Trends in Faculty and Administration

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Timothy Taylor comments on a recent report.

When it comes to employment, colleges and universities have tried to hold down faculty costs in dealing with the expanding numbers of students by the use of time-contract faculty and part-timers. The nonprofessional staff are dealing with the increased number of students by using improved information technology and other capital investments, without a need for a higher total number of staff. But the number of professional staff is rising, both in absolute terms and relative to the number of students…

I’ll only add that institutions are defined by their people. As the full-time and tenured faculty become a smaller share of the employees of the institution and the professional administrators become a larger share, the nature and character of the institution inevitably changes. In this case, colleges and universities have become less about faculty, teaching, and research, and more about the provision of professional services to students and faculty. As far as I know, this shift was not planned or chosen, and the costs and benefits of such a shift were not analyzed in advance. It just happened.

My comments:

1. Perhaps this parallels shifts in other sectors of the economy. That is, we have fewer front-line production workers and more people working on building organizational capital.

2. The value of the organizational capital provided by non-teaching staff in education seems particularly nebulous because the measure of value in education is particularly nebulous.

3. In other sectors, the number of production workers per unit of output probably is falling faster than in higher education.

4. In other sectors, information technology has had more profound effects on the process of providing goods and services. People suspect that bigger changes are in store in education, once people figure out the best ways to apply information technology. I offered my guesses here. Some of these possibilities could lead to a dramatic reduction in the number of professors per student and also in the number of professors per organizational-capital builder in education.

What I’m Reading

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I finished Gregory Clark’s new book. I put it in the must-read category. I hope to publish a review on line in the next few months.

I am now reading Fragile by Design by Charles Calomiris and Stephen Haber. I posted a few months ago on an essay they wrote based on the book. I also attended yesterday an “econtalk live,” where Russ Roberts interviewed the authors in front of live audience for a forthcoming podcast. You might look forward to listening–the authors are very articulate and they speak colorfully, e.g. describing the United States as being “founded by troublemakers” who achieved independence through violence, as opposed to the more boring Canadians.

I think it is an outstanding book, although in my opinion it is marred by their focus on CRA lending as a cause of the recent financial crisis. This is a flaw because (a) they might be wrong and (b) even if they are right, they will turn off many potential readers who might otherwise find much to appreciate in the book. Everyone, regardless of ideology, should read the book. It offers a lot of food for thought.

I am only part-way through it. The story as far as I can tell is this:

1. There is a lot of overlap between government and banking. Governments, particularly as territories coalesced into nation states, needed to raise funds for speculative enterprises, such as wars and trading empires. Banks need to enforce contracts, e.g., by taking possession of collateral in the case of a defaulted loan. Government needs the banks, and the banks need government.

2. If the rulers are too powerful, they may not be able to credibly commit to leaving banks assets alone, so it may be hard for banks to form. But if the government is not powerful enough, it cannot credibly commit to enforcing debt contracts, so that it may be hard for banks to form.

3. Think of democracies as leaning either toward liberal or populist. By liberal, the authors mean Madisonian in design, to curb power in all forms. By populist, the authors mean responsive to the will of popular coalitions of what Madison called factions.

4. If you are lucky (as in Canada), your banking policies are grounded in a liberal version of democracy, meaning that the popular will is checked, and regulation serves to implement a stable banking system. If you are unlucky (as in the U.S.), your banking policies are grounded in the populist version of democracy. Banking policy reflects a combination of debtor-friendly interventionism and regulations that favor rent-seeking coalitions who shift burdens to taxpayers. The result is an unstable system.

I may not be stating point 4 in the most persuasive way. I am not yet persuaded by it. In fact, I think libertarians will be at least as troubled as progressives are by some of the theses that the authors promulgate.

Motivated Reasoning

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Dan M. Kahan and colleagues write,

If high Numeracy subjects use their special cognitive advantage selectively—only when doing so generates an ideological congenial answer but not otherwise—they will end up even more polarized than their low numeracy counterparts. Such a result, while highly counterintuitive from the perspective of SCT [“science comprehension thesis”], would be consistent with the view of a smaller group of scholars who take the view that identity-protective cognition operates on both heuristic and systematic—System 1 and System 2—forms of infor-mation processing (Cohen 2003; Giner-Sorolla & Chaiken 1997; Chen, Duckworth & Chaiken 1999; Kahan 2013). It would also be consistent with, and help to explain, results from observational studies showing that the most science comprehending citizens are the most polarized on issues like climate change and nuclear power.

Read the draft paper. I got to the link from Jonathan Haidt, which in turn I got to from Tyler Cowen.

I think that there is a general moral here, but I am not sure how to phrase it. Maybe something along the lines of, “Try to find the holes in your own most strongly-held beliefs.”

What Should Austrian Macroeconomics Resemble?

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Noah Smith writes,

So it basically seems to me that the New Classicals captured and improved on the basic ideas of the Austrians in almost all of the ways that matter, while vastly improving on the presentation. New Classical concepts of rationality, distrust of empiricism, and distrust of government intervention are more moderate and nuanced than those of the Austrians, and their mathematical style is simply much more appealing to modern academics than the dense, turgid prose of von Mises or Hayek. Thus, if you were a smart young macroeconomist in 1980 who believed that people were both rational and smart, that government intervention was a bad idea, and that theory was the best way to investigate human behavior, you did not become an Austrian; you became a New Classical.

Not me!!

What I don’t like about Austrian macro is the focus on the central bank as the sole source of distortions. But I see New Classical as horrible along almost every dimension. I do not like the math. I do not like rational expectations (it is a very anti-Hayekian notion, that we all have the same information). I do not like the representative-agent formulation, because it rules out important co-ordination problems. I do not like the production function, which ignores the roundaboutness of production and what Fischer Black emphasizes, which is that people invest in all sorts of physical and human capital under conditions of uncertainty, and sometimes their capital ends up not so valuable.

I do not like AS and AD, which I think channel people’s thinking narrowly. AS and AD are like a pair of glasses that make you see the world only in black and white and in two dimensions. Sometimes, simplification is good, but not when you miss the color and the depth.

I do not like a priorism, but I see macro as only faux-empirical. As Noah pointed out in a previous post, the macro equations are not verified (or even verifiable) in the real world.

Moreover, the data with which macroeconomists work is very problematic. Who can be happy with how the money supply is measured? Or prices? Or even GDP–what is the GDP of Google? The measured economic activity consists of advertisements. Do we think that measures Google’s output?

Maybe the worst-measured variable of all is productivity. How many workers in the U.S. are in large organizations where they spend time reading email, producing reports, and going to meetings? I am going to go out on a limb here and say that these are, on average, productive activities. They produce some sort of organizational capital. But they do not produce output in the here and now. So if you divide this month’s output by this month’s hours spent on the job, that is inaccurate, because a lot of this month’s work is about output in later periods.

Finally, my first forays into macroeconomics (see my book) were when macroeconometricians tried to pay attention to special factors that messed with their data–steel strikes, tax-law changes, automobile sales-incentive programs, and so on. Now, it’s like “We don’t care. Stick everything into a vector-autoregression and accept whatever the computer spits out.”

The bottom line: Austrian economics ought to resemble PSST, not New Classical.

Inferring from an Identity

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Scott Sumner writes,

To my eyes it looks like “real wages” [(nominal average hourly earnings)/(NGDP/pop)] lead unemployment by about a month or two

Shock me, shock me. Let’s see:

NGDP = RGDP * P = N * (RGDP/N) * W*(P/W)

In words, nominal GDP = employment times output/worker times nominal wages times the price markup.

Solve this for the ratio of the nominal wage to nominal GDP:

W/NGDP = (W/P) * (RGDP/N)/N

In words, Sumner’s “real wage” (the nominal wage divided by nominal GDP) equals the inverse of the price markup times the inverse of productivity times 1/employment. If the price markup and productivity remain about unchanged, then by definition the “real wage” is inversely related to employment.

Scott is fond of saying, “Never reason from a price change.” I say, “Never draw a behavioral inference from an identity.”

Steve Oliner on Productivity

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Interesting interview. One excerpts:

the underlying pace of innovation has remained rapid but businesses have been slow to take on any kind of risky ventures, and financing for – until recently for, you know, early stage venture capital, for example, or for small businesses, has been pretty tight. So I think we are seeing a slowdown period in terms of the adoption of the innovation into the business world.

Another:

The PPI shows that the price declines for [semiconductors], which were extremely rapid throughout almost the entire history that they’ve been produced, have basically come to a halt — that in the last couple of years there have been no price declines to speak of at all, which is very strange and is in conflict with the fact that innovation in that part of the economy is still proceeding at a rapid rate. And it raises questions about whether the procedures that are being used to measure those prices are appropriate. And I personally think that they’re not, that prices are actually falling more rapidly than the official statistics would show.

The Qualifications for Fed Chair

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Justin Fox writes,

So has an economics PhD basically become a prerequisite for running the Fed? “I think the answer is ‘probably yes’ these days,” former Fed vice chairman Alan Blinder — a Princeton economics professor — emailed when I asked him. “Otherwise, the Fed’s staff will run technical rings around you.”

Not if you have enough confidence in your own judgment. Paul Volcker could not have cared less about the macroeconomic models of the Fed staff. In fact, nowhere in academic economics do they teach how the central bank really operates on a day-to-day basis. For that, you have to read Marcia Stigum’s Money Market.

Pointer from Mark Thoma.

It does seem to be true that Ph.D economists are now in the saddle at the Fed. In fact, there is a non-trivial chance that Janet Yellen will be the last Fed Chair not to have Stan Fischer as part of her intellectual ancestry (she is roughly the same age as Fischer and did her dissertation under James Tobin).

Richard Epstein vs. Hard-Core Libertarians

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He writes,

Society needs a coercive mechanism strong enough to keep defectors in line, but fair enough to command the allegiance of individuals, who must share the costs of creating that larger and mutually beneficial social order. The social contract that Locke said brought individuals out of the state of nature was one such device. The want of individual consent was displaced by a consciously designed substantive program to protect both liberty and property in ways that left all members of society better off than they were in the state of nature. Only constrained coercion can overcome the holdout problems needed to implement any principle of nonaggression.

Read the whole thing. He frames it as a disagreement with Rand Paul. However, most of the criticism seems addressed to Murray Rothbard, rather than at positions that Rand Paul has taken.

In my own thinking, I am increasingly leaning toward the view that government over a large territory and population is the problem. Government at a community level (think of a condo association) is tolerable because of the ease of exit. As you scale up government, the benefits tend to decline and the abuses tend to increase.

A Problem with Modern Macro

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David Glasner writes,

It is only after coordination failures have been excluded from the purview of macroeconomics that it became legitimate (for the sake of mathematical tractability) to deploy representative-agent models in macroeconomics, a coordination failure being tantamount, in the context of a representative agent model, to a form of irrationality on the part of the representative agent. Athreya characterizes choices about the level of aggregation as a trade-off between realism and tractability, but it seems to me that, rather than making a trade-off between realism and tractability, modern macroeconomics has simply made an a priori decision that coordination problems are not a relevant macroeconomic concern.

Pointer from Mark Thoma. In other words, the representative-agent approach in modern macro serves to eliminate what some of us think is the important reason that unemployment exists. In my book, I add

The first fundamental flaw is to to treat the production process as instantaneous. You have your capital and labor sitting there, and all you have to do is put them together to produce output. In my view, Fischer Black’s emphasis that production takes time is very important. It means that plans made months or years ago have to be reconciled with current conditions. As tastes and technologies evolve, some plans turn out to be brilliant, while others turn out to have been misguided…

The second flaw in mainstream macreoconomics is to ignore the time that it takes to discover successful production processes. There is a trial-and-error process at work as enterprises are launched. The fortunate few will expand, but most new firms will fail. Starting from a situation such as one that prevailed in 2009, with many previously-viable patterns of production no longer sustainable and consequently high unemployment, it takes a lot of time and effort to discover the new patterns of specialization and trade that will reveal everyone’s comparative advantage and restore full employment.

The importance of this laborious discovery process is what I think is missing from Fischer Black’s account of macroeconomics. He insists on using the term “general equilibrium,” while I believe that it is important to recognize that the economy is never in an equilibrium state. Moreover, the adjustment to changes in tastes, technology, and shocks (such as a surge in oil prices) can be long and painful.

The CBO’s Economic Outlook

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The Congressional Budget Office, a Koch-funded organization known to be affiliated with the Tea Party, writes,

CBO estimates that the ACA will reduce the total number of hours worked, on net, by about 1.5 percent to 2.0 percent during the period from 2017 to 2024, almost entirely because workers will choose to supply less labor—given the new taxes and other incentives they will face and the financial benefits some will receive.

They also write,

Federal revenues are expected to grow by about 9 percent this year, to $3.0 trillion, or 17.5 percent of GDP—just above their average percentage of the past 40 years…

Federal outlays are expected to increase by 2.6 percent this year, to $3.5 trillion, or 20.5 percent of GDP—their average percentage over the past 40 years. CBO projects that under current law, outlays will grow faster than the economy during the next decade and will equal 22.4 percent of GDP in 2024.

These right-wing nut cases do not acknowledge that the real problem that we face is austerity.