Education and Democracy

From Ed Glaeser writing in The New York Times:



Glaeser:

One way to read the graph is that there are basically no countries with very low levels of education that have managed to be democratic over the long term, and almost every country with a high level of education has remained a stable democracy.

Thomas Jefferson wrote that “if a nation expects to be ignorant and free, in a state of civilization, it expects what never was and never will be.” In 1960, 36 nations had less than 1.74 years of schooling (which happens to be the level that Afghanistan has today). Of those 36 countries, only two — India and Botswana — managed to have average democracy scores above 4.2.

Out of the 19 countries in this sample with more than 5.3 years of schooling (the current level in Iran) in 1960, 17 have average democracy scores above 7.9. Fifteen of these have been perfectly democratic, at least by the standards of Polity IV. Only Poland and Hungary were dictatorships, and one can certainly argue that those places would have been democracies in 1960s if it were not for Soviet troops.

But in the middle ranges of education, between two and five years on average, almost anything goes.

Some places, like Costa Rica and Italy, have been extremely democratic, while others, like Kuwait and Paraguay, have not. Iraq falls into this category today, which suggests a fair amount of uncertainty about that country’s political future.

Why do I think that the chain of causality runs from education to democracy rather than the reverse? Democracy in 1960 is essentially uncorrelated with subsequent growth in the levels of education. Education in 1960, on the other hand, does an extremely good job of predicting increases in democracy.

The ability of education to predict the durability of democracy is well illustrated by the paths of former Communist bloc countries. Initially well-educated places, like the Czech Republic and Poland, have managed to transition toward being well-governed republics. Poorly educated places have not.

Why is there a connection between human capital and freedom?

Giacomo Ponzetto, Andrei Shleifer and I have argued that the connection reflects the ability of educated people to organize and fight collaboratively.

Dictators provide strong incentives for the ruling clique; democracies provide more modest benefits for everyone else. For democracy to beat dictatorship, the dispersed population needs to have the skills and motivation to work collaboratively to defeat dictatorial coups and executive aggrandizement.

Education teaches skills, like reading and writing, that enable people to work collaboratively. At younger grades, teachers spend a lot of time teaching children how to get along. In the United States, education is strongly linked to civic engagement and membership in social groups. The ability to work together enables the defense of democracy.

Update, I had a busy morning, so I could not add my own two cents until now, but I am not entirely convinced abut the chain of causality. What interests me is whether countries who are experiencing vast expansions in education are finding their democracies stabilizing. Anecdotally for Glaeser's example, Argentina, the answer appears to be no. The differences between Argentina's and Brazil's democracies are quite stark. Argentina's democracy is, to my mind, immature, while Brazil, after an unfortunate period of dictatorship has developed quite a mature and stable democracy. In these data, Argentina is well above Brazil in 1960 in terms of average years of education and remains so today though both have doubled. So perhaps it has more to do with INSTITUTIONS (of which education is a part) is what is really important. Perhaps good education is just a proxy for good institutions (laws, courts, bureaucracies, etc.)

Yes on Measures 66 and 67

Here is my take, published today on The Oregonian's web site:

I support measures 66 and 67 because, based on economic evidence, I believe that the risk to the economy from declining education funding far outweighs the potential harm of the taxes themselves.

Economists understand that taxes have consequences, but the effect of these taxes on most businesses and individuals in Oregon will be minimal and the state will remain one of the lowest business tax states in the country. How low? According to the conservative Tax Foundation, even with the new taxes, Oregon will rank 14th in lowest tax states. Thus Oregon businesses are neither excessively burdened by taxes, nor likely to find greener pastures elsewhere. The effect of the new taxes on employment is therefore likely to be very small, and may be more than offset in the short-run by jobs preserved in social services, public safety and education.

Rejecting these new taxes will, however, likely lead to very severe and long-run consequences on the Oregon economy through the decline in investment in education. The positive economic effects of education are empirically well founded. Economic research by Eric Hanushek of Stanford University has found ‘significant growth effects’ from the improved cognitive abilities that result from investments in education. Claudia Goldin and Larry Katz of Harvard have found that a large part of what explains the phenomenal economic success of the United States in the 20th century is the investment the country made in education. The same is true for states: more educated states tend to be more economically successful than less educated states. It is no accident, for example, that the state of California built the world’s best system of public higher education and saw its economy grow to the 10th largest in the world and become a key engine of growth for the US economy in the second half of the 20th century.

So how is Oregon currently doing in terms of public investment in education? Miserably. In K-12, Oregon currently ranks 49th in the nation in terms of class size and has a school year that is three weeks shorter than the national average. In higher education, Oregon ranks 41st in terms of per-student funding. The percentage of Oregonians earning a college degree is actually decreasing through time. Clearly we are not currently on track to create an economy characterized by healthy growth and job creation and we cannot afford to fall any farther behind.

It is also important to note that private business benefit directly from public investment in education: research by Enrico Moretti of the University of California at Berkeley has found that businesses enjoy increased productivity from locating in cities with a large share of college graduates. In other words, a highly educated population makes businesses more productive.

The Oregonian and others have argued that we should hold out for something better and reject 66 and 67. But the country and the state are in the midst of the worst economic crisis since the Great Depression, we do not have the luxury to wait for something better. Research has shown that even temporary disruptions in education can have lifetime consequences for students. Inarguably the state needs to fix its broken revenue system and we should all demand that it do so soon. But we need the temporary fix that 66 and 67 provide right now. Without investment in the education of Oregon’s children, the future economic prosperity of the state is at risk.

Last week Fred Thompson shared his take on the measures on this blog. I largely agree with him but I am less sanguine about the disruptive effect of the failure to pass the measures and about the legislature's ability to come up with a quick compromise solution (including borrowing). Though I am much less of a student of the state government than Fred is, so keep that in mind.

Economist's Notebook: Agglomeration Externalities

Agglomeration Externalities is the technical term of art economists use to describe the benefits non-participants get from other economic activities taking place nearby.  I have talked about them a lot in this blog, especially in conjunction with my advocacy for increased support for public education.  In the education example, an educated population not only increases individual productivity but also gives an extra boost to group productivity.  The empirical evidence has shown that, for example, cities with higher proportions of college graduates have higher productivity firms and pay higher real wages to those without a college education.  In other words, public investments in things like higher education benefit more than just the students themselves, but benefit the community as a whole.

Given the sorry state of Oregon's public investment in education then, it is interesting to read Mike Rogoway's article in The Oregonian on the flight of some high-tech start-ups from Portland.  Though not specifically tied to education, the theme is the lack of a critical mass of human capital - an example of agglomeration externalities.  Firms benefit from having that human capital surrounding them, not just from those they hire.  This contradicts those that think we don't need to invest in education because we can just import high productivity people.  But firms, especially small start-ups, find this difficult to do.  Young, talented and productive people in this fluid job market look for a community not just a single firm, as the likelihood that they will stay in one form for an extended period is small.  Add in things like the proximity of venture capital and the problem becomes even more acute.

The question then is what do you do?  Well, trying to manufacture a high-tech or a bio-tech sector is a fool's errand when you don't have the fundamentals in place, and one could argue (and I do) that the current paucity of high-tech human capital in Portland is a result of decades of underinvestment in education.  Unfortunately, those in government rarely think beyond dots that they can connect in four years or less, and so the emphasis is on new bio-tech districts, business energy tax credits and the like.  And voters, who gleefully pass measures like 5, 50 and the kicker need to accept that with limited government size can also come limited economic vitality. Sure government can be too big and can cause inefficiency, but we are no where near size that in Oregon.  Economic research has shown that government investments in human capital are vital for future economic prosperity and in Oregon we are no where near that size of investment either.

One final note, I think it is really time to stop talking about K-12 education and higher education in separate discussions.  In today's world the expectation should be that everyone should have access and be expected to complete a college degree.  Perhaps it is time to start talking about K-16.

Education, Part 2: Higher Ed

Finally, after many delays it is time to get off my duff and post the next installment of the education series that I have promised. Today I want to focus on Higher Ed and how the state should think about its investments in different types of higher ed. I am not suggesting there is a zero-sum game here (in fact the opposite is true, they are all strong complements), but there is often a debate about priorities in tight budget times, and it is useful them to think about objectives and how to effectively reach them.

This is a particularly good time to write about this as there have been a number of high profile pieces in the media about public higher ed in Oregon. Dave Sarasohn’s opinion piece in the Oregonian today is one, the OPB “Think Out Loud” two-part show with the presidents of EOU, OSU, PSU and UO is another (they don't seem to have a link to the second hour), and Tom Potiowsky’s address to the Portland City Club on Friday is a third.

So how should we think about higher ed and the growth of the state’s economy. Virtually no economist has thought about this more than Philipe Aghion of Harvard University. He started with theoretical work and has now moved into examining the theory with empirical evidence.

Like I did last time I am going to use one paper as a focal point. Aghion, et. al., "Exploiting States' Mistakes to Identify the Causal Impact of Higher Education on Growth." (The link is to the shorter version of the paper). The title refers to the fact that since we expect growth and investment in higher education to be correlated, so it is hard to isolate causal the link between investment in higher education and subsequent growth caused by that investment.

The essential message from his work is this – you can be a innovator or an imitator. Innovators drive economic growth and imitators play catch up. Silicon Valley is full of innovators, the Silicon Forest, I would argue is full of imitators. What Aghion argues is that if you want to be innovators - which we very much want to be in terms of green technology - then you must invest heavily in higher education, but not just higher education, graduate research universities.

There is another side of course, if you are not going to be at the frontier (and you can do pretty well being an imitator), then it is potentially wasteful to spend too much on this type of higher ed and you would do better investing in undergraduate only universities and community colleges. Please keep in mind that the latter are not unimportant even if you are an innovator, it is really about the question: should a state prioritize investments in graduate research universities? If you are an imitator state, the most bang for the buck in terms of growth effects of education spending is two and four year undergraduate education, but if a state is on the technological frontier then the biggest bang for the buck is in graduate research institutions.

There is also a positive feedback effect in that if a state establishes itself on the technological frontier it will get the benefit of in-migration of highly skilled individuals (and thus reap the benefit of out of state investments in human capital). It also exacerbates the difference between leader and follower states. So if you can become an innovation state, you get into a self-reinforcing cycle. This helps explain the long dominance of Silicon Valley (and California in general) in high tech.

Arguably Oregon has made large strides to establish itself on a few frontiers: there is no doubt that the Portland areas has become a place of in-migration of highly artistic and creative types and the city has established itself as a center for design and advertising. The state has tried to establish itself on the frontier of computer technology (the Silicon Forest) but success here has been minimal and it seems pretty easy to argue that in high tech the state is still in the imitator category (and the link with this and the underinvestment in higher ed is pretty clear – you can’t depend entirely on in-migration, you have to create talented people at home as well).

Through innovative statistical analysis the authors of the current paper find that a thousand dollars per person in additional spending on research universities raises a frontier state’s per-employee annual growth rate by 0.269 percentage points but only 0.093 if that state is an imitator state. Conversely a thousand dollars per person in additional spending on undergraduate education in four year colleges raises imitator states annual growth rates by 0.198 percentage points but innovator states growth by only 0.053. They also find that migration accounts for about half the difference between the frontier and far from the frontier states. [And, by the way, lest these seem small, remember with national annual growth rates of about 2.5% over the last 50 years, something that increases growth by a quarter or half a percent is a ten to twenty percent increase in growth rates – pretty huge and it is hard to imagine another investment as effective at doing this] And though the argument may be made that in tight budget times it is necessary to focus on K-12, it is worthwhile to remember that with good economic growth come the resources for future investments in K-12.

The message for Oregon seems clear: if we are serious about being an innovator state in green technology or anything else, we need to invest in its research universities. Tax breaks and inspiring speeches are not enough.

Economist's Notebook: Education, Part 1

This post will be the first in a series of posts in which I try and distill the frontier of economic research on education.  I have talked a lot about how, as a development economist, I think that a state like Oregon should spend heavily on education as human capital is perhaps the most important investment for future growth.  

But am I right that this translates directly to a high income country?  Is more money the solution or are there other things the state can do to improve the human capital accumulation of its children?  And, should the state focus more on K-12 or on higher education?  These are all questions that I realized I did not have good answers to, because I did not have enough knowledge of the latest evidence.  

So in a series of posts over the next few weeks, I hope to focus on some particular pieces of evidence from the economics literature.  Economists do not have all the answers, of course, and bring only one perspective, but economists are particularly good at examining data and teasing out causal links, so I don't claim these to be the last words, just starting points.  

So the first paper I want to introduce to the discussion tries to tackle the very difficult problem of assessing what matters for the quality of primary education.  The difficulty lies in the fact that since families choose to locate in areas in part because of the quality of the school district or a particular school itself, if we see variation in student achievement it is hard to tell whether it is the school that is causing the high levels of achievement or the families.  So, for example, we may see that one school spends twice as much per pupil than another school and has student achievement scores that are twice as high in the well funded school.  The question is whether it is the spending per pupil that is causing the high achievement or that the families of the kids in the better funded school are better educated, wealthier, etc.  Why this matters is that if we see a poor performing school, we might be tempted to say that increasing the per-pupil spending is the answer based on the evidence above.  But we just don't know.  

So how do you tackle this problem?  Well, Rivkin, Hanushek and Kain, in the March 2005 issue of the journal Econometrica use a unique data set from Texas that observes multiple cohorts of children as they move through grades 3 through 7.  This data set allows a very serious examination of some basic questions.  Do schools matter in the achievement of children, or is it all family and peer effects?  Do teachers matter?  Do observable things like class size, teacher education and teacher experience matter?  Finally, if these observables do matter how big are the effects (important if you want to know what to focus on)?   Though these are some pretty basic questions, answers to then have been elusive.  Why?  Well imagine you see that teachers with masters degrees seem to have better performing students than teachers with only bachelors degrees.  You might be tempted to conclude that this means that teachers with masters perform better in the classroom.  But it could be that talented students and their parents seek out such teachers (probably through seeking out well-funded schools that employ such well-qualified teachers in abundance).  Also schools themselves sort teachers and students and often match well performing students to the well-qualified teachers and therefore create a self-fulfilling prophecy.  

How does this data help overcome this problem?  Well by seeing how individual students do through repeated observations over a number of years and by seeing how different groups of students perform in the same teacher's classroom allows an econometrician to control for student heterogeneity and the non-random matching of students and teachers.  Students may have many things that make them better students that are not observable (drive, diligence, intelligence, etc.) but by looking only at individual students through the course of their studies you can effectively control for the effects of these unobservables.  Ditto the non-random matching of students (as long as the policy remains the same through the time of the data).  

So what do they find?  Well, teacher quality is incredibly important.  In fact they find that exposure to high quality instruction can largely offset the disadvantages associated with low socioeconomic background.  However, the quality of teachers is NOT related to their academic background: teachers with masters were not systematically better than those without.  Also, after the initial years in the profession, experience was not related to achievement.  These results help explain a puzzle in the education literature: it is believed that teachers are incredibly important but when we look at things like education and experience of teachers they seem unrelated to student achievement.  So it is true that they are incredibly important, but education and experience are not what characterizes a good teacher. [This poses another puzzle for those who believe in the Spence signaling model, but that is another story...] 

They also find that smaller class sizes do matter, but not as much as teacher quality.  Class size matters most in earlier grades, but other school resources have little to no measurable effect. In other words increased spending on schools seems to matter through the smaller class sizes and in teacher quality, but not in teacher credentials and in other school amenities.  

This research created a policy puzzle, if good teachers cannot be easily identified by their credentials or experience how do you figure out who the good ones are?  It appears that to a large degree, you have to learn their quality by hiring them and observing them.  This argues for considerable flexibility in schools' ability to hire and fire teachers, especially in the first few years of their employment.   Being able to effectively identify the talented teachers and retain them seems to be the first-best solution, but after that, reducing class size seems to be the best way to spend money on student achievement.  I am having a hard time locating recent data on state-by-state comparisons of average class sizes, but the data I can find from the 90s places Oregon near the bottom of all states in terms of class size.  

In the next post in this series, I will look at higher education. 

NOTE: I have updates this post with a link to the article

Higher Education: So Suddenly You Don't Believe in Markets?

I came across this piece in Investor's Business Daily by Alex Tabarrok (of Marginal Revolution fame) in which he argues that there are too many arts and humanities graduates and too few science, technology, engineering and math graduates (STEM). [See also this blog post]

Here is a taste:

If students aren't studying science, technology, engineering and math, what are they studying? In 2009 the U.S. graduated 89,140 students in the visual and performing arts, more than in computer science, math and chemical engineering combined and more than double the number of visual and performing arts graduates in 1985.

The story is the same in psychology, which graduates about 95,000 students a year, more than double the number of 25 years ago and far in excess of the number of available jobs.

***

There is nothing wrong with the arts, psychology and journalism, but graduates in these fields have lower wages and are less likely to find work in their fields than graduates in science and math.

As a result, more than half of all humanities graduates end up in jobs that don't require college degrees. Baggage porters and bellhops don't need college degrees, but in 2008 17.4% of them had at least a bachelor's degree and 45% had some college education. Mail carriers don't need a college education, but in 2008 14% had at least a bachelor's degree and 61% had some college education.

Not surprisingly, these graduates don't get much of a financial "bonus" from college. A college graduate in the humanities who finds a job requiring a college degree had median annual earnings in 2009 of $21,000. For those who ended up in jobs not requiring a college degree, the median was just $14,000.

So the obvious question here - especially since the author is a conservative economist pre-disposed to believe in the efficiency of markets - is: what is the market failure here?  The incentives to go into STEM are clear, the disincentives to go into these other fields are also clear and yet student freely choose them.  Clearly, there is more to a college degree than just how it pays off in the labor market in terms of salary.  The fact that many people choose them suggests that there are sizeable non-pecuniary benefits to these degrees.  If you believe in markets, then, you should see these stats as equilibrium and evidence of the efficient distribution of degrees across the population. And if a letter carrier's life is enriched by a college degree, then it is not the economist's place to judge - preferences are personal.

But Tabarrok next makes a different and more compelling argument: if the social returns to education are much higher in STEM than in other fields, why don't we subsidize them more?

Moreover, arts, psychology and journalism graduates are less likely to create the kinds of innovations that drive economic growth.

Economic growth is not a magic totem to which all else must bow, but it is one of the main reasons we subsidize higher education.

The potential wage gains for college graduates go to the graduates — that's reason enough for students to pursue a college education. We add subsidies to the mix, however, because we believe education has positive spillover benefits that flow to society. One of the biggest of these benefits is the increase in innovation that highly educated workers bring to the economy.

As a result, an argument can be made for subsidizing students in fields with potentially large spillovers, such as microbiology, chemical engineering, nuclear physics and computer science. There is little justification for subsidizing majors in the visual arts, psychology and journalism.

I am not sure there is good evidence to support the conclusion that the social returns to education are that much higher in STEM than in other fields.  Obviously the private returns are higher, one needs only to look at the salaries quoted in the article, but the social returns are another matter.  One could make quite a strong argument (and I do) that fields like journalism provide a social return per dollar that is much higher than STEM through the watchdog role they play that limits corruption and other social inefficiencies.  Similar arguments for psychologists, artists, librarians and the like are easy to make: in fact it is quite easy to imagine that society reaps huge benefits from those that are willing to accept relative low wages to take these roles.

Finally, I don't think it is at all correct to say we subsidize these fields equally.  There are huge government investments in STEM through research support that don't exist to remotely the same degree in arts, humanities and social sciences.  This support filters down to fund graduate and even some undergraduate students as well as create capacity for more undergraduates.  It takes a lot more infrastructure to train a STEM student (well, perhaps not math) as well, so the costs are higher but tuitions are the same in general no matter your field - which is the same as an extra subsidy.

Which is all to say that I buy none of it.  Students should know the facts about the job market post-college (and my experience is that they do), and then make the individual choice about major that makes them the most satisfied given that knowledge.

Is Oregon a Business Friendly State?

Yes, according to CNBC. Oregon comes in #18 in their rankling of states, and it would be higher if not for the terrible state of the state's economy and the horrendous state of the state education system. It is 20th in 'cost of doing business', 16th in 'access to capital' and 26th in 'business friendliness', 19th in 'technology and innovation' and 14th in 'transportation and infrastructure'.

What is troubling, however, is that the ranking of the state's education system has dropped from an already bad 29th in 2008 to 37th in 2009. And the fact that this is included in a "Top States for Business" ranking shows just how much education is important for business and the economy - not just for individuals.

Here is what CNBC has to say about education:

Education and business go hand in hand. Not only do companies want to draw from an educated pool of workers, they want to offer their employees a great place to raise a family. Higher education institutions offer companies a source to recruit new talent, as well as a partner in research and development. We looked at traditional measures of K-12 education including test scores, class size and spending.

And here are the education rankings. Hey, at least we are not Mississippi....yet.

Education, Part 3: Education and Economic Growth

I am trying to find the time to give this outstanding book its due: "The Race Between Education and Technology" by Harvard economists Claudia Goldin and Larry Katz. Unfortunately, I am not done with it and the library (or more accurately Eastern Washington University's library) wants it back. So I have finally decided to spend the money and order it. As I await the arrival of my own copy, I can talk about the parts that I have read carefully. I did one snippet a couple of days ago and here is another one.

Above is a key table that speaks to the relationship between education and growth (is this acceptable fair use - can someone tell me?). This is a growth accounting that looks at increases in educational attainment and their effect on employment and productivity.

How to interpret this table? Well, column one is the measure of productivity growth (output per hour) and column two is the change in educational productivity. For column three, I'll let the authors say the punch line: "Thus, education directly contributed an average of 0.34 percentage points a year to to economic growth...[emphasis theirs]" They go on the say that between 1960 and 1980 the contribution of educational advancement to labor productivity growth was 0.59 percent per year but then sharply declined to 0.37 per year. This matches the general observation that there was great advancement in the educational attainment of Americans post WWII, but a steep fall off in the eighties and nineties (as can be seen in column 4).

So, are these numbers big or small? Well, when average growth rates of high income countries are a little above 2%, a bump of 0.34 percentage points is a 17% increase in growth. So these numbers are pretty huge.

What I really want to discuss here at length is their treatment of the future of education and technology and how a state like Oregon should view education as a part of its economic (as opposed to social) strategy. Soon - the taxpayers of Oregon are paying part of my salary not to blog but to teach research and assist in the operation of OSU, and the tuition paying students of OSU are always my top priority. So blogging has to take a back seat.

Oregon Business Taxes - A Comparison

The talk of the effects of the tax measure on business location goes on and speculation about businesses fleeing continues to crop up - something I blogged about not too long ago.  So it is interesting to see a new Ernst & Young report, commissioned by the Council on State Taxation.  In it, they do an interesting thing, try and see how much businesses play in a state relative to what they receive in state services.  Here is their description:

An Alternative Measure of Business Taxation

This study provides estimates of the taxes paid by businesses in each state, an important first step in any evaluation of short-run business tax changes or longer-run tax reform. To enable comparisons across states, the study also expresses business taxes as an effective tax rate on private sector economic activity (taxes as a share of gross state product).

...

The basic rationale for business taxes, recognizing that the economic burden of business taxes are ultimately borne by consumers or owners of factors of production (including workers), is to pay for government services that directly benefit businesses. This section provides a comparison of business taxes to these benefits in each state.

If state and local business taxes were equal to the value of the benefits business received from state and local public services, they could be considered a payment for services and taxes would not influence business location decisions or impact competitiveness. However, if state and local business taxes exceed the value of the benefits received from government services, the difference represents an excess cost to business that will reduce profitability in the absence of shifting the tax through higher prices or lower payments to labor. When such excess costs exist, they can affect a company’s choice of locations.

To estimate these excess costs, the estimates begin with state-by- state estimates of state and local spending that directly benefits business, which were developed by economists at the Federal Reserve Bank of Chicago with an adjustment to the education spending component to reflect the uncertainty about who benefi ts from education expenditures, business or households. Due to the large expenditures for education in every state, the ratio of business taxes to government expenditures for services benefiting business is sensitive to assumptions about who benefits from public spending for education. The estimates presented in this study present a range of estimates, assuming that 0%, 25% or 50% of education expenditures directly benefit business.

In nearly every state, the business tax burden exceeds the value of government services that
directly benefit business, regardless of the assumption made about education spending.

Except, of course, for Oregon which offers businesses one of the best values for money of any state in the Union. Only Maryland and Nevada offer a better ratio. Here is the figure (this is tax-benefit ratio, so lower numbers mean more benefits per tax dollar):

The darker bar assumes that businesses receive about 50% of the benefits of education expenditure.  This seems reasonable to me-educated people make up the workforce.  In this metric businesses recieve more in the value of the services provided to them by the state than they pay in taxes.

And what of business taxes overall?  Well Ernst & Young measured total business tax as a percentage of Gross State Product (GSP) - the value of all the goods and services produced in the state - and found that Oregon is in a three way tie for the lowest in the country.  So according to E&Y we have the lowest business tax burden in the country (Delaware and N Carolina are the other two):

Now, these figures are for fiscal year 2009, so Oregon's relative position will slip but, at least according to E&Y, we have one of the most business friendly tax structures in the US.

Economist's Notebook: Cost Disease

The Oregonian reports today on a new survey that shows that Americans are becoming more are more skeptical that colleges and universities are "cost-effective and doing all they can to keep tuition affordable."

Unfortunately, this skepticism starts to make Americans question the wisdom of investing in a college degree at the very time that the rewards have never been greater. Given my recent post on agglomeration externalities, this is a troubling trend as individuals personal education decisions affect the overall prosperity of the communities in which they reside.

Part of the problem is the failure of economists to explain the phenomenon of cost disease.  And part of the reason for this failure is that it is a hard concept to explain (as I found out last night at the end of four straight hours of teaching and trying to explain the concept off the cuff).

You see, the cost of a university education rising faster than inflation is not evidence of profligacy on the part of administrators, but a natural byproduct of the fact that the production of knowledge is not terribly more efficient today than 100 or 200 years ago.  And this makes universities among a minority of industries where productivity gains have been very slow.  What this means is that in order to maintain a staff of professors they have to compete with industries that have seen vast productivity gains over the years and so salaries (which account for most of the cost of delivering a university education) have risen as well.

So what you see in the end is that the cost of a college education rises faster than inflation because inflation is a measure of the price of a basket of goods, many of which are produced more productively each year.  Thus what you have to give up (the opportunity cost) of a college education therefore increases.

This idea was first proposed by William Baumol, who called it cost disease, and in the original telling he used an example of musicians performing a Mozart concerto as a classic case of an industry that is absolutely no more productive than hundreds of years ago.

James Surowiecki in The New Yorker a few years back had a very nice explanation that incorporates the musician example:

...And then there’s college: tuitions at private colleges have jumped 5.6 per cent annually over the past three years, according to the College Board, and public colleges are even worse. In times like these, it’s hard to get worked up about deflation.

Why the divergence? It may have something to do with Mozart. When Mozart composed his String Quintet in G Minor (K. 516), in 1787, you needed five people to perform it—two violinists, two violists, and a cellist. Today, you still need five people, and, unless they play really fast, they take about as long to perform it as musicians did two centuries ago. So much for progress.

An economist would say that the productivity of classical musicians has not improved over time, and in this regard the musicians aren’t alone. In a number of industries, workers produce about as much per hour as they did a decade or two ago. The average college professor can’t grade papers or give lectures any faster today than he did in the early nineties. It takes a waiter just as long to serve a meal, and a car-repair guy just as long to fix a radiator hose.

The rest of the American economy functions differently. In most businesses, workers are continually getting more productive and can produce a lot more per hour than they could ten or twenty years ago. In 1979, workers at G.M. needed forty-one hours to assemble a car. Today, they need just twenty-four. In the nineties, according to the consulting firm McKinsey & Company, retailers boosted their sales per hour by sixty per cent, and that was nothing compared with computer makers, whose productivity since 1995 has gone up sixty per cent each year. Because companies are producing more for less, they can hold down costs, and when times are good they can raise wages without hiking prices. So, in the late nineties, as productivity rose, wages did, too, though inflation lay dormant.

Generally, productivity growth is a boon, but it creates problems for non-productive enterprises like classical music, education, and car repair: to keep luring talent, they have to increase wages, or else people eventually migrate to businesses that pay better. Instead of becoming nurses or mechanics, they become telecom engineers or machinists. That’s why teachers are getting paid a lot more than they were twenty years ago. (The average salary for an associate college professor has risen almost seventy per cent since the early eighties, and that’s if you adjust for inflation.) To pay those wages, schools and hospitals have to raise prices. The result is that in industries where productivity is flat costs and prices keep going up. Economists call this phenomenon “Baumol’s cost disease,” after William Baumol, the N.Y.U. economist who first made the diagnosis, using the Mozart analogy, in the sixties. As anyone with kids knows, cost disease is alive and well. A recent study by the economists Jack Triplett and Barry Bosworth demonstrates that among the service businesses that have been least productive in recent years you’ll find education, insurance, health care, and entertainment. These are the ones that have seen steep price hikes.

.........

Cost disease isn’t anyone’s fault. (That’s why it’s called a disease.) It’s just endemic to businesses that are labor-intensive. Colleges, for example, could do many things more efficiently, but, since their biggest expense is labor, the only way to reduce costs is either to increase the number of students each professor teaches or to outsource the work to poorly paid adjuncts. The same goes for health care: you can control drug costs and limit expensive new procedures, but, when it comes to, say, hospital care and doctor visits, the only way to improve productivity is to shrink the size of the staff and have doctors spend less time with patients (or treat several patients at once). Thus the Hobson’s choice: to lower prices you have to lower quality.

Once upon a time, economists worried that cost disease would wreck the economy, as services started to eat up more and more of people’s budgets. But the evidence now suggests that it can be contained. As long as the productive industries keep growing quickly enough to offset the sluggards, the economy as a whole can stay in good shape. The most significant consequence of Baumol’s cost disease, in fact, may be political, rather than economic. Some of the most important services that the government provides—education, law enforcement, health care—are the hardest to make more productive. To keep providing the same quality of services, then, government has to get more expensive. People pay more in taxes and don’t get more in return, which makes it look as though the public sector, at least compared with the private sector, is inept and bloated. But it could be that the government is merely stuck in inherently low-productivity-growth businesses. It’s not inefficient. It’s just got a bad case of Baumol’s.

Which is the point. Yes, college is more expensive in that you have to give up more and better consumption goods to get it. But overall consumption and standard of living has gone up as well, so we are still better off. And the rewards to a college education in the adult labor market and very large and growing, so it is still, despite the cost increases, a good deal.

And, as a bonus, here is a nice application of cost disease to healthcare from The New York Times.

Argentina Then and Now

Buenos Aires immediately strikes the visitor as a city of great wealth and opulence whose fortunes have faded badly. The beautiful architecture of the old buildings resemble Paris at its best, the the crumbling infrastructure serves as a constant reminder of the economic reality of modern Argentina.

And Argentina was once quite wealthy in world terms and Buenos Aires was a cosmopolitan world capital. So what happened? Why has Argentina floundered while a place like the United States has prospered. Both were vast fertile countries with ample natural resources, both had large immigrant populations who came looking for work and prosperity. But the 2oth century has seen a massive divergence in the economic fortunes of the two countries.

In The Economix blog at The New York Times, Ed Glaeser givies his take:

What Happened to Argentina?
By EDWARD L. GLAESER

A century ago, there were only seven countries in the world that were more prosperous than Argentina (Belgium, Switzerland, Britain and four former English colonies including the United States), according to Angus Maddison’s historic incomes database. In 1909, per capita income in Argentina was 50 percent higher than in Italy, 180 percent higher than Japan, and almost five times higher than in neighboring Brazil. Over the course of the 20th century, Argentina’s relative standing in world incomes fell sharply. By 2000, Argentina’s income was less than half that of Italy or Japan.

The chart below shows the relationship between income in 1909 and income in 2000 in 1990 dollars, and Argentina is the extreme outlier. The gap between 2000 income and predicted economic success, based on 1909 income, is larger for Argentina than for any other country.

Why did that once-wealthy nation do so poorly?



In its pre-World War I heyday, Argentina thrived as a trading giant shipping beef and grain abroad. After World War II, formerly poor countries including Japan, Korea and Italy followed an export-led model to wealth. A combination of external shocks (two world wars and the Great Depression) and protectionism caused Argentina to turn inward.

Peronism was not only protectionist, but it also favored large state enterprises and significant regulation of the economy. Neither strategy has been particularly good for growth. Argentina’s inbred banking system has historically had trouble weathering severe shocks. Decades of political instability have made property rights insecure and investment unattractive.

Argentina was cursed with bad policies that bear much of the blame for the country’s problems, but why was Argentina’s public sector so problematic?

Those bad policies weren’t just bad luck. To understand Argentina’s political problems during the 20th century, we must look back to the Belle Epoque, and try to understand why, despite its wealth, Argentina was different from other wealthy countries, like the United States.

In a recent paper, Felipe Campante and I have taken an urban perspective on Argentine exceptionalism and compared Buenos Aires and Chicago in 1900.

In many ways, the two cities are strikingly similar. Chicago grew great in the 19th century as a conduit for the agricultural wealth of the American hinterland. In 1816, it cost as much to move goods 32 miles over land as to ship across the Atlantic. The enormous costs of shipping by land caused America’s population to perch on the Eastern Seaboard, dependent on an Atlantic lifeline. Over the 1800s, a great transportation network of canals and rails makes America’s rich farmland accessible. Cities like Chicago grew as the nodes of that network.

Chicago’s fortune was made by two canals, the Erie Canal and the Illinois and Michigan Canal, which turned Chicago into the linchpin on a great watery arc that runs from New York to New Orleans. Railroads complemented the waterways and enabled the rich farmland of Iowa to ships its corn, in porcine form, to eastern markets via Chicago. Chicago’s most famous 19th century industry was its stockyards, which thrived because of refrigerated rail cars that shipped slaughtered beef back east. Clothing employed even more Chicagoans, who were making garments for thousands of rural customers, supplied by Marshall Field, Montgomery Ward and Sears, Roebuck.

The story of Buenos Aires is broadly similar. Like Chicago, the city was surrounded by a vast, fertile hinterland. Buenos Aires grew as a center for transporting agricultural products east. The frigorificos, refrigerated ships, greatly increased its ability to ship beef. Clothing was also Buenos Aires’s largest industry.

But there were also major dissimilarities between the two places.

Chicago was substantially wealthier, even a century ago. Capital per worker was more than twice higher in the Windy City. Chicago was a seedbed of technological innovations, including the skyscraper, the zipper and the electric washing machine. Buenos Aires’s entrepreneurs, such as the industrious Torcuato DiTella, often succeeded by importing American technologies, as DiTella did with gas pumps and refrigerators.

The greater levels of technological innovation in Chicago probably reflected the higher levels of education in the United States. Throughout the 19th century, Chicago was almost completely literate, because the rural migrants who came to the city had been well educated in the common schools that dotted America’s farmland. By contrast, more than a fifth of Buenos Aires’s population was illiterate until 1900, reflecting the far lower levels of education in rural Argentina.

As the next figure shows, no variable from 1900 better explains success in 2000 than investment in education.



Schooling is measured by the share of the relevant populations that was enrolled in primary, secondary or tertiary schooling. Argentina may have been rich, but it was not that well-educated. In 2000, Argentina was doing about as well as would be expected based on its education levels in 1900. Long-run national success is built on human capital, both because of the link between schooling and technology and because of the link between education and well-functioning democracy.

I will return to this link, and to the puzzle of Argentine exceptionalism, in a future post.

This is why I say often these days that as a development economist the first advice we always give to developing countries is to invest in the human capital of the population and the first step is education, so it is striking to see the level of disinvestment in education, and especially higher education that is happening currently.

And as an aside, the institution that hosted the conference I just returned from was Universidad Torcuato Di Tella, which, despite its name, is brand new.

Anyway, I wonder where the US is headed in the 21st century and if in the 22nd, economists will write about the US and China and how divergent their economic growth paths became.

Should Universities Re-Imagine Themselves?

A reader asks for my take on this opinion piece that appeared in The New York Times on the 26^th of April. The essence of the piece is that the old organizational structure of the university based on disciplinary integrity is outdated and we should move to an interdisciplinary model driven by important questions. It is written by a religion professor at Columbia University.

There are three main points I want to make. The first is the flaw of logic that is so large you could drive a cruise ship through it. This is the assertion that we need to break down the old disciplinary groupings and focus instead on cross-disciplinary problems. Religious studies scholars should talk to political scientists, for example, to solve the religiously motivated political tensions that exist in the world. The problem here is: where do the religious studies experts and political science experts come from so that they can get together and solve all the worlds problems? Without training in traditional disciplinary programs, there is no expertise, no canonical education that produces precisely the type of expert that Prof. Taylor speaks of. Without the discipline-based education what you would get are students who are knowledgeable in many things but experts in nothing. This is a huge distinction that is lost on many people. As a public policy student I became very knowledgeable and could have been a very useful member of society in applying that knowledge. But it was in the core economics education I received that gives me the expertise to apply economics to public policy questions. It is people like me, in other words, that create the knowledge that the generalists use. I think an inevitable result of breaking down discipline specific programs would be the prevalence of ‘good sounding ideas’ but no real way to study just how good they really are.

This leads to the second point. It may be that religious studies students are studying things of no real use, but this is a problem of religious studies not academics in general. I have a hard time thinking of any research in economics that is not directly relevant and valuable to contemporary real world problems. In fact, economics is often accused of straying too far into other disciplines so you might think we are eager to see these lines blur, but this is wrong. Without the intense core economics education such intrusions in other fields would be useless, it is precisely the economists eye on a psychological problem that adds value (and a psychologists eye on economics as well). Rather than blaming academia as a whole for the failings of religious studies, Prof. Taylor, the chair of the religion department at Columbia, should be focusing on why his own discipline has been so stuck in medieval ways.

The last point is that economics has already responded to the changing marketplace for higher education and research (which is perhaps why economics is so successful). Our dissertations today look nothing like those of medieval dissertations or economics dissertations of thirty years ago. Economics has become flexible and our dissertations are usually just bundles of papers on diverse topics because this avoids precisely the sub-sub field problem described by Prof. Taylor. Our graduates are in high demand and not just for academic jobs, but in government, business, consulting, banking and even journalism. Clearly the training and expertise we provide have a high value precisely because of how applicable they are to real world problems.

Two other more minor points also need to be made. First Prof. Taylor argues for an end to tenure, but without tenure, the incentive is to avoid researching the hard questions and rather focus on areas that are popular, have good funding and are easy to publish in. This is not what you want out of university scholars. Tenure is not job security for life, but it does represent intellectual freedom. It does have incentive problems but the alternative is not attractive. [And, as pointed out on this blog before, tenure is a part of compensation, without it you would likely have to increase faculty pay]

Second, as is pretty clear from my comments, think Prof. Taylor is startlingly myopic – unable to see past the problems of his own field - but yet he is quite ready to generalize his problems to the entire academy. For instance, teaching via teleconference might be effective when you are just delivering a long speech on say, early Christian thought, but trying to teach economics that way is unlikely to be successful as there is a lot you have to do to build mathematical models, draw the resulting graphs, perturb them to make predictions and quiz student to make sure they get it. There is a lot of value added to being in the same room, not to mention all the help faculty provide outside of class.

All of the problems he lists are really problems of fields like religious studies where, essentially, the problem is lack of jobs. Clearly the presence of PhD students for whom there are no jobs in his department is what motivates Prof. Taylor to write this. It can be read as a desperate attempt to say, "religious studies PhDs really are valuable, it is just that the old structure devalues them!" So the answer is: they should be hired by political science departments... But it is not the structure of higher education that has devalues religious studies, but religious studies as a field itself that has done it. If the important questions are about religion and politics, that is where the field should place emphasis.

Fortunately, economics is very responsive to markets and remains a valuable field both in and out of the academy. Almost all economics PhDs in the US have a job in their field within a year of getting their degree. As I have mentioned before, university graduates earn wages that are about 75% higher on average than high school graduates, so universities must be doing something right. But Prof. Taylor never mentions undergraduate education, funny that...

Are Agglomeration Externalities Antithetical to Conservative Ideology?

A fascinating blog post by Felix Salmon yesterday got me thinking about the intersection of economics and politics in a new way.

[T]wo of the biggest and most daunting long-term problems facing the US economy are (1) the fact that Americans aren’t as well educated as their counterparts elsewhere in the world; and (2) the fast-growing obesity epidemic.

Both of these problems are caused, in large part, by America’s very high levels of child poverty.

So if you fix the child-poverty problem, you’ve made a serious dent in both the education problem and the obesity problem.

What’s more, the child-poverty problem really is one of those problems which can be fixed quite easily just by throwing money at it. Give enough money to children in poverty, and they’re not poor any more. Problem solved — at least to a first approximation.

***

Is there a conservative way of addressing such issues? I don’t think there is — I think that conservatives will simply say that questions of education and nutrition are a matter of individual choice, and that the government should not concern itself with such things. But if we continue down that road, I fear that the unemployable underclass will only continue to grow. And that anger at the powers that be — whether it comes from the Tea Party or from Occupy Wall Street — will only continue to grow along with it.

What Felix is talking about here is essentially an externality problem, what we in economics call agglomeration externalities. The easiest way to explain is to talk about what is perhaps the most common one: education. The idea is that the more educated people there are in a society the more society benefits as a whole. So an individual's education not only benefits themselves but also has an added benefit to the society as a whole.  We call this social returns to education.

Health problems are another potential example: sick people create a drag on both productivity as well as on the health care system which, in turn, creates a drag on the economy.

Assuming these types of externalities exist, they create a role for government to help promote the activities with positive externalities and restrict the activities with negative externalities.  And indeed governments do: we build bike lanes and tax cigarettes for example.

Whether such agglomeration externalities exist is a question that becomes political for these very reasons.  I recently had a editor of a top journal reject a paper for assuming social returns to education.  I had defended the assumption with what I thought was a pretty convincing set of empirical studies, but his conclusion was that the verdict had been decided the other way. I am not sure his judgement was a political one, but perhaps - he was from a certain school that has become synonymous with conservative economics.

But what Salmon makes me wonder is if the very idea of agglomeration externalities is somehow incongruous with the whole individualist philosophy of some conservatives.

I don't really have an answer here, just a question: suppose that for some activity agglomeration externalities are real, positive and large for economic growth - does this mean necessarily that government should be involved with actively promoting the activity?  And if so, does this undermine the idea of individual self-determination in favor of collective action?

Why Study Economics?

As an undergraduate at a small liberal arts college (Lewis & Clark), I studied economics.  I am very glad I did, but when I think back about the things my undergraduate education provided me that I find particularly valuable today, it has little to do with the specific economics content and more to do with the well-rounded liberal arts education in general.  First and foremost, the amount of writing I had to throughout my undergraduate career was invaluable.  As I progressed through graduate school at Wisconsin and then Cornell, I found that my comparative advantage in writing was pronounced and helped me succeed.  As a research economist, I have come to appreciate that, now matter how good the underlying research is, a research paper is only as good as the writing.

I also appreciate the exposure I got to many different ways of viewing the world.  L&C at the time had a core curriculum that emphasized critical thinking and I took courses in many different subjects that forced me to first understand how each discipline analyzed the world and then think critically about this particular way of looking at the world.  These writing and critical thinking skills formed the bedrock of my education, without which subsequent investments in my education would have been worth a lot less.

But that doesn't mean I regret being an economics major, in fact the opposite it true.  In addition to being a subject that interested me, Economics taught me to think logically and precisely.  When I started to focus on international development, I appreciated this level of intellectual rigor for a subject where there was an endless supply of 'good ideas' but a dearth of critical analysis.

This is all to say that I think this article in the Chronicle of Higher Education by David Colander about the popularity of the economics major at liberal arts colleges has it just right. [HT: Greg Mankiw]  In it Colander makes this statement:

Companies like to hire economics majors from liberal-arts colleges not because the students have been trained in business, but because they have a solid background in the liberal arts. What I hear from businesspeople is that they don't care what a job candidate has majored in. They want students who can think, communicate orally, write, and solve problems, and who are comfortable with quantitative analysis. They do not expect colleges to provide students with specific training in business skills.

I try and tell my OSU students this, but most choose Business anyway as they see it as a more useful major and a lot easier.  It is true that the econ major is hard, at my last job the economics department had the second lowest GPA in its classes (Physics had the lowest), but for me as a student this was part of the point.  I was intimidated by it but I wanted to challenge myself as an undergraduate and I think this too served me very well - it forced me to become a much better student which helped me a lot in graduate school.  Colander's research shows that rigor is a motivation for other students as well.

Consider the results of another question in my survey. We asked economics students to identify majors as hard, moderate, or easy, and we found that 33 percent viewed economics as hard, 3 percent said sociology was hard, 7 percent saw psychology as hard, and 13 percent thought political science was hard. Since other social sciences were the primary alternative majors that most of the economics students considered, that data is compelling evidence that the respondents perceived those other majors as too easy. Students likely reasoned that taking a "too easy" major would signal to potential employers that the student had chosen an easy path through college, thereby hurting their chances of being hired.

In my current job I see students that consistently eschew hard courses and majors for what they deem as more practical and more marketable alternatives.  This is part of what I perceive as a general moving away from the liberal arts based undergraduate education to a more vocational approach at large state universities.  I think we need to do a better job informing the students that this may not be the best long-term strategy and that basic skills in writing and math are incredibly valuable assets that you keep with you your entire life - especially as the economy evolves and the vocation you trained for as an undergraduate may not be there for you in the future.

What is the Education Stability Fund For?

This is, by almost any measure, the worst economic recession since the great depression. The recession has hit Oregon public schools particularly hard, given their dependence on the state's general fund and the general fund's dependence on income taxes. Because of the volatile nature of education funding in the state, the Education Stability Fund (ESF) was created to help cushion the blow to schools from economic downturns.

Given all that, why are legislators so reticent to spend all of the ESF? Why create a fund you are reluctant to use at the very moment it was designed for?  Here is The Oregonian's Kimberly Melton on recent developments in the state legislature:

In recent weeks, there is growing legislative support for giving K-12 schools some additional money, likely $50 million to $100 million from the education reserves. In everyday terms, that money could pay for up to 1,100 teachers or a full week of school for all students in the state.

In March, the co-chairs of the Joint Committee on Ways and Means recommended a $5.7 billion budget for K-12 schools, but said they would consider an additional $56 million for 2012-13 if the economy improves. But advocates haven't given up, saying that money is needed immediately to help blunt devastating reductions.

Their goal is still the additional $100 million they asked for initially, but as end-of-session negotiations intensify, many say $56 million is turning into viable middle ground that could help meet a variety of needs. The $56 million figure would give schools the same amount that they received for 2009-11.

I honestly don't understand the thinking behind not spending all you can. Research shows that temporary disruptions, such as large classes, even for just a year or two have long lasting impacts on student performance. The economy is recovering (albeit painfully slowly) so it is unlikely we'll need the ESF in the near future - but students are suffering now.

The state's Education Stability Fund is intended to help buffer schools during an economic recession. Three-fifths of each legislative chamber must approve any action to remove any of that money -- expected to grow to $300 million over the next two years. State legislators can tap the fund only in times of economic crisis or if the governor declares an emergency. As the state revenue forecasts begin to improve, some advocates fear that lawmakers will not be able to make those funds available during next year's session, as they originally intended.

"I think everyone can agree that there's at least $56 million available for K-12," said Democratic Majority leader Dave Hunt. "It's in the Education Stability Fund. Do we leave it under a mattress or invest it in our kids? I think that's an easy choice."

Indeed, but why only $56 million?

School Choice and Efficiency: A Note

The nomination by Donald Trump of Betsy DeVos for Education secretary has put school choice and vouchers back in the forefront of the national debate about school reform.  Vouchers are often touted by more conservative groups as a way to bring competitive pressures and market discipline to education by empowering families to make choices regarding their children's education.

This is simply a note to point out that a key, even crucial, component of market efficiency is complete information.  Consumers must know everything about the product they are purchasing including hoe beneficial it is to themselves, the prices of all goods in the market and so on.

Education is far from this.  Education experts are still trying to figure out the critical components of educational outcomes, how can uninformed families, who only observe schools from the tousled make well-informed decisions for their kids?  Simply put, they can't.  Thus there is absolutely known reason to believe that we will improve efficiency through the introduction of vouchers, school choice or charter schools.

This is not to say that there could not be beneficial outcomes from such reforms, I remain open-minded, but don't tout the creation of an education market as the answer for it is likely to be inefficient.  

Sigh

Saying it is sure to lose, Oregon quits contest for federal school innovation money

By Betsy Hammond, The Oregonian

Oregon dropped out of competition for a federal Race to the Top school innovation grant Tuesday because the state is too far behind the rest of the pack to have a shot at winning, Oregon Gov. Ted Kulongoski said Tuesday.

Oregon needs to go back to the drawing board on basics such as how to turn around chronically low-performing schools and how to include student achievement growth when evaluating teachers and principals, he said.

What's more, Kulongoski said, Oregon's nearly 200 district school district superintendents and teachers unions aren't interested in gunning for the federal grant, which could have brought $175 million to Oregon but would have required big changes, including more state say over schools.

Nearly 7 1/2 years into his eight years as the state's top official, the governor now says he will convene a group of education advocates and other interested leaders to craft a package of school reform policies for the 2011 Legislature to act on.

"Simply put, Oregon needs to build a stronger foundation for K-12 reform," he wrote in a letter to U.S. Education Secretary Arne Duncan to announce that Oregon has quit the federal contest.

Oregon was one of 40 states that applied in the first round of competition for a share of $4 billion in federal funding. States had to show they have already improved student achievement and offer specific plans to fix low-achieving schools, raise academic standards, use data to improve instruction, and strengthen teacher evaluation.

Oregon's proposal, written by more than 100 educators and school advocates after months of work, was graded seventh worst. The state was judged to have some strong areas, but the application was deemed vague and the state's progress to date too tepid. The state was dinged for having too little authority over low-performing schools, and raters weren't convinced that student growth would be used to help evaluate and reward teachers.

...

Becca Uherbelau, spokeswoman for the state teachers union, the Oregon Education Association, said dropping out was smart because Race to the Top officials wanted a cookie-cutter reform plan that didn't fit Oregon.

But she said the collaboration among public school leaders, universities, state officials and others to design the state's application was a healthy development that will continue.

"Oregon is in a good place to move forward and improve achievement for all students because of that collaborative partnership and coming together," she said. "We remain committed to working together to develop sound education policy," which should revolve primarily around better funding for schools."

Sue Levin, executive director of Stand for Children, a school advocacy group made up mainly of parents, said Oregon's decision not to apply the decision was a "sad" acknowledgment of how little the state has done to improve education.

"Oregonians are still in denial about the troubles of our educational system," Levin said. "In other states, either the governor or the state superintendent of public instruction or legislative leaders are serious, committed champions for education reform who have decided that is going to be their issue and they are going to tackle it. That hasn't been the case in Oregon since the 1990s. Absent that ... you can't just whip it up in three months.

"Hopefully this is a call to action for Oregon parents," Levin said. "I think there are folks around this state who are ready to have the difficult conversations, and they are going to be difficult conversations, about how we are going to educate all our children."

I don't think they want cookie cutter reforms but want evidence-based policy: so they want states to collect and analyze data, create real performance measures and have in place incentive mechanisms to encourage good teachers, schools and districts. Not all of this is easy, nor is the evaluation mechanism obvious and so on, but to give up is unforgivable.

Fred Thompson: Thinking About School Districts and Property Taxes

Note: I have been bust moving my family back from Brazil to Portland and have had not time to blog.  It is back to Brazil in August so my time here in Oregon is tight and I will have difficulty blogging regularly.  Fortunately Fred Thompson rides to the rescue with a couple of blog entries - the first is what follows:

Local school districts, their boards, school superintendents, and district offices have come in for a lot of criticism of late. Dylan Scott, in a recent Governing magazine article (May 2013), reports that advocates, both left and right, increasingly call for the outright elimination of local school districts, which would mean turning educational policy/finance over to state control. This notion is surprisingly attractive to some conservatives, who would make state governments the only higher authority for individual schools, which would be state funded but independently controlled and operated, although a more likely outcome of full state-level funding and control would seem to be machine bureaucracies of even greater scale and scope than at present.

Is the antagonism toward local school districts justified? In Making the Grade: The Economic Evolution of American School Districts, William A. Fischel argues that it is not. Fischel adopts the prevailing economic view of the function of local governments in our unique system of fiscal federalism: local governments, both general-purpose governments and special tax districts are like businesses, property owners are equivalent to shareholders, and local officials create value by maximizing property values within their jurisdictions’ boundaries via the provision of services and amenities that can be more efficiently financed collectively than by individual property owners. This basic logic underlies local reliance on user fees and property taxes, which, where assessments reflect market prices, are the economic equivalents of user fees.

According to Fischel, school districts play a central role in this system, because of the importance of schools to a critical class of property owners: homeowners.

“A significant factor for many people deciding where to live is the quality of the local school district, with superior schools creating a price premium for housing. The result is a ‘race to the top.’ as all school districts attempt to improve their performance in order to attract homeowners.” Fischel also argues that locally funded schools, especially those funded by ad-valorem property taxes, provide homeowners with the motivation to monitor and control local jurisdictions, because amenities and taxes are capitalized in the value of their largest asset, their homes, and local governance gives them an opportunity to do so. Finally, he provides evidence that home prices are more responsive to district boundaries than to the boundaries of school attendance zones, which he attributes to the special role played by local school districts in the accumulation of community-specific social capital, “mainly through the networks parents establish,” which spills over to a wide array of collectively provided services and not just to schools.

 In defending school districts supported in part by local property taxes, Fischel also questions voucher programs, noting that their greatest virtue is also their greatest vice: greater competition among schools erodes location-specific social capital.

The tax-financed, local public school system makes “exit” (to private schools) more costly, which in turn promotes more “voice” within the community. Parents will inevitably seek to make their voices heard in their children’s schools, wherever they are located. Public schools induce those within the same jurisdiction to have a more common voice in self-governance in other community matters.

Critics of Fischel’s argument in favor of linking resources to location typically ground their claims on two priori beliefs. The first has to do with the demand for educational services, the second with democratic governance. The first of these is that education is primarily a public, not a private good, and should, therefore, be supplied equally to all. I am inclined to believe that this argument misconceives the nature of public goods. Public goods are characterized by two characteristics, non-excludability and non-exhaustibility, which means that only one quantity can be supplied to the citizenry within a given jurisdiction, that the citizenry’s enjoyment the good is entirely passive, and that the good must be equally provided to all, whether they like it or not.

Clearly neither of these characteristics nor their implications applies to educational services, at least not for the most part. Consequently, most economists believe that educational services are primarily private goods. For a friend of education, this should generally be seen as a good thing. The single most powerful implication of the theory of public goods is that they tend to be under supplied. The principal exception to this generalization occurs where they are combined with private goods and dominated by the latter.

However, to say that education is not primarily a public good does not mean that this argument is wrong. Repairing it in this case is fairly straightforward. Equity or, more correctly, enjoying the benefits of living in a reasonably fair and equitable community is itself a public good and the delivery of educational services and amenities may be an effective means of promoting its provision. However, the relationship between educational services and a more equitable society is an empirical question, one that that most of those calling for equal student funding neither ask nor answer. My own view of the evidence is that improving access to and the scope of pre-school services and meeting students’ basic needs and, thereby, raising attendance once they have started school will go further toward improving outcomes for students from low-income families than increasing school resources per se, and that those things are appropriately state responsibilities

Opposition to using local property taxes to finance schools also rests upon a peculiar view of democratic governance, which holds that citizens are entitled to certain services simply “by virtue of their membership within a polity,” that governments are obligated to provide these services equally to all, and that this obligation cannot be outweighed by other considerations. Consequently, if education is one of the services to which the citizens of a state are entitled, it must be provided equally to all. Here too, I am inclined to take issue with the argument. I would freely grant that all citizens have certain rights and have been afforded certain entitlements, but what those entitlements are and how far they go is entirely a matter for the members of the polity to decide through its participation in the processes of democratic governance, deliberation, and debate. Folks are well within their rights to argue that education should be a service to which all citizens are equally entitled; that education is a service to which all citizens are equally entitled violates both fact and logic.

Indeed, I would argue that, from the standpoint of democratic governance, the most important criterion by which any institutional arrangement should be judged is the degree to which it promotes citizen engagement and participation in the management of the polity and an understanding of the consequences of collective choices for themselves and their neighbors. And, while this factor does not outweigh all other considerations, it should weigh very heavily in our assessment of alternative institutional arrangements.

From this standpoint, our idiosyncratic system of fiscal federalism appears to work fairly well in general and specifically with respect or the governance of public education. There is evidence that the system promote citizen monitoring of school performance, that higher tax prices and home ownership are associated with higher levels of monitoring, and that greater reliance on property taxes and other measures of decentralized control are associated with greater efficiency on the part of school districts. Further, looking at interstate variations in average student achievement, operating stability, flexibility, and transparency, one consistently finds that they are inversely related to state level financing and control, both in cross-sectional analysis and panel studies. In the face of this evidence, one might conclude that it would be wiser to question the merits of state-level finance/governance than district-level governance.

Understanding the "Creative Class"

I have been chastised for my perceived drive-by on Richard Florida and his snake-oil policy prescriptions for cities.  See, I can't help myself....

Actually, I had only intended to highlight a passage about how what we are really talking about is human capital which, for the most part, means we are talking about education (but in general it is whatever makes us more productive: education, experience, intelligence, yes even creativity, etc).  And that the emphasis on attracting creative types to cities through catering to their preferences is a bit off.  There is no doubt that human capital is immensely important to cities and being able to attract those with high human capital is a great thing, but I tend to prefer we concentrate on how we create human capital ourselves. But of course in the quick firing off of a short blog post all context is lost and meanings become mangled (especially when I tarted up my tweet with the term "Debunking" - which again was meant to refer to the fact that we are talking fundamentally about human capital, not all of Florida's work).

So it is not so much about the substance of the argument - human capital matters and correlates of human capital, creative types, gays, patents, are therefore important as well - but the way that the story is told and the policy prescriptions that follow that we can quibble about.

An argument made forcefully to me is that it is not enough to be right and have evidence on your side, you have to know how to speak to policy makers in a way that can actually move them in the right direction.  Florida has done this - sneakily emphasizing human capital but using language and imagery that can be seized upon by policy maker and that can actually have an impact on policy.

This is fair enough, and a good point: there is no point being precise about everything when no one listens.  And those of us ensconced in the ivory tower tend to think we are doing important work that speaks for itself when the truth is it doesn't.  We have to find a way to make it digestible to, and repeatable by, policy makers.

So what do I think overall of Florida's work, well here is the best thing I have seen written about it by my go to guy on all things urban, Ed Glaeser of Harvard:

But if Florida’s novelty is not emphasizing creativity, or the rise of bohemian lifestyles, he deserves considerably more credit for putting them together. Lifestyles really do differ across occupations, and changing workplace patterns assuredly do matter for changing lifestyle preferences. This insight is correct, and I think Florida really deserves credit for emphasizing it in the popular domain.

He is also right in arguing that if cities want to succeed they need to think about providing lifestyle, or consumption, advantages to their residents. As I have argued elsewhere, declining transportation costs mean that few places have any innate advantages in production anymore. Proximity to the coal mines or the harbor may have mattered in 1900, but do not matter today. Instead, the productive advantage that one area has over another is driven mostly by the people. Urban success comes from being an attractive “consumer city” for high skill people (see e.g. Glaeser, Kolko and Saiz, 2001).

But while I agree with much of Florida’s substantive claims about the real, I end up with doubts about his prescriptions for urban planning. Florida makes the reasonable argument that as cities hinge on creative people, they need to attract creative people. So far, so good. Then he argues that this means attracting bohemian types who like funky, socially free areas with cool downtowns and lots of density. Wait a minute. Where does that come from? I know a lot of creative people. I’ve studied a lot of creative people. Most of them like what most well-off people like—big suburban lots with easy commutes by automobile and safe streets and good schools and low taxes. After all, there is plenty of evidence linking low taxes, sprawl and safety with growth. Plano, Texas was the mostsuccessful skilled city in the country in the 1990s (measured by population growth)—it’s not exactly a Bohemian paradise.

The source of Florida’s policy prescriptions seems to be his attempt to argue that there is a difference between his “creative capital” view and the mainstream urban view that human capital generates growth. As mentioned above, I have always argued that skilled cities grow because “the presence of skills in the metropolitan area may increase new idea production and the growth rate of city-specific productivity levels,” but if Florida wants to argue that there is an effective of bohemian, creative types, over and above the effect of human capital, then presumably that should show up in the data.

He then goes on to do some basic regressions with Florida's data to show that when you put a college educated variable in them it is terribly significant and all the rest of the "creative class" variables - patents, gays, 'super creatives', bohemians - become insignificant.  They do so because, presumably of the high degree of correlation between them and the college educated variable.  It is just a crude way of showing, once again, that it is really all about education.

So you can talk about creatives all you want, but be aware that in so doing what you are really focusing on is education.  Creating places where educated people are created, attracted and retained is crucially important.  I think, as does Glaeser, that the attracting part is a bit of a fools errand - what exactly do they want?  Probably good jobs, first and foremost.  No, what policy makers have more control over is the creating part, through a high quality public education system.  And what concerns me is making sure that the creative class amenities mantra does not dominate the education mantra.