs like Head Start can provide. What do the Finns do?

"To foster a culture of reading parents of newborn babies are given three books, one for the mother and father, and a baby book for the child, as part of the ‘maternity package’."

There is a natural progression of capabilities that must be attained before effective reading can be possible. This requires the slow development of fundamental brain functions on a timescale that cannot be rushed, and on a timescale that varies from individual to individual. Wolf says that this process takes at least five years and is not the same for boys and girls. She says that there are observable differences in maturation towards reading fluency up until age eight, with boys coming along slower.

Could there be any reason that the Finns chose age seven to begin formal education? Wolf provides us with this information.

"They found across three different languages that European children who were asked to begin to learn to read at age five did less well than those who began to learn at age seven. What we conclude from this research is that the many efforts to teach a child to read before four or five years of age are biologically precipitate and potentially counterproductive for many children."

Starting education at an early age has inherent pitfalls. It is a typical occurrence in US schools to have a class where the age is nominally six, but actually consists of pupils who range from just under six to just under seven. This means that some students have had a 20% greater lifetime over which to mature than others. Given what Wolf tells us about the variability of maturation rates, one would assume that this is a difficult situation that must be treated carefully. What is common in the US schools? Typically, the students who learn the easiest get more attention and better tutoring. It is even common to separate students into fast learners and slow learners so that the fast learners will not be held back. Malcolm Gladwell examines this process in detail in his book Outliers. He found evidence that this practice of binning young students creates a learning bias that propagates throughout the students’ careers.

What practice is followed by the Finns?

"There are no "gifted" programs, and the more able children are expected to help those who are slower to catch on."

Finland’s practices (and presumably Sweden’s and Norway’s also) seem to be based on firm evidence about how children function. This information is available to educators and politicians in the US. Have any of these issues entered into our public dialogue on education? What we generally hear are verbal cannonballs lofted back and forth across a dead zone by unionized craftspeople on one side and free-market businessmen on the other. One side is determined to show that teachers are not doing their job; the other complains that politicians and administrators are not doing their job. They tend to forget that it is the children who must do the learning. They should spend more time trying to understand and eliminate factors that inhibit learning in children.

Perhaps it is time to quit worrying about teachers and administrators, and begin worrying about malnutrition, poverty, broken homes, and a host of other social ills that need repairing. We cannot eliminate all these things, but there should be ways in which we can begin to isolate our young children from their ill effects.

Tuesday, December 13, 2011

On the Future of Capitalism: The Great Stagnation?

Tyler Cowen has produced some interesting concepts in his book The Great Stagnation. He provides a rather explicit subtitle that indicates quite well where he is headed: How America Ate All the Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better. Cowen advances the notion that the US and other advanced economies have been facing slower growth over the past few decades because they have consumed the available benefits from a collection of unique circumstances and technological advances, while failing to develop sufficient new innovations to maintain the necessary economic expansion. This slowdown in growth is said to be the cause of changes in our economy that have focused energies in directions that have not been beneficial. A major change has been in the increasing precedence of what he refers to as "private goods" over "public goods."
"Contemporary innovation often takes the form of expanding positions of economic and political privilege, extracting resources from the government by lobbying, seeking the sometimes extreme protections of intellectual property laws, and producing goods that are exclusive or status related rather than universal, private rather than public; think twenty-five seasons of new, fall season Gucci handbags."

Cowen talks about a "slowdown in ideas production" and complains about too much innovation focused on "private goods" in the same breath, leaving the reader a bit confused. In any event, the lack of what might be termed "good innovation" is claimed to be the source of all our problems.

"The slowdown in ideas production mirrors the well-known rise in income inequality. Labor and capital are fairly plentiful in today’s global economy, and so their returns have been somewhat stagnant. Valuable new ideas have become quite scarce, and so the small number of people who hold the rights to new ideas—whether it be the useful Facebook or the more dubious forms of mortgage-backed securities—earned higher relative returns than in earlier periods. The ‘rise in income inequality’ and the ‘slowdown in ideas production’ are two ways of describing the same phenomenon, namely that current innovation is more geared to private goods than to public goods....That simple observation ties together the three major macroeconomic events of our time: growing income inequality, stagnant medium income, and....the financial crisis."

The historical picture Cowen presents is similar, in effect, to that provided by Brink Lindsey in his description of society evolving into a mode where it is driven by what he refers to as "frontier economics." We described and discussed Lindsey’s ideas in On the Future of Capitalism: Frontier Economics? Although the evolution and end point is essentially the same in the two authors’ presentations, the causes and implications are quite different.

Cowen provides a plot of median family income between 1947 and 2007. The curve turns over in the mid 1970s and begins to grow at a much smaller rate. He uses this behavior to pinpoint 1973 as the end of the "era of the low hanging fruit." He further states that medium income is "the best measure of how much we are producing new ideas that benefit most of the American population." The cause of lower income growth is then the great stagnation to which he refers. His claim is that this trend can be reversed by the next great wave of innovation which he expects to occur at any time now.

Instead of using Cowen’s chart, let’s look at an equivalent representation that plots income versus productivity over the same time period.

Income and productivity track each other until around 1975 when income begins to fall while productivity continues to climb. Is it really obvious that one can claim a deficit in innovation and a strong gain in productivity? Can this trend be changed by becoming more innovative again as Cowen claims?

Lindsey would look at this chart and claim that around 1973 is when we began to fulfill the needs required by the great mass markets of food, clothing, shelter and transportation, and the economy began to evolve in a different direction. He would say that saturation of these dominant areas led innovators to look for smaller, more specialized markets, where rapid turnaround and low up-front capitalization where important. Another way to say this is that we transitioned from an economy where the fundamental needs of the population had to be met, to one in which products had to be created and marketed that were not a fundamental need. This is a true inflection point in the evolution of the economy and in the evolution of capitalism. Lindsey does not go into detail about the feedback on income growth, but his general assessment seems intuitively more correct than that of Cowen.

There is another approach to discussing this inflection point in the economy. Robert Reich, in his book, Aftershock: The Next Economy and America’s Future, provides a similar graph to the one above—one that better illustrates what he thinks is occurring. Reich plots productivity versus average hourly compensation. Hourly compensation falls off even more quickly than median income. Around the mid-70s is the period when outsourcing of manufacturing to low-wage countries began to be significant, and it is also the time when increased automation in our factories began to eliminate human jobs.

Reich does not deny that off-shoring was important, but he points out that unemployment remained at a modest level up until the last few years, so the economy continued to create jobs, but they were lower paying jobs. Automation certainly played a significant role in this trend as manufacturing output continued to climb while manufacturing employment continued to fall. Reich also believes that the fall in wages that accompanied the continued creation of jobs was due more to socio-political factors than to purely economic issues.

Reich describes the years 1947-1975 as "The Great Prosperity." He describes the subsequent years as the time when Washington broke "the social contract." In his view it was a time when many social functions were privatized, unions were attacked, payroll and sales taxes where raised on the middle and lower classes while income tax was lowered for the upper income earners. In addition the government

"....increased the cost of public education, reduced job training, cut public transportation, and allowed bridges, ports, and highways to corrode. It shredded safety nets—reducing aid to jobless families with children, and restricting those eligible for unemployment insurance so much that by 2007 only 40 percent of the unemployed were covered."

Whether one fully agrees with Reich’s assessment or not, he is correct in pointing out that fundamental changes occurred in society and in the economy starting in the mid-70s. Reich’s book is discussed here for those who wish more information.

Cowen’s attempt to blame the ills of the economy on innovation stagnation seems a bit muddled. It is difficult to claim that there is a lack of innovation when one sees new products, and even new industries, come and go in the bat of an eye. Cowen has to resort to defining good innovation and not-good innovation—a rather artificial distinction. His assumption that there will be great new innovations that will redistribute wealth and great new jobs for all is presented as a matter of faith. A compelling example to look forward to might have helped the unconvinced.

The arguments of Lindsey and Reich that a fundamental transition has occurred seem more compelling. It is more intuitively correct to assume we are in a period of high innovation, but in an era when innovation leads to work savings and thus the elimination or downgrading of labor. Think of manufacturing and automation as an example. Think of computers and software doing rapidly the work that was once done slowly by legions of individuals. One person can produce software that can eliminate thousands of jobs.

This discussion leads inexorably to the overarching question of what is to be the role of government in its evolving partnership with capitalism? Cowen, whether he admits it or not, will need massive intervention by government, both in funding and in planning, if he is to see the type of innovation he is hoping for. Reich will certainly need government action to restore his social contract. Lindsey believes a hands-off approach must be taken by government for the economy to run efficiently. We will come back to this issue as we pursue further the possible futures we face.

Sunday, December 11, 2011

On The Future of Capitalism: Frontier Economics?

Brink Lindsey provides a glimpse at the future of the economy and capitalism in an article in The American Interest: Frontier Economics. Lindsey claims that the US and all developed countries have left one phase of growth and entered a new phase. This new phase is highly uncertain in terms of direction, hence the term "frontier economics." He provides a description of how we arrived at the place we are, and suggests what must be done to accommodate this new future that lies before us.

It is crucial to understand the phases of growth that occur as an economy matures.

"To begin with it is important to understand that economic growth comes in different forms. For present purposes, the key distinction is between growth as more of the same and growth as something new and different. Specifically, growth as more of the same can come from capital accumulation, the expansion and upgrading of the labor force, and the adoption of ideas developed elsewhere. Or growth can come from innovation—that is, the development of new products and new production processes. The former, or imitative growth, occurs within the existing technological frontier; the latter, or innovative growth, pushes that frontier outward."

There is a corresponding view of the accumulation of wealth that produces two phases. The first focuses on providing mass availability of the more fundamental needs of society.

"For present purposes, we will refer to these two phases as the transition to mass affluence, on the one hand, and mass affluence itself, on the other."

"During the transition to mass affluence, the central economic challenge is the development and servicing of mass markets for the obvious staples of life: food, clothing, housing (including home furnishings and appliances) and transportation. The focus is on exploiting economies of scale by producing relatively homogeneous goods of middling quality aimed at middling tastes."

This phase, in the context of developing countries, is best described as an "industrialization" phase. Lindsey describes it as one that is simple, in concept, for a developing country to follow given the numerous successful examples to follow and the ability to take advantage of existing technologies.

The next phase of development becomes quite different—more complex and more uncertain.

"....the second goes by a variety of labels. Some refer to the service economy, others call it the knowledge or information economy, and still others play it close to the vest and speak simply of the postindustrial economy."

We can think of this transition as going from a state in which the consumers’ needs and desires are understood, to one in which consumers’ needs and desires must be anticipated or created.

"What new products would people buy? What nuances of function or design or marketing would separate big sellers from duds? During the industrial era, investors could identify mass markets that weren’t yet saturated and know with reasonable certainty that the future would bring their further expansion. Now, however, the future is more obscure than ever."

Lindsey declares that the transition from the industrial phase to the post-industrial phase affects not only the way businesses operate, but it also changes the nature of the business-government interaction.

"....compared to rich countries, less developed countries can thrive with a distinctly different institutional mix between markets and government than that which prevails in more advanced countries. Because of the availability of catch-up growth, poor countries can reserve a larger role for government as both market regulator and market participant and still deliver excellent economic performance. In particular, the government can dominate decision-making over the large-scale allocation of capital—through state-owned enterprises, control over the financial sector, corporatist coordination and industrial policy."

The post-industrial era forces companies to think in terms of many more markets, but ones that are smaller and more specialized. This requires a focus on rapid innovation and quick turnover of products. This trend towards specialized or "niche" markets lessens the need for huge capital investments and provides an easier path for new companies to jump in with an innovation and seize or create a market. Given this environment, Lindsey insists that the role of government must be diminished in order to not impede this process. He does not deny that regulation is needed wherever abuses occur, but he believes it is critical that this creative construction and destruction process proceed unimpeded.

"Reduced market barriers to entry make government efforts to direct the course of economic development increasingly problematic. Such efforts typically take the form of funneling resources to existing producers through directed credit, restrictions on competition or outright subsidies. When market conditions are such that the status of leading producers in a given industry is fairly stable even without government intervention, such interventions can be relatively benign. Basically, what government does in these situations is to augment and accelerate investments that would happen anyway."

"When, however, the marketplace is considerably more dynamic, there is a greater risk that government intervention will misfire by propping up incumbent firms and thwarting the emergence of new firms with better ways of doing things. The opportunity costs of backing the wrong horse go up as well, as the possible trajectories of industries with and without intervention grow increasingly divergent."

Lindsey provides a compelling and insightful description of how the economy is evolving, but it is not a given that it will, or can, evolve in a satisfactory manner. What recent developments tell us is that the economy has become efficient at rapidly creating large concentrations of wealth, but very inefficient at creating jobs. That is not a viable long-term path. Lindsey’s suggestion of a highly uncertain business future might sound exciting to some, but uncertainty also suggests randomness. That does not appear to be an attribute of a stable society. One way or another we need an economy that can provide income for all of our citizens. There is no guarantee, or even a hint, that the "frontier economy" can provide this.

Tyler Cowen, in his book The Great Stagnation provides some insight into what the "new" economy provides us. Consider one of the "successes" of the new era: Facebook. This company is quoted as having a grand total of 1,700+ employees and a potential market valuation that has been estimated between $100 billion and $1 trillion. Compare that with General Motors of the old economy: 77,000 US employees and a market valuation of about $33 billion. Google provides jobs for about 22,000 employees, not a large number, but it can at least claim to be providing productivity gains for the economy. Facebook is probably an enormous productivity killer.

Cowen also targets Apple, the current darling of the industrial world. He quotes a study that indicates the revolutionary, highly innovative iPod created a net of 13,920 jobs in the US. Cowen points out that that number does not include all the jobs in the music industry that were lost when the iPod became popular. It is not clear that any net jobs became available. It is hard to create jobs when every time you purchase an Apple product you are siphoning money out of the economy and sending it elsewhere.

If these are examples of what the "frontier" economy holds in store for us, we are in big trouble. One could as easily argue that the conditions faced by the economy argue for a much greater involvement by the government.

Cowen’s book and his thoughts on capitalism and the economy will be presented in a subsequent article.

Saturday, December 10, 2011

A Hot New Export Commodity: Residency Permits

For all the angst about immigration, it is interesting to realize that the US and other countries have found ways to make money from those who wish to enter their countries. The US has a process called the Immigrant Investor Program—or EB5. An article in The Economist with the fetching title, Give me your Gucci-clad masses, describes the program. 
"....EB-5, was set up in 1990 to lure in foreigners by giving them the right to live and work there permanently if they created jobs."

"Initially EB-5 came laden with stringent conditions: immigrants had to invest $1m either in a new enterprise that would create at least ten full-time jobs, or in a failing one to preserve the same number. They were required to manage the business themselves, and even to dedicate some of the jobs to exports. If a company failed in its first two years, investors would lose both their money and their green cards."

"With the exception of the two-year rule, these restrictions have now melted away. Investors today can choose to buy into all sorts of packaged projects, created by regional centres that oversee their day-to-day management. Many projects qualify for a minimum investment of only $500,000, designed to push investment to rural regions and areas of high unemployment. Crucially, the required ten jobs no longer need to be in direct employment. This permits investment in limited partnerships whose purpose is to lend money to companies that do employ workers, reducing investors’ risk."

This program has the potential to inject needed funds into the economy if enough wealthy people from other countries are interested. Apparently that is the case.

"....EB-5 finance has become a much-needed source of funds for private property deals."
"Over the summer, the Citizenship and Immigration Services streamlined the EB-5 process further. Last year, 2,480 immigrants got their green cards via EB-5. The Obama administration would like to see that number increase to 10,000 a year, which should bring in billions of dollars for building shops, offices and infrastructure. It should also mean tens of thousands of jobs for the poor, huddled masses of America’s unemployed."

Such an immigrant must invest at least $0.5 million plus living expenses in the economy. Presumably they would buy a house, cars, and assorted other living expenses. Since we are dealing with wealthy people here let us say at least a million dollars will enter the economy. If the 10,000 participant goal is reached, that is at least $10 billion each year. Here is a good example of area in which adding a few more government employees to facilitate the processing of requests for residency permits might be a good investment.

An article in Businessweek gives us more information on who these people are that want to take up residency: China’s Super-Rich Buy a Better Life Abroad.

"In the U.S. so far this year almost 3,000 Chinese citizens have applied for investor visas, up from 270 in 2007. That’s 78 percent of the total applicant pool for this type of visa, according to U.S. Citizenship and Immigration Services (USCIS). The U.S. investor visa, also known as the EB-5, requires a minimum investment of $500,000 by the applicant in a commercial project in the U.S...."

Whereas Russians are busy moving their families and their capital permanently out of Russia, the Chinese have little desire to leave China permanently. Most will maintain their businesses in China and reside a great deal of the time there. The motives for coming here seem split among providing a healthier environment for their families, a form of long term tourism, and wishing to have a safe harbor to settle in if things go sour in China. Many of the good things in life, especially those cherished by the wealthy, are actually cheaper here. Education is another lure, with US schools—at least universities—seen as a source of a more useful education for their children. The fear of coming to a bad end in China is derived from two possible futures.

"Moving a family abroad and obtaining foreign residency cards could also prove useful in case of sudden legal or policy shifts that hurt entrepreneurs, or if social unrest reaches a boiling point. So-called mass incidents—riots, strikes, and protests—doubled in five years, to 180,000 in 2010, Sun Liping, a professor at Beijing’s Tsinghua University, wrote in a Feb. 25 article in the Economic Observer. ‘Some people in China are talking about class conflicts against rich people,’ says Wang Xiaolu, deputy director of the National Economic Research Institute in Beijing."

That seemingly incredible number of mass "incidents" is supported by another seemingly incredible bit of data.

"One émigré in Boston (who asked only that his last name, Yang, be used since he still owns a factory in China) points out that the Chinese government spent more money on internal security (549 billion yuan) than on defense (534 billion yuan) in 2010. He says that if things got ugly, the rich would be targets not just for being rich but for their close connections with the government."

What is the other future that could disrupt these people’s lives in China?—nothing less than an outbreak of lawfulness.

"Most of China’s wealthy have an ‘original sin,’ or some illegality relating to earning their ‘first bucket of gold,’ says Yang."

Friday, December 9, 2011

On the Future of Capitalism: The Wisdom of Markets?

This dictionary rendering by Merriam Webster serves as a useful definition of what people understand by the term capitalism.
"An economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market"

The historical reality is that this description is an idealization. Over time it has been necessary to impose constraints on "pure" capitalism in order it ensure that basic social needs are not compromised. Most would agree that some degree of regulation of action within a capitalist system is appropriate to inhibit egregious abuses of the social contract. The national and state governments participate in this of regulation. In effect, government and private industry are partners in capitalism.

Capitalism and its interactions with its national and world environment is the study that encumbers economists. These economists like to think of themselves as scientists whose efforts allow them to draw conclusions. These conclusions then become the basis for theories. Unfortunately, these theories are not provable, but nevertheless, economists become attached to them and confer on them the status of economic "law."

Capitalism exists within a constantly changing social and political structure, a constantly changing world economic environment, a constantly changing world physical environment, and within a rapidly evolving technology environment. If everything in the world is in flux, it seems reasonable to suspect that the economic system we think of as capitalism must change also.

Given the recent financial debacle, the ongoing debt debacle, the shifting of global economic and political power, and the threat of major environmental changes, it seems an appropriate time to stop and ponder what all this might mean for how government and private enterprise might propagate their partnership into an uncertain future. A number of articles have appeared addressing this issue. Not surprisingly, opinions are highly colored by political beliefs and faith in the continuity assumed in embracing a few economic "laws." The plan is to discuss at least three of these articles in the near future, but first we start with a brief diversion.

It is clear that the most divergence of opinion resides in the role assigned the government in the future. One of the most tightly held beliefs of economic conservatives is that it is always best to allow the "wisdom of the market" to take precedence over the government in making decisions.

This is such an article of faith for some that almost no one stops to ask if markets are actually "wise." The notion assumes that a large number of rational, self-interested participants will make better economic decisions than a few governmental technocrats. There is even a concept known as the "wisdom of crowds," which seems to assume the larger the number of ignorant people you have guessing the answer to a particular question, the more likely they are to arrive at the correct response—on average. Those who tend toward cynicism will see similarities between the wisdom of the markets and the wisdom of crowds.

Leonard Mladinow has written a book titled The Drunkard’s Walk: How Randomness Rules Our Lives. As the title suggests, Mladinow spends a good deal of the book exposing what appear to be the result of "expert" decisions, but are really better explained by random factors. Consider one experiment performed to assess the degree to which the intrinsic qualities of a product might determine its success in the marketplace. The topic chosen was music.

"For their study they recruited 14,341 participants who were asked to listen to, rate, and if they desired, download 48 songs by bands they had not heard of. Some of the participants were allowed to view data on the popularity of each song—that is on how many participants had downloaded it. These participants were divided into eight separate "worlds" and could only see the data on downloads of people in their own world...each world evolved independently."

If these eight marketplaces where performing efficiently, then one could expect similar rankings in choosing the best music.

"But the researchers found exactly the opposite: the popularity of individual songs varied widely among the different worlds....In this experiment, as one song or another by chance got an early edge in downloads, its seeming popularity influenced future shoppers."

So as—randomly—one piece or another went a few clicks ahead, others began to favor that music and jump on board. So much for the wisdom of the market. Perhaps that is why corporations abhor free markets—they cannot tolerate random results. The market has to be controlled so that the desired purchases are made. One still learns about music by listening to the radio—and who determines what is played on the radio? The producers of the product do not follow the market, the market follows the producers.

To follow up on our government versus corporation theme, the government could have assembled a group of music experts (DJs?) who would be asked to assemble the best music and ensure that it was played on the radio so that the music would be heard. Would this be creating a marketplace that provided better service to both the listeners and the performers?

There is a role for government in the economy and there are areas where the government plays no useful role. Now if only we could decide where to draw that line.

Wednesday, December 7, 2011

Education Reform is Simple—Or Is It?

Yet another view has been heard on what is wrong with our education system and how we can fix it. Marc Tucker provides an article in the Atlantic titled Why Innovation Can’t Fix America’s Classrooms

Tucker begins by reminding us that we are not getting our money’s worth from our education spending.

"....although the U.S. spends more per student on K-12 education than any other nation except Luxembourg, students in a growing number of nations outperform our own. But think about this: Among the consistent top performers are not only developed nations (Japan, Finland, Canada), but developing countries and mega-cities such as South Korea, Hong Kong, and Shanghai."

His thesis is simply that since these countries (and cities) are doing better than us we should learn from their methods rather than going off and trying to invent new techniques that are unproven and likely to fail.

"You would think that, being far behind our competitors, we would be looking hard at how they are managing to outperform us. But many policymakers, business leaders, educators and advocates are not interested. Instead, they are confidently barreling down a path of American exceptionalism, insisting that America is so different from these other nations that we are better off embracing unique, unproven solutions that our foreign competitors find bizarre."

"Some of these uniquely American solutions -- charter schools, private school vouchers, entrepreneurial innovations, grade-by-grade testing, diminished teachers' unions, and basing teachers' pay on how their students do on standardized tests -- may be appealing on their surface. To many in the financial community, these market-inspired reform ideas are very appealing."

"Yet, these proposed solutions are nowhere to be found in the arsenal of strategies used by the top-performing nations. And almost everything these countries are doing to redesign their education systems, we're not doing."

What should we be doing? Tucker makes this reasonable proposal.

"The top-performing nations boost the quality of their teaching forces by greatly raising entry standards for teacher education programs. They insist that all teachers have in-depth knowledge of the subjects they will teach, apprenticing new teachers to master teachers and raising teacher pay to that of other high-status professions. They then encourage these highly trained teachers to take the lead in improving classroom practices."

"The result is a virtuous cycle: teaching ranks as one of the most attractive professions, which means no teacher shortages and no need to waive high licensing standards. That translates into top-notch teaching forces and the world's highest student achievement. All of this makes the teaching profession even more attractive, leading to higher salaries, even greater prestige, and even more professional autonomy. The end results are even better teachers and even higher student performance."

These actions are worthy things to do, but how does one decide that they are necessary and sufficient.

Tucker mentions South Korea as a "developing" country that out-performs us in international tests of students. It is informative to look at South Korea and consider whether it provides an example that we could, or should, emulate. We have provided a discussion of some of the differences in education between the US and South Korea in The State of Education: South Korea and the US. There we noted, with some humor, the fury directed by mothers in South Korea at the state when it decided that children were spending too much time studying so they were going to discontinue Saturday classes in order to allow them more time to play. The consensus among mothers seemed to be that if this outrage came to pass, then the lost time would have to be regained by spending more money on private tutoring for the children. Also, the comparison of the sorry funding available for our schools was made with Korea’s plan to replace all of its textbooks with online versions that students can access with PCs, tablets or other devices. This would allow them to study even on days when they could claim to be sick.

A recent article in The Economist puts this fixation on education in a broader context.

"An unusually large part of the spending that makes Korean education so good is private, not public. The government spends just under 5% of GDP on education, slightly below the rich-country average. Families add an extra 2.8% of GDP on top of that, easily the highest rate in the OECD. At universities, family spending is three times that of the state. And families spend an estimated 8% of their household budgets on after-hours programmes for each child, an investment which explains the effort mothers put into making sure it pays off. If you have three children, their after-school activities alone could swallow up a quarter of the household budget."

So which part of this South Korean approach does Tucker wish us to emulate: the enormous expenditures on private tutoring, or the daring move to place all learning tools on-line? Should we add eight weeks to the school year, or mandate Saturday classes? And yet, do we really need to emulate other systems?

In How Your State’s Students Compare with Those from Other Countries we included this graph.

In reading proficiency, after eliminating Shanghai as too special a case, and treating each of our states as if it were a country, the top six in rank were Korea, Finland, Hong Kong, Massachusetts, Singapore, and Vermont. So Massachusetts and Vermont schools and students perform as well as any in the world. Why are we not then sending observers to those states in order to learn the magic they are practicing so it can be ported elsewhere? Is it because they value their teachers more and reward them with salaries that will encourage the best and the brightest to take up the teaching profession? One can find a ranking of states by teacher compensation here. Using an index that modulates actual salary by the local cost of living, the claim is that in terms of effective compensation, Massachusetts ranks 34 places from the top, while Vermont is at number 49 out of 50.

Salary is not the issue. There is something else going on. The countries we compete with are all rather homogeneous entities where it makes sense to define a national average and a national characteristic. Looking at the spread in results for our individual states it is hard to believe that these results all came from within a common boundary. The reason no one is studying Massachusetts and Vermont is because there is really nothing to learn. The difference is not so much in the teachers or in the schools within the varying states as it is within the society, economy and culture. There is too much poverty, and too much discrimination, and too few good parental role models. And there are too many students with language issues or other special needs that do not get sufficient attention.

While it is hard to agree with the premise that we have a lot to learn from other nations, there is one point on which tucker is spot on.

"The top-performing nations have followed paths that are remarkably similar and straightforward. Most start by putting more money behind their hardest-to-educate students than those who are easier to educate. In the U.S., we do the opposite."

Wealthy students collect in wealthy schools, while poor students tend to collect in poor schools. Addressing that seems like the best place to start.

Tuesday, December 6, 2011

Russia and Its Dysfunctional Society

Russia provides one of the most intriguing national stories, and it has been covered here several times. In Russia and Its Uncertain Future the failure to modernize and its endemic corruption were discussed. The article, Russia and Its People: A Death Spiral?, focused on the poor health and unusual demographics of the population. More recent articles provide us with other perspectives from which the peculiarities of Russian society can be examined.

An article in The Economist, Time to shove off, illustrates the depth of dissatisfaction with life in Russia today.

"A recent opinion poll by the Levada Centre shows that 22% of Russia’s adult population would like to leave the country for good. This is a more than threefold increase from four years ago, when only 7% were considering it. It is the highest figure since the collapse of the Soviet Union, when only 18% said they wanted to get out. Those who are eager to leave are not the poor and desperate. On the contrary, most are entrepreneurs and students."

Consider the following graphic.

The categories of people who are most interested in leaving are the ones a nation would be most interested in keeping. The graph below illustrates the reasons why people are dissatisfied with their lives in Russia.

It is suggested that stagnation is the impression most citizens have about their country and its economy. While Russia is rich in gas and oil, it has not chosen to use that wealth wisely.

"Instead of investing in human capital—such as better schools and hospitals—and modernising the oil and gas industry, Russia has used the money to perpetuate the inefficient structure of the Soviet economy in exchange for political support. Instead of encouraging people to look for newer opportunities, Russia ties them down with handouts to dinosaur enterprises and one-company towns."

"Five years ago Russia needed $50-a-barrel oil in order to balance its budget. Next year the price will have to be $120 to meet its spending obligations. The current price is $113 a barrel....its budget expenditure (which is already growing by more than 10% a year) is bound to increase."

Perhaps even more troubling is a climate of corruption that stifles foreign investment and local entrepreneurship.

"When Walmart tried to buy a retail chain there—a three-year flirtation that eventually ended last year—it was apparently fobbed off by bureaucrats who, according to a source familiar with the negotiations, ‘did not want another whiner like Ikea, which had exposed corruption’."

"That corruption crushes the prospects of active and talented people. The rent-seeking behaviour of Russia’s rulers, who control the money and the levers of repression, stifles competition. Many of the elite have backgrounds in the security services; their instinct is to raid, grab and control, rather than create and compete....Investing in innovation and raising productivity makes little sense when your well-connected competitor can hire the tax police and prosecution service to force you out of business."

There is a general acceptance of things being the way they are. One commentator says of the middle class that "they would rather exchange their country than change it."

"According to the World Bank, 77% of Russian science and engineering students studying in America will never come back."

"A recent survey by Campden Media and UBS, a bank, of 19 Russian businessmen with a personal wealth of more than $50m and a turnover of $100m showed that 88% had moved their personal wealth abroad and were prepared to sell their companies. Few planned to pass their businesses on to their offspring, which is hardly surprising, since most children of the rich and powerful are now ensconced in the West. Parents send their children abroad not to learn to run their businesses more efficiently, but so they never have to come back."

Putin is apparently not worried about a brain drain or about the flight of capital abroad.

"The Kremlin undoubtedly likes things that way. It has learned from the mistakes of the Soviet Union, which raised levels of education and science to compete with America, but in the end created pressure from within the system that it could not contain. This is one reason why Mr Putin is so keen for Russia to have a visa-free travel arrangement with the rest of Europe. The other is that it would give the Russian elite unhindered access to their European properties."

Even given this type of environment, the number who will emigrate is likely much smaller than the 22% who would like to. The question for Russia is: what will those who remain and are dissatisfied do?

The recent election may provide a clue. The Economist provides here an update on what occurred.

"YESTERDAY'S parliamentary poll in Russia was always going to be more a referendum on Vladimir Putin and the ruling United Russia party than a real election. The genuine opposition was barred from taking part long before polling day; television, which remains the main source of news and views for most of the country, has been working at full propaganda throttle; and governors and mayors across Russia were given specific targets for United Russia's voting figures and told to meet them."

"The absurdity of the rigging became clear as results came in. In some regions the sum of votes cast for all parties exceeded 140%. In Chechnya, ruled by Ramzan Kadyrov, a Kremlin-friendly strongman, United Russia’s result was 99.5%. A similar result was achieved in a Moscow psychiatric hospital."

The lower than expected results for Putin’s party is attributed to an erosion of legitimacy among Putin’s core supporters. How this gets propagated into the future is anyone’s guess. The cynical are predicting that the response will be to make the next election better rigged, and any genuine competition will be completely eliminated.

Will the Russian people have a response to all this? At least some of them are angry and letting their feelings be heard. Perhaps even more will have voted with their feet by the next election.

Sunday, December 4, 2011

Illegal Immigration: Hysteria over a Nonexistent Problem

Everyone seems to agree that the number of illegal immigrants in the US is about 11 million. The responses to the existence of these people, and the beliefs about the effects of their being in this country vary considerably. Several states, most notably Arizona, Georgia, and Alabama, have enacted strict laws intended to catch illegals and punish those who might have dealings with them. The conventional wisdom has come to assume that the immigrants incur a considerable expense in our society, and they take jobs away from legal residents. One has an image of hordes of poor Hispancs just waiting for the opportunity to sneak across the border and cause trouble in our country.

Let us address the issue of "hordes" first. A Washington Post article tells us that that the Border Patrol nabbed 327,577 people trying to cross the border into the US illegally in the last fiscal year. An article in The Economist puts this number in perspective by providing this graph.

As border enforcement is enhanced, fewer are being apprehended. The logical conclusion is that an ever smaller number are making the attempt. Historically, the number of illegals has depended on the relative economic prospects on each side of the border. Right now, the US looks less desirable as a destination than it was ten years ago. The number apprehended in 2010 was 447,731. That indicates a drop of 27% from 2010 to 2011. The Washington Post article reminds us that many illegal immigrants eventually return home, and suggests that the net flux across the border has already reached zero. If these trends continue, perhaps the number of illegal immigrants will begin to fall without any assistance from punitive state laws.

Several articles have appeared recently focusing on Alabama and the effects of its recent legislation. An article in Businessweek, Alabama Rethinks Its Harsh Immigration Law, provides an interesting anecdote concerning Mercedes-Benz and one of its employees.

"On Nov. 16, a European businessman paying a visit to his company’s manufacturing plant near Tuscaloosa, Ala., was pulled over for driving a rental car without a tag. The police officer asked the man for his license, but the only paperwork he had with him was a German I.D. card. Anywhere else in the nation, the cop might have issued the man a citation. Not in Alabama, where a strict new law requires police to look into the immigration status of people detained for routine traffic violations. Because the man couldn’t prove he had the right to be in the U.S., he was arrested and hauled off to the police station."

"As it turned out, the businessman was an executive with Mercedes-Benz, one of Alabama’s prized manufacturers. The Mercedes plant employs 3,400 people, and the company’s much-heralded decision in 1993 to build cars in the state encouraged Hyundai, Honda, and Toyota to follow."

This was clearly an embarrassment for the state. Among other unintended consequences is included the fact that not only illegal immigrants left the state in response, but a number of legal immigrants also pulled up stakes and took off rather than face the prospect of continual harassment about their status. The new law has also rendered employers confused about their new obligations, and left a number bereft of sufficient employees to continue their businesses. Apparently, even the governor, Robert Bentley, the most vocal advocate of the immigrant measures, is having second thoughts.

"Alabama officials hope changing the law will also allow them to change the subject. The state has worked hard to convince foreign companies that Alabama is a welcoming place to outsiders. ‘Thirty years after the events surrounding civil rights in Alabama we successfully recruited Mercedes-Benz, and the biggest hurdle we had to overcome … was the perception of racism here,’ says former Governor Jim Folsom Jr., a Democrat. That’s still a touchy subject in Alabama, and recent stories about immigrants abandoning the state and cops cracking down on foreigners have brought unflattering comparisons to the past. ‘One of my concerns is that this bill opened up some old wounds that it didn’t need to open,’ says Dial. ‘All this stuff from the ’50s and ’60s—Alabama is not like that anymore. The unfortunate thing about this whole bill is that it’s painted us what we’re not’."

Every law will invoke a few unintended consequences, but Alabama had Georgia nearby to observe suffering from the consequences of their own legislation to learn from. Elizabeth Dwoskin has an in depth article in Businessweek discussing the issue of jobs usually performed by immigrants and unemployed Alabamians. She provides this perspective.

"For decades many of Alabama’s industries have benefited from a compliant foreign workforce and a state government that largely looked the other way on wages, working conditions, and immigration status. With so many foreign workers now effectively banished from the work pool and jobs sitting empty, businesses must contend with American workers who have higher expectations for themselves and their employers—even in a terrible economy where work is hard to find."

Alabama built industries on the assumption that they could get away with using immigrants to perform hard labor at low pay and without benefits. The governor and his allies seemed to have thought that Alabamians deserved the same right to work for sub-standard wages and no benefits.

Dwoskin describes the workday of a group of Hispanics picking tomatoes on a farm in Alabama.

"On a sunny October afternoon, Juan Castro leans over the back of a pickup truck parked in the middle of a field at Ellen Jenkins’s farm in northern Alabama. He sorts tomatoes rapidly into buckets by color and ripeness. Behind him his crew—his father, his cousin, and some friends—move expertly through the rows of plants that stretch out for acres in all directions, barely looking up as they pull the last tomatoes of the season off the tangled vines and place them in baskets. Since heading into the fields at 7 a.m., they haven’t stopped for more than the few seconds it takes to swig some water. They’ll work until 6 p.m., earning $2 for each 25-pound basket they fill. The men figure they’ll take home around $60 apiece."

Let’s see: 11 hours work to earn $60—that makes $5.45 an hour. And one has the benefit of 11 hours of fresh air in the Alabama sun. Why wouldn’t unemployed workers come from all over the state for such an opportunity? Some of them actually do come, but few last more than a day. Does this imply that Alabamians are lazy, or that they are not willing to work hard, or that they can’t take the heat. In answer, Dwoskin provides this perspective.

"Of course, there’s an equally compelling obverse. Why should farmers and plant owners expect people to take a back-breaking seasonal job with low pay and no benefits just because they happen to be offering it? If no one wants an available job—especially in extreme times—maybe the fault doesn’t rest entirely with the people turning it down. Maybe the market is inefficient."

"Tom Surtees is tired of hearing employers grouse about their lazy countrymen. ‘Don’t tell me an Alabamian can’t work out in the field picking produce because it’s hot and labor intensive,’ he says. ‘Go into a steel mill. Go into a foundry. Go into numerous other occupations and tell them Alabamians don’t like this work because it’s hot and it requires manual labor.’ The difference being, jobs in Alabama’s foundries and steel mills pay better wages—with benefits. ‘If you’re trying to justify paying someone below whatever an appropriate wage level is so you can bring your product, I don’t think that’s a valid argument,’ Surtees says."

So Alabama legislators have embarrassed themselves and their state, have inflicted wounds on numerous businesses and industries, and have denigrated the integrity of the state’s voters—that makes for a few notable unintended consequences.

But surely the legislators in Alabama and similar states had their hearts in the right place and were trying to do what was best for their states. Charles Kenny picks up the question of exactly what are the impacts on the economy from illegal immigrants. His article appeared in Businessweek. He provides us with some interesting and relevant studies.

"In a 2010 paper, Ottaviano, Peri, and Greg Wright looked across U.S. industries and found that the net effect of immigration has been to create more jobs for native workers—including low-skilled workers. That’s in part because many immigrants take jobs that would otherwise be sent abroad."

"In a separate study, Peri analyzed cross-state evidence and found no proof that immigrants crowd out native, unskilled employment—and considerable evidence that they increase productivity. Each 1 percent increase in employment due to immigrants is associated with a half-percent rise in state income per worker between 1960 and 2006. Immigrants provide services efficiently and are themselves a source of demand for local goods and services. Unskilled immigrants take on manual tasks such as construction, while unskilled natives move into communications tasks such as call centers. This is an efficient division of labor that increases overall productivity."

So immigrants are not a burden on the economy, but rather they provide a net benefit! Those Alabama lawmakers may have had their hearts in the right place, but their heads must have been somewhere else—perhaps somewhere where that Alabama sunshine wouldn’t be a problem.

Kenny discusses at length why anti-immigrant laws make little economic or moral sense. He makes a compelling case. Perhaps the title he chose for his piece is an appropriate comment to make in ending this discussion.

"How to Be a Patriot: Hire an illegal immigrant."
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