Thoughts on Charter Schools

My latest essay, which is a bit unusual for me in that it promotes a national government policy.

It would provide grants to states to support the administrative apparatus needed to ensure that charter school operators are given both a fair opportunity to offer educational alternatives and timely audits to ensure that they meet their responsibilities to students and parents. The grants should be sufficient to cover much more than the cost of this administrative apparatus. That way, recalcitrant states will have a strong incentive to adopt best practices for approving and evaluating charter schools.

I am not entirely sure that this is a good idea. But living in charter-hostile Maryland, I think it would take something like this to get charters going here.

Karl Zinsmeister writes,

Twenty-five years ago, charter schools hadn’t even been dreamed up. Today they are mushrooming across the country. There are 6,500 charter schools operating in 42 states, with more than 600 new ones opening every year. Within a blink there will be 3 million American children attending these freshly invented institutions (and 5 million students in them by the end of this decade).

1. As I see it, the main advantage that charter schools have over public schools is fact that bad teachers will tend to be fired and bad charters schools will tend to be closed.

2. Charter schools may follow a Clayton Christensen “disruptive innovation” path. That is, at first they will cater to low-income consumers. However, as they prove themselves in that niche, they may rapidly move up-market. Right now, many affluent parents are very attached to their public schools. However, that is an equilibrium that could tip. If parents come to view charter-school children as having an advantage in, say, college preparation, they will exit the regular public school system with great haste.

3. Another reason that charters may take off quickly in states and school districts that allow them to compete is that good young teachers are likely to prefer working at charter schools. If this happens over the next five to ten years, parents will notice that it is getting difficult to find good public school teachers and easier to find good teachers at charters.

4. If there is a rapid move toward charter schools, I think that this exacerbates the problem of unfunded pensions for retired teachers. If public school enrollment levels off or declines, I believe that the share of the budget devoted to paying for pensions is bound to increase.

5. I suspect that, relative to public schools, on average charters undertake less left-wing indoctrination of students. This is possibly the main reason for conservatives and libertarians to get excited about charter schools.

6. The political opponents of charters have to prevent them from getting started. Where I live, the opponents have succeeded. But once charters become entrenched, getting rid of them is quite difficult. See NYC.

Ignorance, Exit, and Voice

In this essay, I suggest that even if voters were knowledgeable about issues, our democratic process would still not be as desirable as having the exit option. This is in the context of talking about a recent book by Ilya Somin. In my view, an even more frustrating problem than voter ignorance is the enchantment that many people have with democratically elected leaders.

As I see it, reasonable government, including the protection of liberty, requires those in office to follow norms of behavior that are bound by Constitutional constraints and principles of limited government. The problem with democratic enchantment is that it sanctions whatever majority-elected political leaders can get away with.

My Review of Brynjolfsson and McAfee

Is here. An excerpt:

Back at the turn of the millennium, these applications seemed to Kurzweil to be on the near-term horizon. These strike me as the same applications that Brynjolfsson and McAfee suggest are on the near-term horizon today. While a few of Kurzweil’s other predictions did materialize, and while some of these applications are certainly closer to reality today than they were in 1999 or 2009, we should be wary that some of what The Second Machine Age tells us to expect may not in fact appear for several decades, if ever.

The Danger of Bond Bubbles

Gillian Tett writes,

In recent years an astonishing amount of money has quietly flooded into fixed income funds, which buy corporate bonds, emerging markets bonds and mortgage debt. And as the US looks more likely to raise interest rates, creating potential losses for bondholders, the flows could reverse – creating destabilising shocks for regulators and investors alike.

Read the whole thing. Pointer from Phil Izzo. My thoughts:

1. The last time I talked about a “bond bubble” was in 2003. Subsequently, I wrote that only a bursting of the bond bubble could undermine high house prices. I was wrong about that one.

2. Larry Summers would explain the “bond bubble” as secular stagnation. In his view, there is low demand for capital. As you know, I have little regard for this thesis.

3. Perhaps I feel burned by the way that the housing bubble burst on its own, but I would not focus on a bursting of the bond bubble as the key risk today. I find myself sympathetic to Seth Klarman on the stock market (Klarman is cited by Tett, and if you search diligently you can find copies of his investor letter posted on the web). I am skeptical of contemporary market arithmetic.

4. Klarman blames the Fed for low interest rates, and so do many people of my ideological stripe. My view is that if the markets wanted high interest rates, they could have them, notwithstanding the Fed’s efforts. Perhaps we now live in a world in which the primary threat to saving comes from political risk. In that world, savers are not looking for the assets with the best financial characteristics. Instead, they are hoping to invest where they will not lose their capital to taxation and confiscation. This might explain why a lot of foreigners still prefer to invest in low-yielding U.S. assets.

But the bottom line is that today’s financial markets have me puzzled.

The State, the Clan, and Liberty

At Cato Unbound,

Mark S. Weiner argues that, while the state does often destroy individual liberty, an even greater danger lies in the rule of the clan. Clan-based societies have been found throughout the world, in many different times and places. In general they have been highly resilient, successful at replicating themselves – and markedly illiberal. Individual freedom may need a strong central state after all, one that can provide the rule of law, enforce contracts, and suppress clan-based feuds and prejudices. Without the state, we may find ourselves regressing from an egalitarian society of contract to a hierarchical society of status….

Arnold Kling argues that human beings require institutions to interact on the basis of trust and cooperation. Kling argues that the resurgence of the clan is possible but unlikely in Anglo-American societies because the nuclear family rather than the clan is our distinctive form of non-state order. Kling concludes that the natural individualism fostered by the nuclear family makes prospects bright for shrinking the state without the risks of clannism. He calls on libertarians to advocate institutions that would accomplish this task.

Feel free to follow the link and read these essays, as well as others that will be posted on the topic.

Innovation

Yesterday, I attended a discussion held at the Hudson Institute on the topic of innovation. I go to these sorts of things because every once in a while one hears a stimulating idea. Most of the time, one doesn’t, but for me the occasional gain makes up for the frequent loss.

This was for me one of the winners. I will assume a Chatham House Rule, and not associate ideas with names. Some ideas that came up.

1. The presumption is that more innovation undertaken in the U.S. would be better for us. The main fear is that innovation is being held back by cultural and regulatory factors. Assuming that you want the innovation to occur in this country, then encouraging highly-skilled, entrepreneurial immigrants would seem to be the most reliable, least politically fraught way to make that happen.

2. In the area of science, government funding is a two-edged sword. Perhaps we have gotten to the point where the academic community in this country now selects for grant-writers rather than for people who can think outside the box. The most extreme claim was that the last 30 years have produced a “massacre” of genuine innovative scientists at our universities.

I did not bring this up, but I would be happy to offer macroeconomics as an example to illustrate that the use of the term “massacre” may not be too strong.

It had not occurred to me that part of my inability to fit in with academia might be that I might be too willing to challenge the status quo. But it sure would be an affirming notion to believe. Indeed, given my memoirs, I am prepared to consider that perhaps my willingness to challenge the status quo was better received at Freddie Mac in 1988-1994 than it was in academia. Not that Freddie was exactly all gung-ho for innovation (nor should it have been), but compared with the DSGE cartel…and then, just when I was getting worn out from trying to be an “intrapreneur” at Freddie Mac, along came the Web, with the opportunities it opened up for challenging the status quo. hmmm….

3. Maybe where we need innovation is in the area of sovereignty and governance. No, I was not the one who brought this up–someone else did. From that person, I got a tip about some literature that was new to me. I’ll let you know if it proves interesting.

4. Is innovation the product of just a small proportion of the population, or does the entire cultural milieu matter? What if these days, in order to be a significant innovator, you need to be in the 99.5th percentile in terms of cognitive ability?

5. One participant claimed that the existing telecom regulatory structure (the FCC, primarily) has slowed digital communications progress by ten years. Although I often think that markets find a way around regulation, I am afraid that I found this estimate plausible. The FCC is one of the more evil agencies around, and I am afraid that libertarians are less aware of the FCC’s evil than they are of that of the FDA, for example.

6. Since 2008, the number of startups has slowed from 600,000 per year to just over 400,000 per year. This leads me to wonder–has the success rate of startups gone up? If so, then the decline it startups may suggest an unfortunate increase in risk aversion. If not, then it could be a rational responses to an adverse environment.

7. Is there a causal relationship between cultural attitudes toward innovation and entrepreneurs, and which way does it run? It was suggested that support for innovation would go up if somebody discovered, say, a cure for cancer or Alzheimers’.

8. Is innovation dominated by a few really important creations, or by the cumulative effects of lots of incremental improvements? Your answer to that probably is correlated with our answer to (4).

9. One scenario for the future is that perhaps 30 percent of the population is intelligent and adaptive enough to contribute in the work place. The rest enjoy the “narcotics” of digital entertainment, recreational drugs, and so forth, while being supported by, well, I wasn’t the one who made this point, but if I had I would have used the term Vickys.

10. How much has IT contributed to productivity growth? There were optimists as well as pessimists. You know where I stand, given my article on Diane Coyle’s book on GDP.

11. Is there too much separation between value creation and value capture? It was suggested that finance captures too much value, and one effect of that is to draw people with STEM aptitude and skills away from science and engineering. I admit to being sympathetic to that view, although I think you want to try to fight the bias that sees finance as entirely parasitical. It really is important that capital flow to its most efficient uses, and if that means that we need smart people involved in financial markets, then so be it.

I think where finance goes wrong is in allowing people to capture value from inflated prices. So my Internet company gets sold in 1999 for more than what it was really worth (good for me, great for our main backers, not good for whoever ended up owning shares in the company that bought us). Or WhatsApp gets $19 billion today. But if the problem with Wall Street is a lack of wisdom, do you want to subtract talent from Wall Street? If so, which talent?

Another suggestion is that the “winners-take-most” nature of certain markets means that excess value gets captured. Think of Bill Gates in the heyday of Windows, or Google today. Maybe, although I would argue (and did) that, throwing consumers’s surplus into the mix, it’s not clear that the value captured by corporate winners is so excessive.

Velasquez-Manoff on Causal Density

From An Epidemic of Absence.

The scientific method that had proven so useful in defeating infectious disease was, by definition, reductionist in its approach. Germ theory was predicated on certain microbes causing certain diseases. Scientists invariably tried to isolate one product, reproduce one result consistently in experiments, and then, based on this research, create one drug. But we’d evolved surrounded by almost incomprehensible microbial diversity, not just one, or even ten species. And the immune system had an array of inputs for communication with microbes. What if we required multiple stimuli acting on these sensors simultaneously? How would any of the purified substances mentioned above mimic that experience? “The reductionist approach is going to fail in this arena,” says Anthony Horner, who’d used a melange of microbes in his experiment. “There are just too many things we’re exposed to.”

In an essay over ten years ago, I wrote,

E.D. Hirsch, Jr., writes, “If just one factor such as class size is being analyzed, then its relative contribution to student outcomes (which might be co-dependent on many other real-world factors) may not be revealed by even the most careful analysis…And if a whole host of factors are simultaneously evaluated as in ‘whole-school reform,’ it is not just difficult but, despite the claims made for regression analysis, impossible to determine relative causality with confidence.”

In the essay, my own example of a complex process that is not amenable to reductionist scientific method is economic development and growth. In that essay, I also provide a little game, like the children’s game “mastermind,” to illustrate the difficulty of applying reductionism in a complex, nonlinear world. Try playing it (it shows up better in Internet Explorer than in Google Chrome).

The phrase “causal density” is, of course, from James Manzi and his book, Uncontrolled.

Peak Political Psychology

Chris Mooney gives a careless, almost entirely uncritical review of two books that I recently read: Predisposed, by John R. Hibbing, Kevin B. Smith, and John R. Alford; and Our Political Nature, by Avi Tuschman. Mooney writes,

Liberals and conservatives, conclude Hibbing et al., “experience and process different worlds.” No wonder, then, that they often cannot agree. These experiments suggest that conservatives actually do live in a world that is more scary and threatening, at least as they perceive it. Trying to argue them out of it is pointless and naive. It’s like trying to argue them out of their skin.

Note that it is conservatives who Mooney characterizes as intractable. The implicit assumption is that progressives have it right. Political psychology helps to explain the persistence of the wrong-headed view.

Mooney waxes enthusiastic about the genetic/psychological explanations for political differences. The authors of both books are careful to point out that the correlations between personality traits and political beliefs are, while statistically significant, not overwhelmingly large. They explain much less than half of the variation in political beliefs.

Mooney leaves readers with the impression that psychologists explain a larger share of political differences than they themselves claim to explain. In contrast, my guess is that they explain less. These are the sorts of studies that tend to suffer from publication bias (20 studies are tried, one out of 20 passes the “significance test” of having a 5 percent probability of being true by chance, and that study gets published). In these sorts of studies, attempts at replication sometimes fail completely, and even when successful the effects are smaller than in the original published study.

In fact, my guess is that we are approaching peak political psychology. I would bet that ten years from now the links between political beliefs and psychological traits will be regarded as a very minor field of inquiry.

For me, the main problem with this research is that it is almost impossible to reconcile with well-established findings on voting behavior. In my own review of Tuschman’s book, I wrote,

Consider, for example, the fact that Jews and blacks vote predominantly for liberal Democrats. According to Tuschman’s model, this must mean that Jews and blacks are less ethnocentric than other voters (notwithstanding the apparent tribal solidarity of their voting behavior), as well as more Open and less Conscientious. That seems doubtful.

In his conclusion, Mooney advocates tolerance for other political points of view. That is generous of him. Others who have thought that their political opponents had psychological issues came up with idea of the Gulag.

Want more fun? Read Ethan Watters on the germ theory of political beliefs.

he is certain that the most effective way to change political values from conservative to liberal is through health-care interventions and advances in providing clean water and sanitation. “That is clearly the conclusion that the bulk of evidence supports,” Thornhill says. “If you lower disease threats in countries they become more liberal, and that is true for states in this country. The implication is that if you effectively target infectious diseases then you will liberalize the population.”

That explains why Japan liberalized earlier than England. It explains why Germany turned to Hitler. I don’t know why I didn’t think of this theory before. Pointer from Tyler Cowen, who is not buying it, either.

This is not charitable, but what I want is a psychological explanation for why progressives need to make disagreement with their outlook a pathology. I want to know why their capacity for critical thinking disappears when they read studies that make them feel better about being on the left.

MOOC spelled backwards

Hollis Robbins writes,

Thousands of qualified, trained, energetic, and underemployed Ph.D.s are struggling to find stable teaching jobs. Tens of thousands of parents are struggling to pay for a good college education for their children. Home-schooling at the secondary-school level has proved itself an adequate substitute for public or private high school. Could a private home-college arrangement work as a kind of Airbnb or Uber for higher education?

Read the whole thing. Pointer from Tyler Cowen.

I could do this. I could easily teach college-level courses in economics, statistics, history, and philosophy. This would be the opposite of Massive Open Online Courses. It would be College Of One Mentor, or COOM. As Robbins points out, higher education used to work this way.

Education does appear to be ripe for unbundling and disintermediation. However, just as with banking, there is a tight link between education and the state.

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.