Coffee shops and the economy of the future.

Great little entry on ... Education, retail, and coffee shops

One scary thought: Maybe I should get out of the university game. If the bubble bursts, i would be about as relevant as a home builder in Florida. We all know that the price is highly inflated. We know technology is changing and that classroom style learning is kind of outdated. We know the product is becoming less attractive. Something has to give, right?

However, I do like the idea that retail, and offices may go towards this coffee shop model. Make things better for all. Offices and stores are not fun places to be.

Francis Fukyuama and New Ideologies

A new article by Francis Fukyuama in Foreign Affairs:

Fukyuama's main argument is that, in the West, the "left" has basically been defeated. Their main policy ideas are unaffordable, and incompatible with the growth that is required to pay for them. A return to social democracy is unlikely. Fukyuama is unhappy with this. He argues that a new alternative must arise so that economic liberalism has a challenger. In the U.S., the main political movement that has arisen in response to the Financial Crisis has been right-wing populism.

One of the most puzzling features of the world in the aftermath of the financial crisis is that so far, populism has taken primarily a right-wing form, not a left-wing one....In the United States, for example, although the Tea Party is anti-elitist in its rhetoric, its members vote for conservative politicians who serve the interests of precisely those financiers and corporate elites they claim to despise.

Ultimately, he argues, it is democracy that is at stake.

AM: One has to agree that the political influence of financeers has unsettling implications for democracy. But the answer to this may be more capitalism, not less. Perhaps this is the new ideology? One that would seek to separate government influence from the market, and vice versa, through a reduction in the size and scope of government and employing market mechanisms, like competition and choice, as a way to curb corporate excess.

Caption contest

Real Johnson caption contest, takes shots at parallel polity readers!

A bubble means that you’re not as rich as you think you are: the case of education

Prices are how activities are coordinated, and sometimes, due to government interference price signals are wrong. Nowhere is this becoming more apparent than the realm of higher education. It’s pretty evident: education costs have skyrocketed in recent years at a level that far outpaces the CPI.

(from Carpe Diem)

The parallels with housing are striking. In the case of housing, government policy wanted to promote home ownership. In this case, government policy is to promote higher education. The mechanisms were also similar: the U.S. government (and Canadian provinces) expanded credit by subsidizing student loans and tuition. Low interest rates under the Greenspan years also made borrowing easier. The result, it’s easier to afford school.

Well intentioned? Yes. More people get university educations, and that’s good, right? Maybe. I’m sceptical. But there are some serious downsides: first, the degree costs more and is worth less. Second, the high demand has resulted in even higher prices. Cheap credit allows everyone to play, but when everyone plays, the price rises, and the ‘signalling value’ decrease. Who wins? The universities that reap the benefits of high tuition costs and skyrocketing demand. Who loses? The students: they overvalue the degree: too many people go to school. If you’re one of those people the reality is you’re not as rich as you think you are. Education is an investment. Students made what you think is a solid investment in school with the expectation of some future payoff and then realize when they test the market that they may have to accept a lower paying job or no job at all in their field. When the interest rates on student debt rise, the emerging graduates feel a little bit more like they’ve been ripped off: the actual cost of the degree (not to mention the opportunity cost) was a little bit more than it was worth. In short, you’re not quite as rich as you thought you were. Devalued human capital makes up the slack.

What about on the supply side? The artificially high price of education leads to further misallocation of resources: too many ‘resources’ are sucked into the education sphere. Universities are expanding based on these price signals. They are making commitments, investments etc… If the bubble bursts maybe some people are not going to get paid. Just like housing. Now the big question is: will the bubble burst? Obviously I don’t know. Since government student loan programs can keep hammering out cheap credit forever, this bubble may continue for a long time. But there are other factors: maybe employers may place less value on university as a signalling model. This makes sense because North American universities are turning out some pretty bad grads. Third, a major technological change in the way that affects how education is delivered might totally mess things up.

Another weird parallel is with gov. response to bad investments. In housing, creditors and
bankers received the now infamous bailouts. What about educational malinvestments? That’s really what the OWS movement was a calling for on this one… investor bailouts: the investor in this case: the beleaguered women’s studies grad.


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The Failure of Climate Talks...

Smart comment from the Globe and Mail's Margaret Wente:

The key thing to understand about the climate talks is that they’re not really about the climate. They’re about power and money. They are about the desire of fast-growing emitters such as Brazil, South Africa, India and China to extract billions in so-called climate reparations from rich countries, especially the United States. These and other so-called developing countries now account for more than half of greenhouse gas emissions. They want the rich countries to start cutting large amounts of carbon right away, while they do nothing. The rich countries are understandably reluctant. Hence the impasse.

AM: We here at Parallel Polity are not climate change deniers. It's a real problem. But as a political scientist, it's quite obvious the large-scale international agreements are not the way to go. The barriers to successful negotiation are huge; power political always rules over the technocratic; and when rules are made, there is no guarantee that they will be implemented or followed.

Furthermore, it also seems that the world focuses too much on the issue of emission reduction. Are we even sure that this is going to have any real effect? How much do we have to cut to make any dent? Why not invest more in new technological solutions like geoengineering, which might be way cheaper and although still unproven, potentially more effective?

Forecasting, weather, and economy

This is great! From the Ottawa Citizen...

Two top U.S. hurricane forecasters, revered like rock stars in Deep South hurricane country, are quitting the practice because it doesn’t work.

William Gray and Phil Klotzbach say a look back shows their past 20 years of forecasts had no value.

These guys clearly have their professional integrity. Now, if we could just get macroeconomic forecasters to quit their jobs.... It's really the same basic problem: using abstract models to predict complex events in a contingent world. And they perform terribly as well. Economists know this, but I think they continue b/c people ask for their advice. See Steve Levitt on this....

Unintended Consequences: Doo-gooders and Housing Bubbles

In my last post, I referred to the work of economists who argue that government policy was the cause of the housing bubble and the financial crisis. (I’ll stick with the housing bubble here, because even though they are related, they are separate issues). I often emphasize this point, not just because it is always overlooked in discussions of this issue, the economy, and the future, but because it pisses off my lefty friends who will take any excuse they can to bash free-market capitalism.

In response to my last post, fellow blogger the Real Johnson, comments: “The government didn’t just decide, ‘’hey, poor people should be able to own houses too.’” In this post, i'd like to address this point. In my view, there was a coherent policy, and it was basically well-intentioned.

I think the mechanics of the government-failure argument are pretty sound. I won’t rehash them, but you can read good overviews here, and here. When presented with this point, people often respond by trying to save the “evil capitalism” narrative as follows: it was the evil companies that corrupted government to put these policies in place so that they could make money. Now, let me say right away: I’m not fundamentally against this type of argument. There is far too much money and influence from corporations and special interest in politics, in my opinion. I don’t know of anyone who disagrees with this basic, albeit vague principle.

The question is, in this instance, which special interests and political forces were driving federal government housing policy? Was there even a policy to begin with? And if there was, were the designers intending to help poor people? The answer to the last two questions is “yes.”

The policy is clear. Bill Clinton announced his “Home Ownership Strategy” in 1995. It tries to make a case for homeownership based largely on positive externalities (economic development, dignity, financial stability crime etc…) and on inequality (fairness). Indeed, the touted benefits of the policy were: help poor people, help the community. How was the ownership strategy carried out? First, Fanny and Freddy were required to buy mortgages made to low-income buyers. Congress leaned on them heavily. Second, to make investment and ownership more attractive, tax policy was changed so that capital gains from housing were treated differently than others. Third, state restrictions on commercial lending that prevented banks from taking recourse against defaulters. Fourth, the implementation of tax deductions for mortgages. Clearly, there was a coherent policy at work. It wasn’t “deregulation” but an agenda to increase homeownership.

The second part of the issue concerns the “political economy” of housing policy. What political forces were behind this? This is a little bit more difficult to answer: but there is reason to believe that it was the forces of good, not so much the forces of evil. One lobby that pushed for cheap housing was ACORN: as early as 1992 they were pressuring banks to issue mortgage loans to (poor) people who did not qualify.
From the NY Times:

Prodded by Federal laws and an aggressive community-action group called Acorn, banks here and in other cities across the country have started making mortgage loans in neighborhoods they have traditionally avoided.

The article goes on to say:

A Federal regulator concurs. "Acorn is street-tough rough and they bedevil the bankers," he said. "But they've gotten banks to commit millions they otherwise would not have lent."

This cause was picked up by members of the Democratic Party, and pushed the center of the agenda under Clinton, and then again under Bush. Barney Frank’s role in this is well documented
He continues to deny that home-ownership policies had anything to do with the crisis, but this betrays a sort of cognitive dissonance, or a basic misunderstanding of the fundamentals (he says that home owners were not highly leveraged: but three percent down = highly leveraged). As late as 2005, he says in speech to Congress that the housing bubble is essential fake (not a bubble) and that he and his Committee would continue to push for home ownership.

This is not to say that leftwing doo-gooders were fully responsible for the housing bubble: only to say that it was caused by government policy and that it was basically well intentioned. Not many people saw this coming. Very few of the ones that did would estimate the cascading effects on the rest of the financial system and economy. But really, when housing prices are rising it’s hard to argue that everyone shouldn’t buy in. I speculate that those on the right were probably complicit in their acceptance of these policies. Indeed, if anything, homeownership and housing prices continued to rise thanks to continuation of Clinton-era policies by the Bush administration. So this is not entirely a ‘left-right’ thing, but clearly the driving force was government policy, and the intention was basically good.

In the end, IMO, the lesson is unintended consequences of government intervention. Lots of well-meaning policies have bad outcomes. This is the basic problem: knowledge. You don’t know, in advance, how people are going to react. This isn’t about science: economics is not that.