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Naive and Sophisticated Economics

October 30, 2012

Economics, Economy, Markets, Planning

Debt

Imagine a financial planner who tricked his or her clients into behaviors that were against their long-term best interests, encouraging them to spend, when years of overspending had left them in perilous financial shape, and scheming to have them sell their safe, conservative assets and instead, have them invest their funds in unsuitable risky assets. Furthermore, what if all this was done to save some financially dysfunctional individuals who had gained undue influence over the planner by liberally spending their ill-gotten gains? Ah, you get the idea. I’m describing the Federal Reserve’s policy of penalizing savers and propping up declining asset values for the sake of poorly managed dysfunctional banks. But, I’m told by some ‘sophisticated’ people that my analogy doesn’t hold water because the policies that are appropriate for individuals are different from the policies appropriate for an economy. The economy, after all,  is so much more complex than an individual. But is this really true? Isn’t the economy just a large number of individuals interacting together? If all these individuals (and don’t forget, the government is also made up of individuals) were in good financial shape would not the economy also be in good financial shape?

Of course ‘sophisticated’ media pundits and economists alike, will have none of this, because if life were so simple they would not be employed in well-paid jobs explaining this so-called complexity to the untutored masses. This is one reason at least, why the reputation of Warren Harding, 29th President of the United States (1921-23), has been the subject of ceaseless ridicule at the hands of historians. President Harding also shared the ‘naïve’ view that what was prudent behavior for an individual was also prudent behavior for the country.

Although it is not well known, the depression of 1920-21, following the distortions in the economy brought about by World War I, was one of the most severe in American history. GNP plunged 24 percent and prices declined by 18 percent between 1920 and 1921, making it America’s worst one year deflationary shock in 140 years. The 36.8 percent fall in wholesale prices was even more severe, and was the worst since the American Revolution. Automobile production fell by 60 percent and total production fell by 30 percent, while unemployment rose sharply from 5.2 percent to 11.7 percent. Businesses that managed to avoid bankruptcy saw a fall in profits of 75 percent. All in all, this was the largest drop of business activity of any recession between 1899 and the Great Depression.

Secretary of Commerce Herbert Hoover (later President Hoover), entreated President Harding to implement many of the same measures that former President Bush and President Obama have endorsed. These included bailouts of the large banks and ‘too big to fail’ companies, more government spending, increased taxes on the rich, and support for labor unions and additional business regulations. However, unlike Presidents Bush and Obama, President Harding was firmly set on striking “the shackles from industry” and against high taxes and government waste, and so he rejected Hoover’s recommendations, doing the exact opposite of what Hoover urged.  Harding curtailed government spending and regulation, paid off government debt, eliminated government agencies and reduced taxes rather than increasing them. The strength and speed of the resulting recovery surprised even Harding’s staunchest critics. GNP rebounded, unemployment fell to 6.7 percent of the labor force in 1922 and continued to decline reaching an extraordinary low of 1.8 percent in 1926. Within 18 months of Harding taking office the Roaring Twenties had begun, a period of sustained economic prosperity and unparalleled social, cultural and artistic dynamism.

Financial planning isn’t rocket science and neither is the work of the Federal Reserve. If I, as financial planner, cannot solve an individual’s debt problem by giving him another credit card, neither can the Federal Reserve solve the country’s debt problem by printing more money. As hedge fund manager Mark Spitznagel opined in the Wall Street Journal, the one economist who wrote the book on the subject of economic depressions continues to be ignored because he, too, had certain ‘naïve’ beliefs such as the need to encourage savings rather than consumption and the importance of letting businesses fail. Spitznagel concludes by saying “Must we sit through yet another performance of this tragic tale?”

________________

“True, governments can reduce the rate of interest in the short run. They can issue additional paper money. They can open the way to credit expansion by the banks. They can thus create an artificial boom and the appearance of prosperity. But such a boom is bound to collapse soon or late and to bring about a depression.” Ludwig von Mises

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About Malcolm Greenhill

Malcolm Greenhill is President of Sterling Futures, a fee-based financial advisory firm, based in San Francisco. I write about wealth related issues in the broadest sense of the word. When I am not writing, reading, working and spending time with family, I try to spend as much time as possible backpacking in the wilderness.

View all posts by Malcolm Greenhill

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40 Comments on “Naive and Sophisticated Economics”

  1. johnrchildress Says:

    Malcolm: excellent post. It’s really not that difficult, it’s just that the big banks own congress and the government. This presidential election is up to 900M, and it’s not the little guy giving all that money. Buying a candidate guarantees things will never change.

    Reply

    • Malcolm Greenhill Says:

      Thank you. I agree that the big banks have bought congress and the government. The important question is how do we design a system of government which can’t be bought?

      Reply

      • Michael Says:

        We’re becoming more of a Plutocracy all the time. This trend probably won’t reverse itself until the rest of us have more influence. And the only real way I see that happening – short of a revolution – is through increased union membership.

        I know, I know, unions can get greedy, etc. But when you look at the problems we currently have – high income inequality, lagging worker pay, lower real growth, more corporate influence in government – they all started in the mid-1970’s. This is the same time unionization rates fell dramatically.

        Another possibility would be a strong Democrat who actually works to strengthen the middle class instead of just paying lip service to them.

        Reply

        • Malcolm Greenhill Says:

          Thank you for this interesting comment. Adam Smith would not be surprised by our plutocracy, indeed he forecast it. In essence he said that as long as the government controls the spoils every sectional interest will do its best to control or influence the government. The solution is not to give one sectional interest more power to redress a perceived inequality. Rather, the solution is to reduce the size of the government and ensure strict adherence to the rule of law (meaning everyone is treated equally). In this way we reduce the incentive to capture the government because it does not have the power to do much of anything.

      • Michael Says:

        I agree that part of the solution is to reduce the scope of government. But there will still be issues like “free trade” with China where a union voice would still be necessary.

        As far as decreased government influence is concerned, I would love to see the 17th Amendment repealed. If Senators actually represented state interests like they were meant to, I have little doubt the federal government would shrink.

        Reply

        • Malcolm Greenhill Says:

          Michael, I don’t see why anyone’s voice is needed to discuss trade with China. If a worker in China can make an item more cheaply than a worker in the U.S. then everyone benefits. The Chinese worker receives a higher price for the product than Chinese domestic consumers would pay him and U.S. consumers benefit because they can buy a product cheaper than it would cost if it was made in the U.S. With the savings from this transaction the U.S. consumer can now buy additional goods and services. Everyone benefits. Trade is not a zero sum game.

          As to the 17th amendment I tend to agree with you.

      • Michael Says:

        I don’t have a problem with actual free trade. But in the case of China, it is anything but free. For one, they have unilaterally set the exchange rate in their favor. Doing so has driven many US manufacturers out of business and given an excuse for remaining manufacturers to lower wages. If unions were more influential I’m not sure we would be letting China get away with that.

        Reply

        • Malcolm Greenhill Says:

          Michael, thank you again for the opportunity to engage in this great conversation.

          OK. China has set the exchange rate in their favor. That means that China is subsidizing their exports, making them cheaper than they would otherwise be. This enables U.S. consumers to reap the benefit of lower prices on Chinese goods and there are more U.S. consumers who benefit from lower prices than U.S. producers who suffer from it. What’s wrong with that? We are all consumers who can save money on subsidized Chinese goods and can spend the savings on other goods and services.

          Even if China revalued the renminbi this would not necessarily translate into more U.S. export jobs. A revalued renminbi would lower the cost of China’s manufacturing inputs which means that final prices on Chinese finished products might not change much. Also, plenty of American jobs are in import-dependent industries that would be harmed by a weaker dollar.

          Furthermore, you can’t blame China for all the jobs that have gone overseas. We are solely responsible for debasing our own currency, forcing U.S. manufacturers to go offshore in an attempt to keep prices down. China has nothing to do with that. Finally, despite all the electioneering rhetoric, until the recent slowdown in the Chinese economy U.S. exports to China were actually soaring.

      • Michael Says:

        Yes, great conversation Malcolm. Nice to know it’s still possible to have an intelligent online discussion!

        In a true free market economy, China’s huge trade surplus would require them to return US dollars in exchange for renminbi. This would result in appreciation of the renminbi and make Chinese products more expensive and US products cheaper in China. In theory, the exchange rate would continue to adjust until the trade deficit became negligible. But because they won’t allow the exchange rate to adjust properly, they are able to remain a continuing source of artificially cheap labor.

        I agree that their cheaper exports allow U.S. consumers to save money. But they achieve these lower prices through cheap labor, not higher efficiency. This puts pressure on US manufacturing wages, which leads to weaker domestic consumption and slower growth. I call this the Paradox of Cheap Labor.

        http://econopolitics.com/2012/10/31/the-paradox-of-cheap-labor/

        Reply

        • Malcolm Greenhill Says:

          Michael, if wages fall, the demand for labor rises, so total labor income will be unaffected by the wage cuts. Even if the demand for labor is inelastic wage cuts will only reduce labor income by the same amount as it raises employers’ income so again, aggregate demand will remain the same. In your post on the Paradox of Labor you say: “Again, imagine an entire economy reducing costs through pay cuts. As opposed to the first example, this would create a vicious cycle where less purchasing power would weaken the overall economy.” This makes no sense. If everyone took a pay cut and consequently all prices fell, wouldn’t all consumers benefit from the reduced prices?

      • Michael Says:

        Yes, if everyone took a pay cut and prices fell proportionately no one would be worse off. But that isn’t what’s happening, it’s only middle and lower income workers that are the casualties of cheap labor. The share of income going to the top is the highest it’s been since the Depression, and corporate profits as a share of GDP have never been higher.

        Since middle class consumption is the primary driver of demand, their lagging incomes have resulted in lower growth. This problem was masked for a while with rising household debt, but ever since 2007 when households started deleveraging, demand has been very weak. It will continue to be weak until incomes increase or they resume borrowing.

        Meanwhile, booming incomes for people at the top have resulted in a glut of investment capital. I’ll bet you’ve noticed this in your line of work.

        Reply

        • Malcolm Greenhill Says:

          Michael, you state that “the share of income going to the top is the highest it’s been since the Great Depression”, as if there is no discussion among economists about this issue. However your statement is a very contentious one and although this is not the forum to debate it, I would like to point out that some of those studies that have shown rising income inequality have problems, such as the fact that they omit workers compensation in the form of benefits, that they don’t take into account changes in the tax code which causes more income to be reported at the top and less at the bottom, and the fact that they ignore transfer payments and spending from unemployment insurance, food stamps, Medicaid and other safety-net programs. Indeed, other studies have found that the consumption gap across income groups has remained remarkably stable over time. Furthermore the poorest sectors (those earning under $20,000/year) certainly have greater access to devices and appliances such as computers, air-conditioning, dish washers, washing machines and cell phones, than their predecessors. Would a typical low-income American trade in his or her lifestyle for a low-income American a decade earlier? I doubt it, if that would mean giving up all those appliances and safety net programs. In my opinion this at least sows some real seeds of doubt about the idea of widening income inequality (which I acknowledge may be true).

      • Michael Says:

        I’ve only seen a couple of studies that claim income inequality isn’t rising – from Alan Reynolds and a few conservative think tanks. The majority of them conclude it has risen dramatically. If you haven’t seen it, the CBO report takes into account all of the transfer income you mentioned.

        http://www.cbo.gov/publication/42729

        Low-income households can still see a rising living standard while income inequality is increasing. If their incomes increase faster than inflation, they will be relatively better off. But if they increase less than inflation + productivity, income inequality will widen – because that extra productivity will go to someone.

        Reply

  2. Dapper Dan Says:

    Thanks for the post and the Wall Street Journal article. Mises’ “Theory of Money and Credit” looks interesting. Do you have any other economic book recommendations?

    Reply

    • Malcolm Greenhill Says:

      Thank you. Not quite sure what you are looking for but if you haven’t read it Henry Hazlitt’s ‘Economics in One Lesson’ is a minor classic based on Frederick Bastiat’s ‘Economic Sophisms’, which might still be in print. If you want a heavier read then Ludwig von Mises’ ‘Human Action’ or Murray Rothbard’s more contemporary ‘Man, Economy and State’ are the definitive tomes on Austrian economics.

      Reply

  3. A Gripping Life Says:

    Thanks for writing this brilliant and succinct post. What seems so obvious to me, and I know very little about economics, seems to confound others. When has going further into debt ever created prosperity? This was a great read!!

    Reply

  4. Christian Wignall Says:

    “Michael, I’ve read your thread with Malcolm and visited your blog site at EconoPolitics. There are so many points to be made. Trade unions by keeping wages above market clearing levels create unemployment and reduce output. The UAW did a magnificent job of ensuring this outcome in the auto industry, with GM, Ford and Chrysler being forced to shrink and shrink. Obama is trying to get kudos for saving the auto industry, which begs the question as to why it needed saving in the first place. The Japanese government didn’t have to save Toyota or Nissan or Honda, nor did the German government have to buy stakes in VW, Daimler or BMW to keep them going during the great financial crisis, although car sales fell terribly in all countries.

    You seem to acknowledge that partial unionization hasn’t and wouldn’t work (because of the competition from non-unionized workers at home and abroad), so presumably you advocate total unionization, which is tantamount to the government setting across the board wage controls. But then you would need tariffs to keep out the products of cheap foreign labor. So you would have elevated consumer prices, elevated wages, put in place draconian restrictions on economic freedom and created poorly functioning markets because of bad price signals, fewer economies of scale and lower efficiency as a result of the inability to enjoy comparative advantages. Producing for the US market would become less profitable therefore capital would flee to freer regimes overseas and there would have to be capital controls and restrictions on money transfers etc. The economic model would begin to look more and more like Cuba.

    If you think there is discontent with inequality now, can you imagine how contented and happy the American public would be under this new regime, which would have a draconian police force and rampant black markets. Truly the ‘cure’ would be worse than the disease. I believe inequality is essential to innovation. If everybody is paid the same, who will be the pioneers, the early adopters, the first people to buy a Tesla, a smart phone etc?”

    Reply

    • Michael Says:

      This is complete nonsense. All unions do is level the playing field between management and labor. When unions are insignificant – as they have been the last 30 years, and were during the Gilded Age – management gets their way. There is nothing about our current one-sided system that has anything to do with a free market. A healthy free market requires checks and balances – which unions provide. Our economy was much stronger when unionization rates were higher.

      As far as the auto industry is concerned, German autoworkers are not only more unionized, but the union has reps on the board. As a result, German autoworkers make more than US workers, and German automakers are more profitable.

      http://www.forbes.com/sites/frederickallen/2011/12/21/germany-builds-twice-as-many-cars-as-the-u-s-while-paying-its-auto-workers-twice-as-much/

      Your final paragraph is the usual straw man that comes from many on the far right. No one has ever (except for radical socialists) suggested that everyone should be paid the same.

      Reply

      • Jon Kalb Says:

        No Michael, it isn’t true that “All unions do is level the playing field between management and labor.” What they do is restrict output. They do this to raise wages in the exact same way that monopolists restrict output to raise prices.
        In your rhetoric, you imply that it is only “management” that suffers from this policy. But firms pass the costs onto consumers who, along with non-union workers, pay the real price. Eventually, of course, firms will also suffer from their lack of competitiveness. When these firms fail even the union members may find that their anti-production demands were counter-productive. Unless of course the government steps in to bail out the firms or their pension funds. In which case it is taxpayers that end up subsidizing union demands.

        Economic competition doesn’t happen between labor and capital, which complement each other. Labor competes with labor and capital competes with capital. (Granted, labor is gradually replaced by capital intensive technology in a continual process called progress.) Unionization is much less a problem for firms than it is for non-union workers who find themselves unable to sell their labor at market rates.

        You also said that “Our economy was much stronger when unionization rates were higher.” If this is true, you may have cause and effect reversed. When times are good, it is easy for firms to accede to union demands, even when they are clearly anti-production. When firms that have accepted these demands become uncompetitive, unionized jobs are lost and unionization rates fall.

        Reply

  5. Michael Denny Says:

    Nice job Malcolm…

    Reply

  6. christian Says:

    If a union ( or government ) coerces corporations to pay employees ( in benefits, tenure or wages) more than they would voluntarily do, then corporations will prefer to invest elsewhere where they have a freer hand ( in the US in ‘right to work’ states, for example.) German companies who are required by law to deal with unions through a panoply of labor legislation, have responded to such incentives, just as US corporations have. Volkswagen for example shifted from producing 35% of their vehicles in Germany to only 31% during the decade 2000-2010 – and they went from having 51% of their workforce in Germany to 46% over the same period.

    Germany had chronically high unemployment (considerably higher than in the US) in the 1990s and they became greatly concerned at their own lack of competitiveness, very sluggish economic growth and structural unemployment. As a result the unionized workforce ceded ground and there was a prolonged period of zero or negative real wage gains over the past decade. Furthermore a major package of legislation addressing workplace rigidities and inflexible labor contracts, particularly facilitating the use of part time and contracted labor, was introduced in mid decade (The Hartz reforms). I would suggest that much of the recent comparative revival of Germany can be attributed to this movement towards a lower cost, freer labor market. Indeed that is the general opinion within Germany itself. It is moreover away from the ‘more power to the unions’ position which you seem to favor.

    Even if you attribute Germany’s recent success to other factors, that is irrelevant to the basic point which is that unless you prohibit companies from recruiting and investing overseas, you cannot stop them from responding to the market incentives around them. So to restore the power of US unions you will have to resort to protectionism in one form or another. Perhaps you can think of a product or service which has improved because it is protected, but I can only think of the contrast between a Volkswagen and a Trabant.

    Of course German wages and benefits are high, that can be attributed to many intelligent things Germans have done over the years in terms of technical education and training. Being able to compete in world markets despite their high costs has depended on producing superior top-of -line products. The key to a high standard of living in the US is similarly a highly-skilled well-educated citizenry. Perhaps the school system has a part to play in this.

    Reply

    • Michael Says:

      Unions can’t force corporations to do anything – they simply negotiate. I don’t see where people get the idea that unions are more powerful than corporations. When push comes to shove, striking union employees will go broke long before corporate executives and shareholders will. Even Adam Smith understood this.

      True, there will be competition from right to work states. But personally, I would rather not live in a low wage state. They consistently have the worst schools and highest poverty and crime rates.

      Yes, the Hartz reforms in Germany were needed. The German welfare system was far too generous. Germany was too liberal and needed to move to the right – and that improved their economy. I think the US is too conservative and would benefit by moving to the left. Reduced income inequality would stimulate consumer demand, which is what we need most at the moment.

      When talking about foreign competition, it’s mostly about China. We let China get away with murder – even Mitt Romney wants to go after them! The only reason we allow them to get away with what they are doing is because the US worker has become impotent and corporations are now calling all the shots. Another symptom of under-unionization, IMO.

      I agree that we need a better educated citizenry. I think our current problems in that area are another indication of our move to the right economically. When I went to college in the 80s, it was easy for me to cover costs with a part-time job. I made $7.50/hr as a grocery checker and University of California expenses (books, tuition, insurance, etc) were $1,800/year. So with 3 months of work, I could cover all costs. That same job today pays $10/hr and UC expenses are now $14,010/year. It would now take 18 months of work to pay for 1 year of education! That’s why student loan debt has exploded. The American Dream is fading, and it’s time to do something about it – increase education funding and reduce income inequality.

      Reply

      • Tim Starr Says:

        None of the car factories in right-to-work states were in danger of bankruptcy in the past decade. Meanwhile, GM imploded, and Ford had serious trouble. Detroit’s schools, crime rate, & poverty are nothing to be envied; if you compare Detroit & Hiroshima today, Detroit looks like the one that got bombed.

        Student loan debt has exploded because it’s been subsidized & guaranteed by the Federal government, just like mortgages were. That’s why higher education raised its fees, so it could capture more of that student loan spending w/ facilities designed to rival those of caribbean beach resorts.

        Reply

      • campfirememories Says:

        Unions do far more than negotiate. They strike. Growing up, I witnesed many machine shops close in northern IN and MI. In the end, workers lost their jobs. Owners shifted their investments elsewhere. Inner cities are still in ruin. Many of the inequities which required unions decades ago have been addressed through labor laws and regulations. Profit centers and profit sharing are far better motivators and allow workers to have a stake in ownership. Perhaps such incentives could be incorporated into state school systems. i.e. Teacher pay rises as costs are cut. US union bosses should infiltrate China’s factories, if they dare, as another facet of leveling the trade-playing field. Here, unions are antiquated, and are holding this country back. I’ll bet a Hostess Twinkie on it.

        Reply

        • Malcolm Greenhill Says:

          Nancy, thank you. This is a great comment. The use of incentives in state schools is way overdue. Also, I love the idea of infiltrating union bosses into China’s factories but feel sorry for the Chinese factory workers who will lose their jobs as a result. Hostess Twinkie indeed:)

  7. Jon Sharp Says:

    Very interesting set of exchanges to an interesting post Malcolm. Did you see the recent 19 page special report the Economist did on inequality October 13th titled “For Richer for Poorer” A Special Report on the World Economy? It pretty much took up the drain covers on inequality Worldwide and left very little room for doubt that inequality is at historic highs in the US. The interesting part was why? Is it necessarily bad? And, what can be done about it? Of course the weakening of unions has played a part, but there are many other factors cited, particularly education. Education gains in the US stalled just when the information and technology revolution was getting started. This hindered those at the bottom but equally benefitted those at the top. This is a big issue for a country like the US that prides itself on the idea of equality of opportunity vs equality of outcomes and rejects the more liberal redistribution ideas of many European countries. But inequality of opportunity as measured by the World Bank is now actually higher in the US than in Germany, Norway and Sweden. Clearly something is amiss. I don’t personally see salvation in unions having witnessed the socialist led destruction of British industry in the 1970’s (nationalisation of industry combined with union power), but it’s also clear unions can have a positive effect when there is a common sense of purpose and effective representation as in Germany following the Hartz reforms. Having also lived and worked in Germany, I am unconvinced that the German approach can be made to work in the the US where lobbies and special interest groups have hijacked the political process and rational debate and cooperation across party lines is receding. The US is going to have to come up with it’s own solution.
    Anyway, I enjoyed reading your posts Michael and Christian.

    Reply

    • Michael Says:

      Yes, I saw that article. They also see similarities between today and the Gilded Age. Union busting was popular back then too! Union membership also declined in the 1920s – I’m seeing a pattern here.

      But unions aren’t necessarily the best or only option. Silicon Valley is arguably the most successful area in the US, but they do it with more of a cooperative approach by giving generous amounts of stock options. There are also a lot of successful non-union companies that realize paying employees more can increase profits… who knew?

      http://www.newyorker.com/talk/financial/2012/03/26/120326ta_talk_surowiecki

      The most upsetting thing about the decrease in education funding is this: My generation is now benefitting from the low-cost education previous taxpayers paid for. Now we demand cuts to education so we can get more tax cuts.

      Reply

  8. christian Says:

    Regarding education. Productivity gains in the production of goods have outstripped productivity in many service areas over the past several decades. An extreme example of this would be the comparison of the price of a barbershop haircut and a laptop computer. If you step back into a less developed society you can recapture the relative prices which obtained in the US decades ago. If you want a cheap college education…go to the third world.

    So just as plumbers and psychotherapists and lawyers seem to be incredibly expensive these days, much the same sticker shock applies to education. Subsidizing higher education out of taxation has therefore become a progressively heavier burden on the public purse. To return the relative price of a public college education to the levels of the Pat Brown era in California today would require a much more aggressive level of subsidy/burden on the tax payer than was required in his time. If in addition you take into account the much higher percentage of the population in college today, the burden would be even greater. ( In 1965 3.0% of the US population were enrolled in tertiary education, in 1975 it was 5.2% and today it is about 6.7%) The halcyon days of our youth cannot feasibly be restored for the current generation unless you want to halve the number of students, rewind all the productivity gains in the US economy during our working lives and/or massively increase the burden on the tax payer. It is not the swing of the ideological pendulum which has brought this difficult situation about, it is remorseless demographics combined with the dramatic improvement in the productivity of the rest of the economy.

    Why has there been so little productivity gain in education compared with elsewhere? Could it be tenure and subsidy and an anticompetitive mindset in the educational establishment? Many of the same criticisms apply to the primary and secondary education as well. (I am carefully avoiding any mention of unions!) Trust the teachers, they know best. They are the education experts. Well, increasingly outsiders are becoming distrustful (Peter Thiel for example) and are funding innovative ways ( Bill Gates’s support of Kahn Academy) to harness the technological revolution to bring about the sort of transformative productivity gains which the entrenched interests are slow to pursue on their own.

    Reply

    • Michael Says:

      That all sounds great, but it is factually incorrect. The big increase in education costs have come from a big decrease in education funding. In 1980, 14.2% of California’s total spending went to higher education. This year, it is down to 6.5%. See Chart C-1:

      http://www.dof.ca.gov/budgeting/budget_faqs/information/index.php#SummarySchedules/

      Reply

      • Tim Starr Says:

        That’s just a decrease in the share of the total CA budget. Meanwhile, the total CA budget has gone way up, so has total education spending. There has been absolutely no decrease in education funding whatsoever.

        Reply

      • Michael Says:

        Since 2005, higher education spending in has dropped 28% in nominal dollars. When you account for inflation and population growth, the number is even worse.

        Reply

      • Jon Sharp Says:

        Surely the point that Christian made is the pertinent one though ie. that education is a victim of massive productivity gains in the rest of the economy? The single most important aspect of education is the teacher standing at the front of the classroom. There is no technology substitute or easy way to increase their productivity unless one believes that ever increasing class sizes and lecture halls are the way to go. We need good, competent teachers and to get that we are going to have to pay more in real terms year on year or see a significant reduction in teacher quality. The cost of education MUST go up in real terms, and it is paid for by productivity gains elsewhere in the economy. If we balk at this then the US economy will suffer. Personally I support improving teacher quality through more rigorous standards & eliminating tenure (while finding some other way to guarantee free thinking amongst academics) and options for parents including vouchers and such. But ultimately we all have to be willing to pay more in real terms for education.

        Reply

      • Michael Says:

        Again, that might sound good, but it is factually incorrect. UC per-student cost has fallen in real terms – from $20,990 in 1990 to $15,820 in 2010 (both figures inflation-adjusted). Teacher salaries are a fraction of the total cost of education. How many students can one teacher teach in a year? 100? Even if teacher salaries are $100k, that only works out to $1k per student. Education also benefits from technology. For example, it’s possible to conduct lectures and have students submit homework online.

        Again, the main problem is cuts to education funding.

        http://budget.universityofcalifornia.edu/?page_id=5

        Reply

  9. Tim Starr Says:

    Michael: You are equating UC spending with the total cost of ALL higher education. The UC system isn’t even the only higher education system operated by the state of California. There’s also the state college system, the community college system, etc. Furthermore, there’s also the private universities & colleges, e.g. Stanford. The total cost per student of all higher education has gone up, outpacing inflation.

    Furthermore, there’s no relationship between increased education spending and better student performance or economic growth. At most, spending more on education gives some workers advantages lacked by other workers, but that just redistributes wealth within the population, it does not increase the total aggregate.

    Reply

    • Tim Starr Says:

      Furthermore, government spending on higher education is regressive, as it forces taxpayers, most of whom do not have college degrees, to pay for the college degrees of others, who will make more than the average person due to having those college degrees.

      Reply

  10. Mish Says:

    One argument that the corrupt bankers had was that their dealings were so complex that they have to be rehired to undo them. I’m glad that Obama won, however I can’t forgive the rehiring .

    Mish

    Reply

  11. Malcolm Greenhill Says:

    Chris, thank you for the linkback.

    Reply

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  1. Adam Garfinkle At The American Interest: ‘Still Broken’ | Chris Navin - July 24, 2013

    […] if you have a few minutes, read Malcolm Greenhill’s post ”Naive And Sophisticated Economics” about this very same issue, which is not good for Main […]

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