Sunday, September 30, 2012

The Iron Law of Meritocracy and Its Application to Education

Christopher Hayes has penned a thought-provoking and troubling book: Twilight of the Elites: America After Meritocracy. There is much to discuss in Hayes’s book, but here we will focus on what he describes as the fundamental flaw in the execution of meritocracy, and, as an example, indicate how meritocracy has influenced our educational system.

Hayes describes the United States as a country where the concept of meritocracy is deeply imbedded in our national psyche. Meritocracy might be simply summarized as the concept that the most capable will be rewarded for their skills and capabilities, regardless of irrelevant features such as wealth, ethnicity, race, or gender. Hayes tells us that meritocracy rests on two fundamental principles.

The first is the Principle of Difference:

"....which holds that there is a vast differentiation among people in their ability, and that we should embrace this natural hierarchy and set ourselves the task of matching the hardest working and most talented to the most difficult, important, and remunerative tasks."

The second is the Principle of Mobility:

"....over time, there must be some continuous competitive selection process that insures that performance is rewarded and failure punished....People must be able to rise and fall along with their accomplishments and failures."

This latter principle assumes that the capable poor will be able to rise to the top while the incompetent wealthy fall to the bottom. Note also that inequality of outcomes is a fundamental component of this process.

Given this description of the ideal of meritocracy, Hayes then invokes what he refers to as The Iron Law of Meritocracy:

"....eventually the inequality produced by a meritocratic system will grow large enough to subvert the mechanisms of mobility. Unequal outcomes make equal opportunity impossible. The Principle of Difference will come to overwhelm the Principle of Mobility. Those who are able to climb up the ladder will find ways to pull it up after them, or to selectively lower it down to allow their friends, allies, and kin to scramble up. In other words: ‘Whoever says meritocracy says oligarchy’."

Hayes uses Hunter College High School in Manhattan as an example of how meritocracy creates the conditions that pervert its fundamental principles.

"The school embodies the meritocratic ideal as much as any institution in the country. It is public and open to students from all five boroughs of New York City, but highly selective. Each year, between 3,000 and 4,000 students citywide score high enough on their fifth-grade standardized tests to even qualify to take Hunter’s entrance exam in the sixth grade; only 185 are offered admission."

Hunter is universally recognized as one of the best schools in the nation, and is an effective gateway to acceptance at top flight universities. Given the great variation in the quality of public school education across the neighborhoods of New York City, is it any wonder that those who can afford to, pay to get their children in elite preschools, in the best private grammar schools, and can provide the private lessons and tutoring classes that have sprung up to prepare students for the test. The result is not equality of opportunity as intended, but an educational process that favors the wealthy and their children.

"....the entering seventh-grade class was 12 percent black and 6 percent Hispanic in 1995, but just 3 percent black and 1 percent Hispanic by 2009."

Given that the city has a population that is 25 percent black and 27.5 percent Hispanic, it is rather hard to associate this process with equality of opportunity.

Hayes describes a comparable process that occurs in our elite colleges and universities.

"American universities are the central institution of the modern meritocracy, and yet, as Daniel Golden documents in his devastating and meticulous book The Price of Admission, atop the ostensibly meritocratic architecture of SATs and high school grades is built an entire tower of preference and subsidy for the privileged...."

"At least one third of the students at elite universities, and at least half at liberal arts colleges, are flagged for preferential treatment in the admissions process."

Hayes tells us that minorities are targeted to represent 10 to 15 percent of a typical student population, but the rest of the preferences are dominated by affluent whites: children of alumni or faculty, student athletes, children of celebrities and politicians, and a category referred to as "development cases."

"This doesn’t even count the advantages that wealthy children have in terms of private tutors, test prep, and access to expensive private schools and college counselors adept at navigating the politics of admissions. All together this layered system of preferences for the children of the privileged amounts to, in Golden’s words, ‘affirmative action for rich white people.’ It is not so much the meritocracy as idealized and celebrated but rather the ancient practice of ‘elites mastering the art of perpetuating themselves."

Hayes claims that the Iron Law of Meritocracy will lead to ever greater inequality over time, a result that seems to be supported by the history of our recent decades.

"Indeed, over time, a society will grow both more unequal and less mobile as those who ascend its heights create means of preserving and defending their privilege and find ways to pass it on across generations. And this, as it turns out, is a pretty spot-on description of the trajectory of the American economy since the mid-1970s."

Saturday, September 29, 2012

Party Affiliation, Skewing Polls, and Voting

When one party endures a seemingly unending streak of disappointing polls, it is natural to begin asking if there could be some reason why the pollsters are all in error. Recent presidential election polling has showed results heavily tilted toward the Democratic candidate. This has prompted a few on the Republican side to claim the polls are in error because they are not sampling enough Republican voters. There is even an attempt to recalibrate polls using the "correct" ratio of Republicans to Democrats. This nonsense leads nowhere, but it did prompt the Pew Research Center to issue an interesting article summarizing the issues associated with polling and party affiliation.
"While all of our surveys are statistically adjusted to represent the proper proportion of Americans in different regions of the country; younger and older Americans; whites, African Americans and Hispanics; and even the correct share of adults who rely on cell phones as opposed to landline phones, these are all known, and relatively stable, characteristics of the population that can be verified off of U.S. Census Bureau data or other high quality government data sources."

"Party identification is another thing entirely. Most fundamentally, it is an attitude, not a demographic. To put it simply, party identification is one of the aspects of public opinion that our surveys are trying to measure, not something that we know ahead of time...."

To make the point that party affiliation changes continually, Pew provided this chart of recent polling data:

Some have argued that the exit poll data from the previous election might be more accurate in determining the appropriate mix of voters to consider. Pew points out that data that is at least two years old has to be suspect in terms of accuracy. The article provides these results from exit polling of recent elections:

Note that voters present a higher level of Republican participation than would be expected from the party’s representation among all those registered to vote. It turns out that Republicans are more likely to vote than those who claim to be Democrats or Democrat leaning. In a presidential election year only about 60% of registered voters actually take the time to vote. In an off-year election the number is even lower. This puts a lot of pressure on the poll takers to determine the people who can be depended upon to vote: the "likely voter."

"But, in the same way that party affiliation is not fixed for a given individual, being a "likely voter" is not a demographic characteristic like gender or race. Political campaigns are, in part, designed to mobilize supporters to vote. Although it may feel like the presidential campaign is in full swing, much of the hard work of mobilizing voters has not yet taken place and won’t occur until much closer to the election. Accordingly, any determination of who is a likely voter today – three months before the election – is apt to contain a significant amount of error. For this reason, Pew Research and many other polling organizations typically do not report on likely voters until September, after the nominating conventions have concluded and the campaign is fully underway."

To illustrate the importance of this likely voter model, Pew provides this data:

"In these polls the vote margin has been, on average, five points more favorable to the Republican candidates when based on likely voters rather than registered voters. These final estimates of the outcome have generally been very accurate, especially when undecided respondents are allocated to the candidates."

While the Republicans seem to have more-dedicated voters, there seems to be a long-term trend towards fewer of them, or, at least, fewer who choose to admit to being a Republican.

This recent trend is partly driven by concurrent events, but it also represents long-term demographic changes that are more favorable to the Democrats.

Wealth, Taxes, and Society: Givers and Takers

It seems Germany is considering the efficacy of a tax on wealth. Several nations in Europe levy such a tax today. At one time such a tax was quite common in Europe. An article in The Economist reported on Germany’s deliberations.
"This old idea gained new life in July, when DIW, a think-tank in Berlin, argued that the sovereign-debt crisis in the euro zone could easily be solved if governments confiscated part of the ample private wealth that still exists in Europe, including Germany...."

The article provided this chart to support the notion that private wealth is large compared to public debt.

The United States has a ratio of private wealth to public debt of about 4.5. A family having assets that much greater than liabilities would probably consider itself fiscally sound. Unfortunately, nations can’t quite seem to function with the same sense of shared responsibility as families.

What does The Economist think of the notion of a wealth tax?

"The best argument against a one-time wealth tax in normal times is that it is antithetical to freedom. The state has no business helping itself arbitrarily to the belongings of any group of its citizens."

What a curious statement! Ignoring the diversion of "normal times" and the utility of the idea proposed, is it society’s role to provide people with freedom? Do people form a society in search of freedom—or in search of security? In order to accumulate wealth, what is more important: freedom or security?

A businessman needs society to define and enforce rules and regulations within which business can compete on the basis of competence. Businesses need society to prevent unfair competition and theft of their various forms of property. Without that security they could not accumulate wealth.

An investor needs society to provide and enforce rules and regulations for markets in order that there be a correlation between investment decisions and investment results. Without that element of security investors could not accumulate wealth.

Those who have accumulated wealth need society to provide the law and order that makes their wealth secure.

It is the great mass of wage earners who provide this security, and the economic conditions under which wealth can be accumulated.  They do this under the assumption that society will provide them with secure access to food, clothing, and shelter.

In a society everyone is a taker—and everyone is a giver.

In times of national need society has had the right to "confiscate" peoples’ lives and expend them on a battlefield. Members of society usually see this as a duty they will fulfill. In a time of national need society should not have the right to "confiscate" wealth? Has wealth become more valuable than life? In times of national need must wealth be protected above all else?

That is not freedom; that is license.

Friday, September 28, 2012

Are Corporate CEOs Paid Too Much?

Forming an opinion on whether CEOs are overpaid or not is more a matter of personal philosophy than quantitative reasoning. However, if one is going to weigh in with an opinion, then one should at least be informed with some relevant data. One can then pick the data that best supports his/her philosophy. An economist from the University of Chicago, Steven N. Kaplan, makes the case that while CEOs are highly paid, their level of pay should not be considered outrageous. He has produced a lengthy and detailed paper: Executive Compensation and Corporate Governance in the U.S.: Perceptions, Facts and Challenges

Kaplan’s conclusions are summarized in the abstract to his paper:

"In this paper, I consider the evidence for three common perceptions of U.S. public company CEO pay and corporate governance: (1) CEOs are overpaid and their pay keeps increasing; (2) CEOs are not paid for their performance; and (3) boards do not penalize CEOs for poor performance. While average CEO pay increased substantially through the 1990s, it has declined since then. CEO pay levels relative to other highly paid groups today are comparable to their average levels in the early 1990s although they remain above their long-term historical average. The ratio of large-company CEO pay to firm market value is roughly similar to its level in the late-1970s and lower than its pre-1960s levels. These patterns suggest that similar forces, likely technology and scale, have played a meaningful role in driving CEO pay and the pay of others with top incomes. With regard to performance, CEOs are paid for performance and penalized for poor performance. Finally, boards do monitor CEOs. The rate of CEO turnover has increased in the 2000s compared to the 1980s and 1990s, and is significantly tied to poor stock performance."

Compensation of CEOs comes in various forms. Stock options, for example, vary in value with time. Kaplan favors tallying the value of options at the time issued as the best representation of the intent of the board in its compensation decision. He refers to this as an "estimated" value (as opposed to a "realized" value). Kaplan provides data on large corporation CEOs as well as that for smaller corporations. The CEOs of large entities are more generously compensated than the others and we will focus on them. Kaplan acquires data from various sources and these large corporations are sometimes tallied via membership in the S&P 500 or some other stock index, or simply by rank in size.

This chart provides the most basic data with respect to compensation.

Pay grew rapidly in the 1990s as the stock markets and the economy grew at a rapid pace. Since the dot-com bubble burst, CEO pay has been relatively constant. Note also that the spike in pay around 2000 shows up mainly in the average, not the median data. This indicates that the data was being pulled up by those at the extreme of the compensation distribution who were gaining income much faster than most CEOs. It is the extremes that make it into the popular media.

This chart compares CEO pay to median household pay over the same time interval.

This is where the philosophy enters. Are these levels too high compared to wage earners? Again, this indicates a rather flat level of pay for CEOs relative to the general population over the past decade.

Kaplan suggests that it is useful to consider CEO compensation relative to the degree of responsibility they bear. He chooses company market value as an indication of responsibility.

When CEO compensation is normalized to the market value of the companies they lead, big spikes over time tend to damp out. The level of compensation rose in this representation from around 1970 to 1990, but after that it has been relatively flat. It is interesting to note that by this measure, CEOs were much more highly compensated in 1936-1950. What this chart indicates is that the highest paid CEOs tend to be the CEOs of the largest companies. Is that unexpected or unreasonable?

Kaplan claims that the trend in CEO compensation is representative of the trends taking place for high income earners in general.

The large spike in pay around 2000 is considerably dampened when normalized to the income of others in the top 0.1%.

Kaplan compares corporate CEOs to other professional classifications that rise to that level. The most interesting comparison was to high-performing professional athletes.

Top athletes in football, baseball, and basketball have been more generously compensated than the CEOs of top corporations over the past decade, and the difference continues to grow. Is that unexpected or unreasonable?

The argument is made that professional athletes require large pay packages because their careers are so short and subject unforeseeable events such as injury. Is there any correlation with the career of a CEO? Is it also risky, potentially short, and highly dependent on performance? Kaplan would probably claim that such an analogy could be made. In order to indicate the degree to which performance leaves CEOs at risk for termination, Kaplan provides this data:

Note that the data refers to turnover in a five-year period, and that the first quintile refers to the lowest performers. While there is no age limit applied to CEOs, as there is in athletics, the career of an executive of a poorly performing corporation is rather perilous, and could indeed be quite short. On the other hand, the highest performing companies tend to appreciate their leaders.

My progressive gut tells me that CEOs are paid too much relative to the average wage earner, but I also have a hard time justifying paying the CEO of a large corporation less than an all-star athlete.

Thanks to Steven N. Kaplan for the interesting data.

Tuesday, September 25, 2012

Education: The Danger in Testing Five-Year-Olds

Stephanie Simon has an article for Reuters that alerts us to a disturbing trend. It seems the emphasis on standardized testing as a measure of academic achievement and teacher performance has been extended to helpless kindergarten children.
"A national push to make public schools more rigorous and hold teachers more accountable has led to a vast expansion of testing in kindergarten. And more exams are on the way, including a test meant to determine whether 5-year-olds are on track to succeed in college and career."

Heavens! We may have five-year-olds who are not college-ready.

"Paul Weeks, a vice president at test developer ACT Inc., says he knows that particular assessment sounds a bit nutty....But ACT will soon roll out college- and career-readiness exams for kids age 8 through 18 and Weeks said developing similar tests for younger ages is ‘high on our agenda.’ Asking kids to predict the ending of a story or to suggest a different ending, for instance, can identify the critical thinking skills that employers prize, he said.....’There are skills that we've identified as essential for college and career success, and you can back them down in a grade-appropriate manner,’ Weeks said. ‘Even in the early grades, you can find students who may be at risk’."

Yes it does sound nutty.

To consider the efficacy of testing and drawing conclusions from five-year-olds let us turn to Maryanne Wolf, director of the Center for Reading and Language Research at Tufts University. She has written a fascinating book called Proust and the Squid: The Story and the Science of the Reading Brain. In it she provides a description of the process a child goes through in learning to be an effective and efficient reader, the cornerstone of education. An important part of that process is physical maturation of the child’s brain. The act of reading requires that many components or regions of the brain function quickly and in harmony.

"This integration depends on the maturation of each of the individual regions, their association areas, and the speed with which these regions can be connected and integrated. That speed, in turn, depends a great deal on the myelination of the neuron’s axons....The more myelin sheathes the axon, the faster the neuron can conduct its charge."

"Although each of the sensory and motor regions is myelinated and functions independently before a person is five years of age, the principle regions of the brain that underlie our ability to integrate visual, verbal, and auditory information rapidly—like the angular gyrus—are not fully myelinated in most humans until five years of age and after."

There appear to be differences in this rate of myelination between boys and girls. Boys are observed to begin to read fluently later than girls. Wolf herself has observed perceptual differences between the sexes up until about age eight.

Perhaps the most interesting data that Wolf provides are the results of a European study.

"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."

At the age of five children are on the threshold of an important stage of maturity. One must also consider that the difference in age of an "old" five-year-old and a "young" five-year-old is about 20% of the child’s lifespan. There are going to be enormous differences because of these maturity effects. And forget not that little girls mature faster than little boys. So how are the geniuses who wish to predict college performance going to unravel all of these effects and deliver what they promise?

A test to evaluate the educational status of a kindergarten student is not necessarily a bad thing in that can be a means to assess progress. However, the tests can be used in ways that are risky for the children. Consider this comment from one teacher named Knutson who was interviewed for the article.

"In her view, the kids are far too young to tackle formal exams, especially in their first weeks of what is for many their first school experience. "Half of them are crying because they miss mom and dad. When you tell them to line up, they don't even know what a line is," Knutson said."

"Despite her frustration, Knutson acknowledges the tests have some advantages. The results help shape her lesson plans, she said, as she can quickly group kids by ability."

Group kids by ability at age five? Many nations with better school systems than ours strictly forbid ability grouping until a much later age. Finland, with one of the most admired and successful school systems, never bins students by ability—and they don’t teach reading until age seven.

Malcolm Gladwell, in his book Outliers: The Story Of Success describes in detail how grouping young children by ability creates inequalities that propagate throughout the children’s lives. The effect is first described in a study of Canadian all-star hockey players.

" iron law of Canadian hockey: in any elite group of hockey players—the very best of the best—40 percent of the players will have been born between January and March, 30 percent between April and June, 20 percent between July and September, and 10 percent between October and December."

Why are the best hockey players preferentially born early in the year? What is being observed here is a perfect example of accumulated advantage. The threshold for birthdates in determining which age classification a youth will play in is January 1. That means someone born in January will be competing with others born in December, nearly a year later. A year is a long time in the life of a child. The January player will tend to be bigger, stronger, better coordinated and more mature intellectually and emotionally. In other words they will tend to perform better. In sports leagues the better players tend to be selected for advanced training with better coaches and in a more competitive environment. They will also get more playing time. These advantages tend to propagate through their playing years rather than being damped out. This phenomenon has been noted in other sports where similar age cutoffs are applied.

Gladwell tells us that the same phenomenon has also been observed in our education system.

"Parents with a child born at the end of the calendar year often think about holding their child back before the start of kindergarten: it is hard for a five-year-old to keep up with a child born many months earlier. But most parents, one suspects, think that whatever disadvantage a younger child faces in kindergarten eventually goes away. But it doesn’t. It’s just like hockey. The small initial advantage that the child born in the early part of the year has over the child born at the end of the year persists. It locks children into patterns of achievement and underachievement, encouragement and discouragement, that stretch on and on for years."

The size of this effect does not appear as large as in the sports leagues where physicality dominates, but it is measurable. And it does not take much of a difference in a test score to enable placement in a program for the gifted. Gladwell refers to data from fourth grade performance in math and science tests to support this case. He also finds data that indicates students born early in the year are more abundant in college enrollment lists than students born later in the year, supporting the claim that this effect persists.

Please! Can’t we give our children a few more years before we try to determine which ones are already on the path to failure?

Monday, September 24, 2012

Education: Comprehension and the Lost Art of Writing

Peg Tyre has produced an eye-opening article exposing one of the ways in which education in this country has been following an unproductive path. Her work appeared in The Atlantic under the title The Writing Revolution. Tyre uses the experience of one Staten Island high school as the core around which to construct her essay.
"For years, nothing seemed capable of turning around New Dorp High School’s dismal performance—not firing bad teachers, not flashy education technology, not after-school programs. So, faced with closure, the school’s principal went all-in on a very specific curriculum reform, placing an overwhelming focus on teaching the basics of analytic writing, every day, in virtually every class. What followed was an extraordinary blossoming of student potential, across nearly every subject—one that has made New Dorp a model for educational reform."

What the teachers at New Dorp discovered was that their students’ language skills were so meager that they had trouble expressing what they might know about a subject; and if they could not express knowledge, how could one know if they possessed knowledge.

The lack of language skills is a hindrance at a fundamental level. If one is presented with a concept, one has to be capable of describing that concept in one’s own words. If that is not possible, can it be claimed that that the concept is understood? It is this act of expression that leads to knowledge being imprinted. Another way to express this thought is to state that one never truly understands a subject until one tries to explain it to someone. Being compelled to write coherently about the subjects that are being studied is a good way to go through that exercise. Comprehension and linguistic expression work together. It is not surprising that the New Dorp students improved. What is astonishing is that teachers, of all people, did not understand the connection.

New Dorp’s faculty reverted to traditional methods and sought the aid of Judith Hochman who had established a reputation for instilling writing skills in even the most language-challenged of students. Her method was referred to as the Hochman Program.

"[Students] are explicitly taught how to turn ideas into simple sentences, and how to construct complex sentences from simple ones by supplying the answer to three prompts—but, because, and so. They are instructed on how to use appositive clauses to vary the way their sentences begin. Later on, they are taught how to recognize sentence fragments, how to pull the main idea from a paragraph, and how to form a main idea on their own. It is, at least initially, a rigid, unswerving formula. ‘I prefer recipe,’ Hochman says, ‘but formula? Yes! Okay’!"

Hochman expresses her philosophy with this quote:

"The thing is, kids need a formula, at least at first, because what we are asking them to do is very difficult. So God, let’s stop acting like they should just know how to do it. Give them a formula! Later, when they understand the rules of good writing, they can figure out how to break them."

Hochman accepted the New Dorp challenge.

"Under her supervision, the teachers at New Dorp began revamping their curriculum. By fall 2009, nearly every instructional hour except for math class was dedicated to teaching essay writing along with a particular subject."

"New Dorp, once the black sheep of the borough, is being held up as a model of successful school turnaround. ‘To be able to think critically and express that thinking, it’s where we are going,’ says Dennis Walcott, New York City’s schools chancellor. ‘We are thrilled with what has happened there’."

At first thought, this result is quite exciting. Here we have a dramatic improvement in student performance by the simple mechanism of reverting to a more traditional and more direct form of instruction. On second thought, one has to pose the question: "How did we lose our way?"

Tyre explains:

"But the truth is, the problems affecting New Dorp students are common to a large subset of students nationally. Fifty years ago, elementary-school teachers taught the general rules of spelling and the structure of sentences. Later instruction focused on building solid paragraphs into full-blown essays. Some kids mastered it, but many did not. About 25 years ago, in an effort to enliven instruction and get more kids writing, schools of education began promoting a different approach....Roughly, it was supposed to work like this: Give students interesting creative-writing assignments; put that writing in a fun, social context in which kids share their work. Kids, the theory goes, will "catch" what they need in order to be successful writers. Formal lessons in grammar, sentence structure, and essay-writing took a back seat to creative expression."

This method seemed to work quite well for some students, but left many with little if any skills. The trend away from formal writing classes was accentuated when emphasis came to be placed on mandated standardized tests in reading and math.

"Then, in 2001, came No Child Left Behind. The program’s federally mandated tests assess two subjects—math and reading—and the familiar adage ‘What gets tested gets taught’ has turned out to be true. Literacy, which once consisted of the ability to read for knowledge, write coherently, and express complex thoughts about the written word, has become synonymous with reading. Formal writing instruction has become even more of an afterthought."

What is the result of this neglect?

"According to the Nation’s Report Card, in 2007, the latest year for which this data is available, only 1 percent of all 12th-graders nationwide could write a sophisticated, well-organized essay. Other research has shown that 70 to 75 percent of students in grades four through 12 write poorly.’

Tyre tells us that there is hope for the future because change is coming.

"Over the next two school years, 46 states will align themselves with the Common Core State Standards. For the first time, elementary-school students—who today mostly learn writing by constructing personal narratives, memoirs, and small works of fiction—will be required to write informative and persuasive essays. By high school, students will be expected to produce mature and thoughtful essays, not just in English class but in history and science classes as well."

"Common Core’s architect, David Coleman, says the new writing standards are meant to reverse a pedagogical pendulum that has swung too far, favoring self-expression and emotion over lucid communication."

Tyre then includes a quote by Coleman that strikes awfully close to home.

"’As you grow up in this world, you realize people really don’t give a shit about what you feel or what you think,’ he famously told a group of educators last year in New York."

Evidence is already emerging that this new emphasis on writing skills will make a difference.

"Last spring, Florida school officials administered a writing test that, for the first time, required 10th-graders to produce an expository essay aligned with Common Core goals. The pass rate on the exam plummeted from 80 percent in 2011 to 38 percent this year."

Can it be called a revolution when what is happening is throwing out the new and reverting to the old? Is there a better word?

Let’s hope it works.

Education: Asking Children to Evaluate Their Teachers

Everyone seems to agree that providing children with good teachers is an important component of providing a good education. The problem arises when it is necessary to determine which teachers are the best. The teachers feel that they are the ones who can make that subjective judgment; others feel that student performance is the best guide to teacher performance. Student performance has been interpreted as scores on standardized tests. Everyone seems to have agreed that test scores tell as much about the students as about the teacher and are not on their own definitive. A compromise generally appears to be agreeable to both sides: test scores will be a part of a teacher’s evaluation, perhaps a third, with two thirds coming from peer review and other subjective observations, perhaps by an administrator or by an outside party. 

Amanda Ripley has provided a thought-provoking article in The Atlantic suggesting that there is a much more reliable way to evaluate teachers than any of the above approaches: Why Kids Should Grade Teachers.

Ripley tells us of a Harvard economist named Ronald Ferguson who went to a school system in Ohio to study why black kids did not perform as well as white kids on tests. One of his concerns was that subtle influences were at work that might not be apparent to the outside observer. As part of his effort he assembled a questionnaire to give to students asking them to comment on their specific classrooms.

"The results were counterintuitive. The same group of kids answered differently from one classroom to the next, but the differences didn’t have as much to do with race as he’d expected; in fact, black students and white students largely agreed."

"The variance had to do with the teachers. In one classroom, kids said they worked hard, paid attention, and corrected their mistakes; they liked being there, and they believed that the teacher cared about them. In the next classroom, the very same kids reported that the teacher had trouble explaining things and didn’t notice when students failed to understand a lesson."

The children appeared to have arrived at a definite and accurate description of their teachers’ performances. The administrators at the Ohio school district considered the results of the survey helpful and Ferguson returned to Harvard and other activities.

"Then, in 2009, the Bill & Melinda Gates Foundation launched a massive project to study 3,000 teachers in seven cities and learn what made them effective—or ineffective. Thomas Kane, a colleague of Ferguson’s, led the sprawling study, called the "Measures of Effective Teaching" project."

Among all the other measurements and observations to be included in the study, Kane wanted to include student perceptions. He had heard of Ferguson’s surveys and invited him to participate.

"With Ferguson’s help, Kane and his colleagues gave an abbreviated version of the survey to the tens of thousands of students in the research study—and compared the results with test scores and other measures of effectiveness."

The student surveys turned out to be very useful.

"The responses did indeed help predict which classes would have the most test-score improvement at the end of the year. In math, for example, the teachers rated most highly by students delivered the equivalent of about six more months of learning than teachers with the lowest ratings. (By comparison, teachers who get a master’s degree—one of the few ways to earn a pay raise in most schools —delivered about one more month of learning per year than teachers without one.)"

The conclusion was reached that the children were more effective than a trained adult at evaluating a teacher.

"This wasn’t because they were smarter but because they had months to form an opinion, as opposed to 30 minutes. And there were dozens of them, as opposed to a single principal."

It was also concluded that the student surveys were more reliable than student test scores in teacher evaluations. The latter can vary considerably from term to term depending on the mix of students the teacher faced.

"Survey results don’t change depending on race or income—not the case with test data, which can rise depending on how white and affluent a school is."

"Student surveys, on the other hand, are far less volatile. Kids’ answers for a given teacher remained similar, Ferguson found, from class to class and from fall to spring. And more important, the questions led to revelations that test scores did not: Above and beyond academic skills, what was it really like to spend a year in this classroom? Did you work harder in this classroom than you did anywhere else? The answers to these questions matter to a student for years to come...."

The use of the surveys allowed the researchers to determine what was most critical in a learning environment. The five elements identified were:

1. Students in this class treat the teacher with respect.
2. My classmates behave the way my teacher wants them to.
3. Our class stays busy and doesn’t waste time.
4. In this class, we learn a lot almost every day.
5. In this class, we learn to correct our mistakes.

"When Ferguson and Kane shared these five statements at conferences, teachers were surprised. They had typically thought it most important to care about kids, but what mattered more, according to the study, was whether teachers had control over the classroom and made it a challenging place to be."

The Gates project provided validation of the efficacy of the surveys.

"Suddenly, dozens of school districts wanted to try out the survey....partly because of federal incentives to evaluate teachers more rigorously, using multiple metrics. This past school year, Memphis became the first school system in the country to tie survey results to teachers’ annual reviews; surveys counted for 5 percent of a teacher’s evaluation. And that proportion may go up in the future."

"The New Teacher Project, a national nonprofit based in Brooklyn that recruits and trains new teachers, last school year used student surveys to evaluate 460 of its 1,006 teachers. ‘The advent of student feedback in teacher evaluations is among the most significant developments for education reform in the last decade,’ says Timothy Daly, the organization’s president and a former teacher."

Not surprisingly, teachers are hesitant to endure another new approach to evaluating (criticizing) their performance.

"In Pittsburgh, all students took the survey last school year. The teachers union objects to any attempt to use the results in performance reviews, but education officials may do so anyway in the not-too-distant future. In Georgia, principals will consider student survey responses when they evaluate teachers this school year. In Chicago, starting in the fall of 2013, student survey results will count for 10 percent of a teacher’s evaluation."

Ripley suggests that caution is yet required. As promising as these surveys have been, there is no guarantee that they will continue to be as productive as their usage is scaled up and applied by different school systems in different environments. There is the danger that they will be used explicitly as a tool to winnow out less effective teachers, rather than as a tool to help teachers become more effective. That is a valid concern on the part of the teachers and their representatives. One expects that it will be years of back and forth before teachers and administrators come to terms with this approach, but it does provide hope for a more effective path forward.

Teachers at upper levels of education have often commented on how much they learn from the feedback they receive in trying to teach a subject to students. It appears the same conclusion applies even with the littlest of children.

Friday, September 21, 2012

Life Expectancy Plummets for Poorly Educated Whites

Sabrina Tavernisi has provided an interesting and disturbing article in the New York Times: Reversing Trend, Life Span Shrinks for Some Whites. It has been known for some time that more highly-educated people tend to live longer. A researcher apparently took that clue and decided to interpret mortality rates by separating out those who had not graduated from high school. What was discovered was that this subgroup was not only not keeping up with the general population, but its life expectancy was actually falling—but only for whites. Blacks and Hispanics in the same educational category continued to show gains in life expectancy.

"The steepest declines were for white women without a high school diploma, who lost five years of life between 1990 and 2008, said S. Jay Olshansky, a public health professor at the University of Illinois at Chicago and the lead investigator on the study, published last month in Health Affairs. By 2008, life expectancy for black women without a high school diploma had surpassed that of white women of the same education level, the study found."

"White men lacking a high school diploma lost three years of life. Life expectancy for both blacks and Hispanics of the same education level rose, the data showed. But blacks over all do not live as long as whites, while Hispanics live longer than both whites and blacks."

The increase in mortality in this group was not only exceptional—it was extreme.

"The five-year decline for white women rivals the catastrophic seven-year drop for Russian men in the years after the collapse of the Soviet Union, said Michael Marmot, director of the Institute of Health Equity in London."

This data serves to identify the extreme lack of homogeneity that exists throughout our society.

"The decline among the least educated non-Hispanic whites, who make up a shrinking share of the population, widened an already troubling gap. The latest estimate shows life expectancy for white women without a high school diploma was 73.5 years, compared with 83.9 years for white women with a college degree or more. For white men, the gap was even bigger: 67.5 years for the least educated white men compared with 80.4 for those with a college degree or better."

The population of white non-graduates has been declining across the time period covering the increase in mortality. Given that education itself is neutral in terms of health, it is likely that the high school graduation filter is actually selecting some other unhealthy factor which is more common in this subset of the population.

"The reasons for the decline remain unclear, but researchers offered possible explanations, including a spike in prescription drug overdoses among young whites, higher rates of smoking among less educated white women, rising obesity, and a steady increase in the number of the least educated Americans who lack health insurance."

Given the amount of money we spend on our healthcare, and the appellation "best healthcare system in the world" that we apply to it, our life expectancy is rather pathetic. Tavernise tells us that this is particularly true for women as she leads us to this data:

"The dropping life expectancies have helped weigh down the United States in international life expectancy rankings, particularly for women. In 2010, American women fell to 41st place, down from 14th place in 1985, in the United Nations rankings. Among developed countries, American women sank from the middle of the pack in 1970 to last place in 2010, according to the Human Mortality Database."

Some of the possible explanations for increasing mortality rates among the poorly educated involve unwise lifestyle decisions, like smoking, but there are things as a society that we should have been doing, but failed to do.

"The share of working-age adults with less than a high school diploma who did not have health insurance rose to 43 percent in 2006, up from 35 percent in 1993, according to Mr. Jemal at the American Cancer Society. Just 10 percent of those with a college degree were uninsured last year, the Census Bureau reported."

Home Ownership, Wealth, and the Economy

The journal, The Economist, recently asked its readers to comment on an interesting proposition: Should Home-Ownership Be Discouraged? It is not too surprising that such a question would come up given the turmoil caused by collapsing housing bubbles here and in Europe.
Andrew Oswald was given the task of arguing in the affirmative.

"High home-ownership in a nation is like a treacle blanket thrown over the surface of the country and economy. With a high degree of owner-occupation, everything slows. Folk get stuck. Worse, they become long-distance commuters and clog up the motorways for their neighbours. Renters can up sticks and go to new jobs. In that way they do the economy a favour. Milton Friedman knew this. In a famous speech published in the 1968 American Economic Review he said that the equilibrium rate of unemployment depends on the flexibility of the housing market."

Oswald is well-known for contributing a study that produced a correlation between national home-ownership percentages and unemployment. He also suggests that focusing on the value of a home as the dominant investment can be destabilizing. Germany and Switzerland are provided as examples of healthy, renter-dominated economies that survived quite nicely while others collapsed during the Great Recession. Obvious examples are Spain and Ireland.

Oswald also suggests that investing so much wealth in home equity causes an imbalance in the economy wherein more productive investments are ignored.

"In the past few decades, in the hope of getting untaxed capital gains way above their true labour earnings, many people in industrialised nations sank their spare cash into buying larger houses or building extra bedrooms to make a bigger home. Tax systems, and lightweight TV programmes about how to make easy money, encouraged that. Our countries ought, instead, to design tax systems that encourage people to invest in productive real activities and in innovation. Renting leaves money free for better purposes."

Oswald raises some interesting points. A home and a mortgage are an anchor that is not easily shed if one wishes to move unless there is a lively and rising housing market that one can sell quickly into. There is also the question of the stability of housing markets. If a house is viewed not just as a home but as an investment, it is implicit that it is expected to outperform inflation. In fact, it also has to be competitive with other forms of investment. But is there any reason why housing should outperform inflation other than when being driven by speculation? The ease with which housing prices can rise and fall makes one suspicious about the stability issue.

The assumption of home ownership as not only a good investment, but as a necessary investment, is well-imbedded in our psyche. Consider this data from an article be David Resnick and Dean Baker of the Center for Economic and Policy Research.

The authors were studying another issue, but found it necessary to break out data on wealth into categories of homeowners and non-homeowners. The difference between the two categories is astonishing. The data is based on the 2007 Survey of Consumer Finances produced every three years by the Federal Reserve. The 2007 compilation is the latest available. That document also produced this table:

Of the wealth of many homeowners, nearly half consists of the value of the house. This would seem to indicate that those who have the motivation and the money to invest consider home ownership as a fundamental component of their financial planning. And it clearly seems to have paid off in the past.

Oswald would argue that all that wealth tied up in inert structures would better serve the economy if invested in some other manner.

One issue Oswald does not discuss is the question of whether or not home ownership will be a good investment going forward. Playing the housing market in the past usually involved investing as much as one could in a home in order to get into a "starter" house. Inflation in income and rising home equity then allows one to sell the first house and buy a bigger and better house. This usually involves repeating the process of extending oneself financially in order to make ends meet until inflation allows the mortgage pain to recede. Eventually one finds a satisfactory home and lets the equity increase.

In addition to the assumption that the price of a house will inevitably increase, the procedure for investing in housing successfully assumes the individual has control over the timing of housing purchases and sales. If the nature of the economy has changed such that the desire or ability to maintain long-term roots in a given location has vanished, then the game is over. Young adults who would have been looking at that starter home in the past, might now be looking at their financial futures in a totally different way. Career uncertainty and job churn seem to be what they can anticipate. This is not necessarily bad; it can even be a stimulating situation. But for them it makes much less sense to purchase a home unless they have enough money that they can risk losing some value by an inopportune purchase or sale.

It is a good time to be old and sitting on a lot of equity.

Thursday, September 20, 2012

Jobs Produced: Barack Obama vs. George W. Bush

It has been fun to compare the performance of our economy under Democratic and under Republican presidents. In Democratic Presidents vs. Republican Presidents: Income and Jobs we pointed out that both job growth and income growth are greater when there is a Democrat in the White House. Bill Clinton shook the convention when he quoted the job figures. The income figures were even more telling of the differences between the two parties, but a chart is needed to make that point.

The Democrats have been very vocal in touting the over 4 million jobs created over the last 30 months since emerging from the Great Recession. An article in The Economist looks at the data from the Bureau of Labor Statistics over the span of the Obama presidency and provides an excellent summary of what has transpired.

People confuse the election in early November of 2008 with the start of Obama’s presidency in January of 2009. A lot transpired in the period November through January that Obama should not be held responsible for. The chart clearly makes that point. Private sector jobs have actually increased a bit since Obama took office. The chart also corroborates the number of private sector jobs claimed by the Democrats since the end of the recession.

The Republicans love to claim that it is the Obama policies that are holding the economy back. Just put them back in power and all will be well again. Oh? That invites an obvious comparison.

George W. Bush faced a relatively minor recession after taking office and he helped usher in the Great Recession as he was leaving, but he essentially had eight years to do the things Republican presidents do. How did that work out?

Interesting! The business-friendly, tax-cutting, deficit-spending Republican managed to create not a single net new private sector job in eight years. Not a one! The only reason any new jobs came into existence was because government grew under the small-government Republicans.

One more Republican president and we will be completely undone.

Wednesday, September 19, 2012

Have We Promised Our Senior Citizens More Than We Can Afford?

As the national debt increases, the cries for entitlement reform become louder and more frequent. One often hears the claim that we have promised ourselves more than we can afford. As expenses are projected decades into the future it becomes clear that unless something changes the costs of the Social Security and Medicare programs will consume a much larger fraction of the federal budget. This growth is partly due to the surge in retirees entering these programs as the baby boomers age, partly because medical costs are rising faster than GDP, and partly because the fall in incomes has diminished the expected flow of funds into these programs.

We must recognize that the question: "How much can we afford?" is really code for the real question: "How much are we willing to spend?"

Given that our society has not yet decided that our elderly will be allowed to die in the streets, and given that it is more efficient that they have enough funds to take care of themselves rather than have someone paid to take care of them, then it would seem that we must ensure that seniors have enough income to feed, clothe, and provide shelter for themselves. A reasonable societal goal might be to prevent a person who was not living in poverty as a worker from falling below the poverty line as a retiree. Consider this chart:

Financial analysts generally suggest that a retirement income of about 70% of preretirement income is necessary to maintain one’s lifestyle. None of these income levels receive anything close to the 70%. Social Security is intended to provide enough income to avoid dire poverty if one has no other source of funds. That is what it does. That is all it does.

Are Social security benefits needed? Consider this chart provided by the Economic Policy Institute

At least 60% of the elderly depend on their benefits for at least half of their income. Social Security benefits are said to prevent 40% of those over age 65 from falling into poverty. How does one argue that those benefits can be cut?

It has been claimed that Social Security is a Ponzi scheme. Actually the program has been on rather firm financial footing. Part of the reason revenue is below expectations is because no one anticipated that real wages would fall for most people. When the claim is made that the program will go bankrupt in whatever year is the current prediction, what it really means is that there will be a revenue shortfall of about 20% that will have to be made up from other revenue sources. That hardly qualifies as a bankruptcy.

Is it common knowledge that many people contribute more to the program in payroll taxes than they will ever receive in benefits? C. Eugene Steuerle and Stephanie Rennane of The Urban Institute have produced a useful compilation of taxes paid and benefits received by income and by year of retirement. In Social Security and Medicare: Collected Taxes, Benefits Received we summarized some of their data as it applies to those retiring at age 65 in 2011. Consider this summary table:

The ratio of benefits to taxes paid for Social Security is made more explicit in this table:

The only category that receives much more than contributed is the single-earner couple with modest income, a configuration that is becoming ever rarer.

Social Security was meant to be self-supported. It very nearly is. Only minor tweaks to the system are required to keep it financially sound. It makes no sense to cry bankruptcy, or to try to turn youth against the elderly by bellowing that the program will not be there when our children need it. And don’t lower benefits for those who really depend on them.

Medicare is a more complex issue. Currently, revenue comes nowhere near to covering costs. Consider this table:

Is this imbalance between costs and revenue caused by lavish benefits, or waste and inefficiency? Actually, Medicare is the most cost effective way of delivering healthcare. If it has a defect, it is its vulnerability to fraud. Quite a bit of money could be saved if fraud was eliminated.


Trying to save money by increasing the eligibility age, or by cutting benefits, or by providing vouchers, doesn’t really fix anything. Less money might be spent explicitly on Medicare, but by moving people from an efficient system to an inefficient system costs will go up and they will have to be borne by those least able to manage them. Dumping a lot of expensive elderly people into the commercial insurance market will either raise the medical insurance rates for everyone, or will require seniors to have separate plans with enormous premiums. Besides the pain and inconvenience suffered by the elderly, more of their income will be extracted from the general economy and dumped into our wasteful healthcare system. That does not make sense. It also makes no sense to provide them on one hand with sufficient income to keep them free of poverty, and then with the other put them at risk of financial ruin by withholding support for medical costs.

The major problem with Medicare is that healthcare costs are just too high. Other countries deliver better healthcare at half the cost. This is a problem for our entire society, not just the Medicare Program. The most effective way to bring those ratios in the above table closer to unity is by lowering costs. This is the path the Obama administration has taken by incorporating and encouraging inefficiencies into medical practice within the Medicare system. There is evidence that these actions are beginning to work as the growth in Medicare per capita costs has fallen considerably since the healthcare law was passed. There is also evidence that these methods are spreading to healthcare delivery for the general public. Encouraging results are being obtained.

Medicare is not a lavish or wasteful program. The best way to approach the cost issue is by reining in healthcare costs in general. That will probably not be sufficient. Medicare is already a progressive system in the sense that people with higher incomes pay Medicare payroll taxes at a higher rate, and they pay more for Medicare coverage when they become eligible. For those who can afford to pay more it is a tremendous bargain. Let them pay more if necessary.

Monday, September 17, 2012

Young vs. Old: Class Warfare?

A number of articles have appeared recently that focus on the relative wealth of retirement age citizens compared to the apparent lack of wealth in younger people. This difference is projected to continue growing and cause discontent between the two groups as youth must sacrifice in order to transfer their wealth upwards to satisfy the demands of the smug and comfortable elderly. There could be an interesting story to tell here, but those who insist on telling it seem more intent on conjuring up scenarios that support political or economic beliefs than interpreting any hard data.

A good example of the politically motivated conclusion is provided in an article by Robert J. Samuelson in the Wilson Quarterly: The Withering of the Affluent Society. Samuelson makes this claim:

"As it is, the generations are in an undeclared war. Americans in their late forties, fifties, and sixties believe that the contract made with them should be kept. They want their Social Security and Medicare benefits. They are angry when what they thought were career jobs are unexpectedly terminated; corporate buyouts and firings weren’t part of the bargain. Meanwhile, their children and grandchildren are befuddled and frustrated. Their unemployment rates are high, and their wage levels—compared to those of the past—are low. Yet they feel guilty advocating trims to Social Security and Medicare, even when the transfers go from the struggling young to the comfortable old."

The term "war" seems a bit extreme given the content of that paragraph. Is there any data presented to support his assumption? No. Perhaps he is just guessing, but one suspects that he wishes to use the notion of conflict between generations as a means to convince people to take actions that would be consistent with his political and economic philosophy. Our youth are trotted out as props to use in the conservatives’ arguments that we must cut social benefits.

Consider some of his other statements.

"Even assuming a full recovery from the Great Recession—possible, though not certain—the resulting prosperity will be qualified by greater competition for scarce economic resources. Massive federal budget deficits are only the most conspicuous sign of a society that has promised itself more than it can afford."

"The future of today’s young has been heavily mortgaged. The grimmest prospect is a death spiral for the welfare state. That could happen if we continue to pay for promised benefits by increasing taxes or deficits, further retarding economic growth and thus spurring still more tax and deficit increases to sustain benefits."

Samuelson makes valid but arguable points about our economic condition, but where is this intergenerational war?

David Leonhardt injects cultural differences between young and old in an article in the New York Times: Old vs. Young. He indicates that of all the things that divide our society into segments, there is one that has not received sufficient attention.

"But you can make a strong case that one dividing line has actually received too little attention. It’s the line between young and old."

"Draw it at the age of 65, 50 or 40. Wherever the line is, the people on either side of it end up looking very different, both economically and politically."

"Throughout the 1980s and ’90s, younger and older adults voted in largely similar ways with a majority of each supporting the winner in every presidential election. Sometime around 2004, though, older voters began moving right, while younger voters shifted left. This year, polls suggest that Mitt Romney will win in a landslide among the over-65 crowd and that President Obama will do likewise among those under 40."

Leonhardt refers to exit poll data from presidential elections to indicate differences in the voting pattern of young and old. The data really only supports a distinctive difference in the 2008 election. That is one data point—two if one anticipates the 2012 results. But does this polarization by age indicate some fundamental shift in attitudes by young and old, or is it merely a response to the shift to the right by the Republican Party and a greater emphasis on controversial "values."

Nevertheless, the term "war" must arise.

"If there is a theme unifying these economic and political trends, in fact, it is that the young are generally losing out to the old. On a different subject, Warren E. Buffett, 81, has joked that there really is a class war in this country — and that his class is winning it. He could say the same about a generational war."

Both authors discuss the growing gap in wealth between young and old. CNN provides us with some data in an article titled Older Americans are 47 times richer than the young. This graph is provided:

Thankfully, the attempt is made to explain this data rather than turn it into a political axe.

"Perhaps the biggest factor leading to the wealth gap between the ages though, is the housing market, the Pew Center said."

"While rising home equity helped drive wealth gains for the older generation over the long-term, younger people had less time to ride out the housing market's volatility -- especially its most recent boom and bust."

Most of the wealth that is possessed by the senior citizens consists of their home equity—if they own a home. That is not something that they took away from the young. Most depend heavily on Social Security checks just to get by. That is not indicative of a smug generation greedily guarding their pot of gold. The conservative voting pattern of the elderly can easily be explained by fear of losing what little they have.

The gap between old and young has also been exacerbated by changing economic factors faced by the young.

"Whether by choice or due to the weak economy, today's young people are getting their independent lives started later in nearly all respects, taking out more debt, living with parents longer and putting off key milestones like employment, marriage and home ownership longer."

The young are having a harder time getting started. Education is more expensive, it takes longer to complete, and jobs are harder to find. Are these the fault of the elderly? Remember, the elderly are the parents and grandparents of these young people. Yes, those who help with the education costs and allow their children to live at home if necessary. It is hard to see those as conditions that would ignite warfare.

A refreshing counterpoint is found in a Businessweek article by Chris Farrell: Why Young and Old Americans Have More in Common Than You Think.

Farrell recognizes that this supposed intergenerational warfare is used to further political agendas. The supposedly disastrous future Social Security and Medicare expenses that will consume resources that could have been spent on the young are, in fact, manageable.

"Raising the current ceiling on the Social Security payroll tax from $110,000 to $250,000 would extend the date of trust fund exhaustion by some four decades, according to the Congressional Budget Office."

And as for Medicare, Farrell makes a point that has been made here many times before:

"The main factor behind long-term federal budget deficits, as well as state and local government fiscal pressures, is health care. Health-care reform is critical for everyone from the 27-year-old worker to the 65-year-old retiree on Medicare. The U. S. pays more than twice as much per person for health care as the average for other wealthy countries, and if America’s health care costs were comparable to costs in Germany, Canada or elsewhere, the U.S. would be looking at long-term budget surpluses, not deficits...."

And then there is this summary:

"What matters is that there is no good reason for pitting younger Americans against aging Americans in the pursuit of a more conservative fiscal path for the federal government. Plenty of alternatives are available to policy makers. ‘Young people aren’t blaming their grandparents for the bad economy,’ says Jill Quadagno, sociologist at Florida State University and senior policy adviser to President Clinton’s 1994 Bi-Partisan Commission on Entitlement and Tax Reform. ‘If anything, parents and grandparents are supporting their children and grandchildren’."

I couldn’t agree more.

Sunday, September 16, 2012

California Still Leads the Way: Retirement, Healthcare, and Dysfunctional Government

California always seemed to be the biggest state with the biggest problems, and also the biggest solutions. If some trend was going to begin—good or bad—it seemed like California was the first place it would be spotted. California led the way in demonstrating to the rest of the nation how to feed and nourish a housing bubble. It has also been a groundbreaker in the art of utilizing the tools of democracy to make democracy dysfunctional. California is the example the US Senate followed in using super-majority voting requirements and the ensuing minority rule to impose that dysfunctionality on the entire federal government. Until Greece came along, California was definitely in the running for the title of "state most incapable of governing itself."

It was encouraging to come across several indications that California was not only not dead yet, but that it was out there trying to lead the way again.

The problem of providing pensions for US workers needs some serious consideration. Company-provided defined-benefit plans are disappearing. Defined-contribution plans via 401Ks have not proved effective. Most people do not, or cannot, save enough; they don’t know how to invest wisely; and excessive fees bleed their earnings away. California is going to implement a first step towards a possible solution. The Economic Policy Institute provides an article: California retirement plan could serve as a national plan.

"A bill to create a publicly administered retirement savings program for private-sector workers in California who do not have access to an employer-sponsored plan has passed both houses of the state legislature and awaits the signature of Governor Jerry Brown. The California Secure Choice Retirement Savings Program (SB 1234), co-authored by California State Senators Kevin de León (D-Los Angeles) and Senate President Pro Tempore Darrell Steinberg (D-Sacramento), would require employers who do not offer a retirement plan to implement automatic paycheck deduction for employee contributions to a low-fee and relatively low-risk retirement savings plan."

The goal is to provide the equivalent of a defined-contribution pension plan to workers who are not provided access to one by their employers. The current notion is to make the plan voluntary and have employers deduct 3% from a worker’s paycheck and deposit the amount in a state-run fund. The fund would be administered by professional investors and fees would be controlled. The concept assumes that professional will always outperform amateurs. It also will eliminate the large fees companies pay to have 401K plans administered. These annual fees can exceed 1% of the funds administered. That means if a portfolio earns 4% over a 30 year worker’s career, he/she will only see a yield of 3%. The difference between 4% and 3% compounded over 30 years represents a lot of lost money.

The simplest option for California would be to have this plan administered by the organization that runs the pension plan for the state employees. Probably every state has a similar organization in place to cover its public employees. This is one way in which the plan could be transported nationally.

But consider: if this arrangement can be made to work for workers without a 401K plan, why not just replace 401Ks with this plan? It would simplify and save money for everyone involved—except for some financial institutions that nobody cares about anymore. This latter concept is another way in which this idea could be taken nationally.

While most states fuss and fret about the recent healthcare law, California is jumping in with both feet. The New York Times provided an article on California’s actions: California Tries to Guide the Way on Health Law.

"Delay and outright resistance to the health care overhaul might be the norm in much of the country, but not here. California — home to seven million uninsured people, more than any other state — is at the forefront of preparations for January 2014, when a controversial requirement that most Americans have medical coverage or pay a penalty takes effect."

"So far, only 13 states and the District of Columbia have told the Obama administration they intend to set up the insurance exchanges that are supposed to provide a marketplace for people to buy health plans. None are being watched as closely as California, whose singular challenges, from the size, diversity and geographic spread of its uninsured population to its vast budget problems, make it stand out. Many feel a successful rollout here could convince other states with high numbers of uninsured residents that the law can be made to work for them."

Commissions are deliberating, web pages are being built, and Hollywood is being recruited to help get the word out. California believes this effort is necessary and they are determined to show others how it should be done.

It doesn’t hurt that the citizenry is generally supportive of the reform plan.

"In a Field Poll released on Aug. 20, 54 percent of California voters said they supported the health care law, compared with 37 percent who said they were opposed. Support was strongest among blacks (88 percent) and Hispanics (67 percent), who together make up more than 44 percent of the state’s population. Voters of Vietnamese and Korean descent also firmly supported the law, but white and Chinese voters were more divided."

California is also taking a lead role in high-speed rail. This is an expensive and controversial contribution to the nation’s infrastructure. It is impressive and encouraging that California, with all its fiscal challenges, can still see the big picture and take giant steps forward. Let us wish them well.

What is impressive about all this government activity is that it is taking place under the same dysfunctional situation that exists in Washington. A Republican minority uses legislative rules to try to prohibit any increase in revenue and inhibit any sort of progress. Perhaps the Republican minority has become sufficiently out of touch with the population that their relevance has begun to vanish. One can play the role of troublemaker only so long before voters get the message. Perhaps by holding on and enduring the conservative attack California has demonstrated that perseverance wins in the end. Perhaps it is only a matter of time before the national Republicans are made to realize that they must recast themselves into something that is of some value. Perhaps our national government will soon regain functionality.

Finally, there is this article in Bloomberg Businessweek: California’s Job Growth Outpaces Texas.

This chart was provided:

In the past year the biggest progressive blue state stomped the biggest conservative red state—economically speaking.

Keep the faith progressives!

Thursday, September 13, 2012

George Soros: "Germany Must Lead or Leave"

George Soros has produced a fascinating article for the New York Review of Books: The Tragedy of the European Union and How to Resolve It. The article provides a long and detailed explanation of the situation the euro zone countries find themselves in, and how they managed to get there. He provides an excellent summary, but much of what he has to say has been said before in terms of approaches to extricating the group of countries from its dilemma. However, what is of most interest is that he does suggest an alternate approach that I had not heard proposed before.

Soros fears that Europe will continue to follow the path of least resistance which is to do the minimum necessary to keep the euro zone from falling apart. But that approach cannot go on forever and eventually the debtor countries will decide they have no recourse but to depart in order to disencumber themselves of their debt and the repressive measures imposed on them. Soros predicts that if that happens then not only the euro zone, but the European Union itself will disassemble under the burden of the hostility that has been generated.

"The policies pursued under German leadership will likely hold the euro together for an indefinite period, but not forever. The permanent division of the European Union into creditor and debtor countries with the creditors dictating terms is politically unacceptable for many Europeans. If and when the euro eventually breaks up it will destroy the common market and the European Union. Europe will be worse off than it was when the effort to unite it began, because the breakup will leave a legacy of mutual mistrust and hostility. The later it happens, the worse the ultimate outcome. That is such a dismal prospect that it is time to consider alternatives that would have been inconceivable until recently."

Most of the discussion of nations leaving the euro zone has focused on what it would mean if one of the debtor nations found it necessary to depart. The previously inconceivable alternative Soros puts forward is for one of the creditor nations to leave, and, in particular, the biggest creditor nation of all.

"In my judgment the best course of action is to persuade Germany to choose between becoming a more benevolent hegemon, or leading nation, or leaving the euro. In other words, Germany must lead or leave."

Soros prefers the former path, but believes the departure of Germany from the euro zone would be beneficial to the remaining debtor countries, and although financially painful for Germany it would eventually thrive as well.

He differentiates between what would happen if a debtor nation left the euro system from the ramifications of Germany’s departure.

"If a debtor country leaves, its debt increases in value in line with the depreciation of its currency. The country concerned could become competitive; but it would be forced to default on its debt and that would cause incalculable financial disruptions. The common market and the European Union may be able to cope with the default of a small country such as Greece, especially when it is so widely anticipated, but it could not survive the departure of a larger country like Spain or Italy. Even a Greek default may prove fatal. It would encourage capital flight and embolden financial markets to mount bear raids against other countries, so the euro may well break up...."

"By contrast, if Germany were to exit and leave the common currency in the hands of the debtor countries, the euro would fall and the accumulated debt would depreciate in line with the currency. Practically all the currently intractable problems would dissolve. The debtor countries would regain competitiveness; their debt would diminish in real terms and, with the ECB in their control, the threat of default would evaporate. Without Germany, the euro area would have no difficulty in carrying out the U-turn for which it would otherwise need Chancellor Merkel’s consent."

Germany has long benefited from being in the euro zone by utilizing a joint currency that is of lower value than Germany’s unique currency would have been. This has helped boost their export-driven economy. On exit it would lose that benefit and see losses on any investment denominated in euros as the depreciating of that currency proceeded. Soros believes this economic shock is survivable.

"The common market would survive but the relative position of Germany and other creditor countries that may leave the euro would swing from the winning to the losing side. They would encounter stiff competition in their home markets from the euro area and while they may not lose their export markets, these would become less lucrative. They would also suffer financial losses on their ownership of assets denominated in the euro as well as on their claims within the TARGET2 clearing system. The extent of the losses would depend on the extent of the euro’s depreciation."

"After the initial shock, Europe would escape from the deflationary debt trap in which it is currently caught; the global economy in general and Europe in particular would recover and Germany, after it has adjusted to its losses, could resume its position as a leading producer and exporter of high-value-added products. Germany would benefit from the overall improvement."

This, of course, is not the desired path.

"The same result would be achieved, with less cost to Germany, if Germany chose to behave as a benevolent hegemon. That would mean (1) establishing a more or less level playing field between debtor and creditor countries and (2) aiming at nominal growth of up to 5 percent, in other words allowing Europe to grow its way out of excessive indebtedness. This would entail a greater degree of inflation than the Bundesbank is likely to approve."

Soros explains in detail in the article how those two goals could be accomplished.

Given that Soros has the eventual economic outcomes correct, how does one convince Germany to become either a benevolent hegemon, or to leave? Soros is a bit fuzzy on that. He suggests that France might have enough clout if it united with other countries to counter German domination.

"Taking the side of the debtor countries and challenging the policy of austerity would allow France to resume the position of leadership it held during Mitterrand’s presidency. That would be a more dignified position than being a passenger with Germany in the driver’s seat. Still, it would take great courage for France to part ways from Germany in the short run."

His suggested alternative:

"The campaign to change German attitudes will therefore have to take a very different form from the intergovernmental negotiations that are currently deciding policy. European civil society, the business community, and the general public need to mobilize and become engaged. At present, the public in many eurozone countries is distressed, confused, and angry. This finds expression in xenophobia, anti-European attitudes, and extremist political movements. The latent pro-European sentiments, which currently have no outlet, need to be aroused in order to save the European Union. Such a movement would encounter a sympathetic response in Germany, where the large majority is still pro-European but under the spell of false fiscal and monetary doctrines."

Is this a movement...or a revolution? If Soros can see a path that returns Europe to the place we have come to love, then let’s go for it!
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