Unbundling Higher Education

Jose Ferreira writes,

Originally, the university bundle included courses, food, and board. Over time they’ve added more services, at first academic (extracurriculars, better libraries) and now luxury (rock-climbing walls, European-style bistros).

Higher education is still trending towards increasing bundle size. The more they bundle, the more they can raise prices. So when, if ever, can we expect higher ed to start trending in the other direction, towards unbundling?

My guess is in about five years, plus or minus. The forces that will make it inevitable are picking up steam right now.

He also points to this post.

Bundling has been the primary way universities have managed to avoid the cost/benefit analyses consumers make for virtually every other purchase decision. Just as it has for music, unbundling would dramatically reduce per student revenue in higher education. In microeconomic terms, bundling captures surplus for producers. Unbundling moves some of that producer surplus to consumers and may create new consumer surplus.

As I watch the world of online YouTube lectures emerge, it strikes me that it is not a good idea to think in terms of one teacher providing a lot of lessons (Sal Khan started that way, but I don’t think that most of his lessons will still be watched in ten years, and my guess is he would not disagree).

Instead, you should focus on what you teach really, really well. If you are a guitar teacher, and you are really good at bluesy hammer-ons, then that you should focus on those. If you are really good at double-string lead guitar solos, then you should focus on those.

In economics, if you teach comparative advantage really well, then do that. If you teach the Coase Theorem really well, then teach that.

For example, of all my high school teaching videos, the ones that are most viewed are “calculating p-values on the TI-84,” “Z test and t test,” and “joint probability.” My most popular AP economics video is on “Substitutes and complements.” I would not have guessed that these were my strong suits (actually, joint probability is something I think I do well), but for now, that is what the market says.

Evidently, the market is not impressed with my talks on market structure in econ or my talks on doing calculations with the normal distribution. Somebody out there must be doing that stuff better.

Think in terms of a future in which all that survives of all of your lectures is only the best 20 minutes, covering a total of one or two topics.

Liquidity Crisis or Solvency Crisis?

Noah Smith writes,

Back in 2008, as the financial crisis was unfolding, there was a big argument as to whether the crisis was a “liquidity crisis” or a “solvency crisis”. It’s a very important distinction. A “liquidity crisis” is when banks (or similar finance companies) are financially in the black – their assets are greater than their liabilities – but they can’t get the cash to keep paying their bills in the short term. A bank run is the classic example of a liquidity crisis – even if the bank could eventually pay everyone back, it can’t pay them back all at once, so if people get scared and all try to withdraw their money in a rush, they force the bank to collapse. A “solvency crisis”, on the other hand, is when finance companies are actually bankrupt, and no amount of short-term borrowing will change that fact.

This is difficult to unravel. The high officials talked as if it were a liquidity crisis. But one might argue that they acted as if it were a solvency crisis. The Fed could have lent to Citigroup through the discount window. Instead, they injected capital into Citigroup, via TARP.

I think that AIG suffered from a liquidity crisis, because the contractual arrangements in their credit default swaps evidently allowed their counterparties to make “collateral calls” as the underlying securities declined in market value. The way the government dealt with AIG’s liquidity crisis was to give AIG enough money to meet the collateral calls (to Goldman Sachs and others) and essentially taking away capital from AIG, so that AIG had to dismember itself in order to remain a company.

Among the many problems with sorting things out is the problem of valuing brand equity. If you think that Citigroup had brand equity, then they were not in a solvency crisis.

If you think that Freddie and Fannie had brand equity, then they suffered from a liquidity crisis, because once their borrowing costs were held down, they became profitable again.

So I don’t have a crisp answer to Noah’s question, even in hindsight.

Political Religion

Joseph Bottum writes,

We live in what can only be called a spiritual age, swayed by its metaphysical fears and hungers, when we imagine that our ordinary political opponents are not merely mistaken, but actually evil. When we assume that past ages, and the people who lived in them, are defined by the systematic crimes of history. When we suppose that some vast ethical miasma, racism, radicalism, cultural self-hatred, selfish blindness, determines the beliefs of classes other than our own. When we can make no rhetorical distinction between absolute wickedness and the people with whom we disagree.

Read the whole thing. The theme of political beliefs becoming a substitute for religion is an interesting one. I think that many human organizations, including corporations, religions, and political parties, exploit our need for tribal affiliation.

Karl Smith’s Question

As reported by Tyler Cowen.

Name the period or event in economic history where we looked backed and said “hmm, money was less important than we thought at the time

Of course, the trend over the past fifty years has been to assign a large role to money in economic history. I believe that this trend in thinking is wrong-headed.

Let me digress for a moment. A few days ago, I watched “Money for Nothing,” a documentary about the Fed that was sent to me to review. On the positive side, I would say that

1. It includes excerpts of interviews with an outstanding and diverse set of experts, including Allan Meltzer, Alan Blinder, and Janet Yellen.

2. Its rendition of the history of the Fed is well done.

On the negative side, I would say that I have never walked away from a documentary feeling satisfied. That is an understatement. Every documentary, regardless of whether I am sympathetic to its point of view, leaves me feeling swindled. I think the format is suited to leaving people with impressions and illusions, not with genuine understanding.

For example, “Money for Nothing” devotes about 15 seconds each to Brooksley Born and Ned Gramlich. If all you knew about them came from this documentary, then you would have not sense of the ambiguity that surrounds their alleged farsighted desire to increase regulation.

Born was fighting an unlikely turf war, attempting to get the dealer markets in financial derivatives to be overseen by the Commodity Futures Trading Commission, which has expertise in a very different area–standardized contracts traded on organized exchanges. Now, if you abolished the dealer market in derivatives and forced them onto an exchange, then you could place derivatives under the CFTC’s jurisiction. First, there has to be a debate over whether or not this is a good idea (in the wake of the crisis, many people think it would be a good idea. I do not.) But if we take as given the existing dealer market, Born’s claim of turf was untenable.

Gramlich was worried about consumer protection issues in mortgage lending. There were a lot of mortgage brokers behaving like old-time car salesmen, always trying to make customers pay more than necessary. As the housing boom accelerated, more and more borrowers were on the lower end of the scale in terms of income and sophistication, and the abuses and exploitation by lenders tended to increase. (Keep in mind, however, that down payments were so low that the bulk of the losses from the crash were born by investors, not borrowers. The phrase “predatory borrowing” is not unjustified.) To the best of my knowledge, what Gramlich was not doing was warning that the whole financial system was vulnerable because of what was going on in mortgage markets.

Also, the issue of how money affects the economy is too deep and controversial to be captured in a documentary. “Money for Nothing” appears to claim that both high interest rates and low interest rates are bad for investment. High interest rates choke off investment, while today’s low interest rates choke off saving–which is supposedly hurting investment. Maybe they do not mean to make the latter claim, but, again, it is a format that lends itself to leaving you with impressions, rather than helping you think through an issue. The documentary does not raise the issue of the distinction between short-term inter-bank interest rates (which the Fed can affect) from other interest rates (where the effect of the Fed is in doubt among many economists). It does not bring up the issue of the “zero bound,” which some economists (not me) make a big deal out of.

Finally, and this gets back to Karl Smith’s question, I think that “Money for Nothing” vastly overstates the Fed’s role in the economy. Going forward, the big issue is fiscal policy. Remember the ad from Hillary Clinton’s campaign for President where she played the role of Santa Claus, handing out gifts to various constituency groups? Well, going forward, given the excess of the government’s promises relative to its ability to pay, politicians are going to be playing a lot less Santa and a lot more Scrooge. That is going to cause a fraying of our politics, which is already taking place.

In the coming drama, the Fed is a bit player. If we end up with hyperinflation, it will be the result of a total breakdown on the fiscal side, in which the monetary authorities are given no choice but to try to meet the government’s revenue needs by collecting the inflation tax. Not the most likely outcome, and even if it were to take place, the fault would not lie with the Fed.

More broadly, my inclination in macroeconomics is to get away from aggregate supply and demand. I think that the obsession with money and the Fed is one huge attribution error. It is human nature to look for simple causes and scapegoats. I think we should lean against that.

So I would like to see us place less blame on the Fed for the Great Depression. I would like to see us assign less blame to Arthur Burns for the inflation of the 1970s and assign less credit to Paul Volcker for ending it. I think that we may be over-emphasizing the role of money in all of these cases.

Karl Smith is correct to imply that over time we have come to assign a greater role to money than contemporaries did at the time. That does not necessarily mean that we are wiser.

Lots of Megan McArdle

The video of the event on Megan McArdle’s book is here. My talk starts about 26 minutes in, but I recommend listening to her talk, which starts about 2 minutes in.

If you want to watch Megan and Tyler Cowen discuss the book, you can check out this AEI event this evening at 5:30 eastern time–it will be shown live on line if you are nowhere near DC.

Incidentally, in 2004, I collected a series of essays that I had written, and I self-published a book. Prior to publication, I sent the manuscript to my former thesis adviser, Robert Solow, hoping he would write an endorsement that I could put on the cover. He sent me a peevish letter in response, saying that he looked at one of the first essays in the book and saw that one of my citations was to a “blogger,” and he thought that this showed a total lack of rigor and seriousness on my part.

That blogger was Megan McArdle.

Lots of Diane Coyle

My review of GDP: An Affectionate History is here.

Overall, one arrives at a mixed verdict on GDP. On the one hand, it is the best way that we have to measure economic capability. On the other hand, because it fails to account for consumer surplus, GDP statistics lead us to take an overly pessimistic view of the economy. There is no Great Stagnation. There is only a widening gap between the rate of economic improvement and our ability to measure that improvement.

Tyler Cowen’s review is here:

Yet markets are developing new innovations whose benefits probably are undervalued by the GDP concept. This is the potential revision to GDP that commands the most attention from Coyle. For instance, consumers attach great value to Facebook, Google and Wikipedia, all of which are absolutely free to their users and do not enter directly into GDP calculations. I would go further yet, noting that the modern world also better matches plans and goals. Perhaps you can meet your ideal spouse on Match.com or at least pick up cheaper collectibles, better suited to your taste, on eBay. Who makes mistaken purchases of music these days, when you can hear a lot of the songs in advance online? Just about everything is reviewed online, which helps us spend with greater effectiveness. These gains are not well-represented by the older methods of calculating GDP.

Cable Internet: What is the Problem?

Felix Salmon writes,

Americans really love their TV. They love it so much that cable-TV penetration is still substantially higher than broadband penetration. As a result, any new broadband company will not be competing against the standalone cost of broadband from the cable operators: instead, they will be competing against the marginal extra cost of broadband from the cable company, for people who already have — and won’t give up — their cable TV.

If you’re a cable-TV subscriber, the cost of upgrading to a double-play package of cable TV and broadband is actually very low; what’s more, there’s a certain amount of convenience involved in just dealing with one company for both services.

And yet Salmon argues that the lack of competition in offering broadband Internet is a problem. I am not sure why.

It has always seemed to me that what holds back penetration of broadband Internet is that there are a lot of “want-nots” among American consumers. The penetration rate for cable TV is somewhere north of 90 percent, and as Salmon points out, the marginal cost of adding broadband is low. So if more Americans wanted broadband Internet, they could have it.

The other technology that Americans really love is cell phones. My guess is that going forward the marginal value of bandwidth is much higher in wireless than it is in cable. Worrying about cable monopolies reminds me of the days when the government pursued an antitrust case against IBM for its monopoly in mainframe computers. In hindsight, that monopoly does not appear so formidable.

Pointer from Tyler Cowen, who is on my side, but for somewhat different reasons.

More on WhatsApp

1. From Sarah Lacey.

Facebook has grown into such a huge thing that we forget what the core always was: Photos. This was the reason Instagram was such a threat to its dominance. It was the next social network where the primary organizing and viral mechanism was photos. That’s why Facebook had to own it.

Read the whole thing. She points out that WhatsApp was valued at 10 percent of Facebook, which is a much higher share of the acquiring company that YouTube was relative to Google, for example.

2. From Peter Schiff.

It’s very easy to get customers when you don’t charge them, it’s much harder to keep them when you do.

Thanks to a commenter for the pointer.

I look at it this way. I would value WhatsApp at about $200 million. Like Schiff, I believe that it will start to bleed users rapidly as (a) it attempts to monetize them and (b) as competitors take them.

If $200 million is 10 percent of Facebook, then Facebook is worth $2 billion. Have a nice day.

What I’m Saying

I am a last-minute fill-in for Brink Lindsey at this event discussing the new book by Megan McArdle. The book is about failure, which is a fascinating topic. My talk should begin shortly after this post goes up. I will try to say that the best way to deal with failure depends on the institution.

An individual needs to fail with a fallback position. Megan discusses this in terms of job search and in terms of living within your means so that you can deal with illness or loss of a job. She also discusses the forgiving nature of the U.S. bankruptcy code.

A small startup firm needs to fail quickly. Find out that you need to rethink your concept after you have test-marketed a prototype that you built in three months, not after you have spent two years in stealth mode trying to implement your grand design.

A large, established firm needs to fail gracefully. Be able to kill the project without killing the company. You might think of Coca-Cola’s recovery from New Coke, but the real graceful failures are the ones we never even hear about. A large firm that fails ungracefully is denying that it is in trouble (Megan uses the example of Dan Rather and Mary Mapes of CBS News, who put out a story based on a forged document and just refused to back down from the story.)

Government cannot do any of these things well. Think of Obamacare. Fallback position? None. Quick failure? No, it is going to be long and drawn out. Graceful failure? No, it is a big, ugly failure.

At one point in Megan’s book, she writes,

There is a scientific name for people with an especially accurate perception of how talented, attractive, and popular they are–we call them clinically depressed.

For government, I think that the only solution is clinical depression.

Scott Sumner on the Fed Transcripts

He writes,

Note that on the very day of the September 16 meeting, the meeting at which the Fed refused to cut rates due to fear of “high inflation,” the TIPS spreads were showing only 1.23% inflation over the next 5 years, well below target. The Fed should have ignored its own worries about inflation, and instead relied on the wisdom of the crowds. The crowd is not always right, but they are more reliable than the Fed, especially when conditions are changing rapidly. Market participants saw the bottom dropping out of the economy using millions of pieces of highly dispersed information, while the clumsy Fed waited for macro data that comes in with long lags.

The idea of relying on market forecasts is what puts the “market” in market monetarism. An interesting question is how much the Fed would have had to do to cause both actual and expected inflation (or nominal GDP) to change. My inclination is to believe that a lot more M would have merely resulted in a lot less V.