Archive for August, 2009

31
Aug
09

the capital problem

Pretend you’re poor. Actually, you have absolutely no money, but you know a really good investment to make. In fact, the investment is a sure thing.

If capital markets are working properly, you should be able to overcome the fact that you currently have no money and get some lent to you so that you can make the investment (assuming you can demonstrate to the bank or other capital holding institution that there are clear cut benefit accruing to your investment).

So, given the relationship between education and wages, why do we need public financing of education? Why won’t people just make the sure fire investment in human capital?

The reason is that capital markets cannot be accessed. Here’s Hoxby.

In the classic statement of how much schooling an individual should choose, an individual should invest in the level of schooling that equates that individual’s personal discount rate to the internal rate of return from the marginal year of schooling (Becker, 1964; Rosen, 1977). In deciding on the privately optimal investment, an individual will mainly think of the returns to schooling due to higher lifetime earnings. For the socially optimal investment, the individual should also internalize any additional returns that may occur if that person’s decision provides positive spillovers for others. For instance, human capital might provide positive spillovers if people learn from one another in the course of everyday contact or if people who are more educated are better citizens.

School finance faces three challenges in getting people to make such optimal investments. The first challenge, and by far the most serious, is to motivate people to make privately optimal investments in the face of a severely imperfect capital market. A small child cannot commit to repaying debts assumed for investments in schooling, and parents cannot commit a child’s future earnings to repay debt they might assume for investments in that child’s schooling. Even if family relationships could be used to enforce repayment, liquidity constraints would likely prevent many parents from making optimal schooling investments using their own funds. Children are biologically timed to need schooling when parents’ income and wealth are low, and much value would be lost if parents were forced to spread schooling out in smaller chunks over more years.

Education is most effective when kids are young, but this is most often when parents are relatively poor, and kids can’t promise to pay back with their future earnings, and the parents can’t commit their increased further income (the “payoff” to the investment) for their kids. Parents can’t make binding contracts for the mature future versions of their children.

In the classic statement of how much schooling an individual should choose,
an individual should invest in the level of schooling that equates that individual’s
personal discount rate to the internal rate of return from the marginal year of
schooling (Becker, 1964; Rosen, 1977). In deciding on the privately optimal investment,
an individual will mainly think of the returns to schooling due to higher
lifetime earnings. For the socially optimal investment, the individual should also
internalize any additional returns that may occur if that person’s decision provides
positive spillovers for others. For instance, human capital might provide positive
spillovers if people learn from one another in the course of everyday contact or if
people who are more educated are better citizens.
School finance faces three challenges in getting people to make such optimal
investments. The first challenge, and by far the most serious, is to motivate people
to make privately optimal investments in the face of a severely imperfect capital
market. A small child cannot commit to repaying debts assumed for investments in
schooling, and parents cannot commit a child’s future earnings to repay debt they
might assume for investments in that child’s schooling. Even if family relationships
could be used to enforce repayment, liquidity constraints would likely prevent many
parents from making optimal schooling investments using their own funds. Children
are biologically timed to need schooling when parents’ income and wealth
are low, and much value would be lost if parents were forced to spread schooling
out in smaller chunks over more years.

What’s the solution? Hoxby makes a really interesting point about one way to solve the capital problem, but I’ll get to that next time.

31
Aug
09

the dutch

I got a table at my restaurant who didn’t tip me well. They were dutch.

So, at first I wanted — in the spirit of some great idiom posting on Amateur Night (here and here)– to list a bunch of pejorative idioms making fun of the dutch.

And I’ll still do that:

Examples from the time of the Dutch wars include Dutch reckoning, a bill that is presented without any details, and which only gets bigger if you question it, and a Dutch widow, a prostitute. In the same spirit, but recorded later, are Dutch courage, temporary bravery induced by alcohol; Dutch metal, an alloy of copper and zinc used as a substitute for gold foil; Dutch comfort or Dutch consolation, in which somebody might say “thank God it is no worse!”; Dutch concert, in which each musician plays a different tune; Dutch uncle, someone who criticises or rebukes you with the frankness of a relative; and Dutch treat, one in which those invited pay for themselves (this last one first appeared only in the twentieth century, but it continues the associations).

But what’s more interesting is that, as this brief article explains, these idioms are only in English because they entered the English language as a result of the various Anglo Dutch wars in the late 17th century. Basically, the dutch were blamed for everything at this time and mocked at every turn, and this hatred became a linguistic artifact.

Also, just stumbling around, I found this blog discussing Dutch idioms (but I didn’t find any about the English, so the hatred must have not been as intense the other way around). One of the idioms is “the monkey comes out of the sleeve,” which means that a previously critical but hidden piece of information has just been revealed. Aha, the monkey’s out of the sleeve!

31
Aug
09

Google Chrome

goog chrome

One of my computer-savvy friends (a programmer) told me that he uses google chrome and that I should too. It was a funny conversation, because I’m always telling various grown-ups that internet explorer is outdated and that everyone in the know uses firefox. But apparently they don’t. People in the know use google chrome, and I’m a first-level ignorant person spreading falsehoods to people who are twice removed from the preferred option.

But maybe not so fast. I looked up the supposed benefits of google chrome (the primary one being that things load faster), and found that the latest addition of firefox can probably keep pace.

28
Aug
09

broken wings vs. drive

Here are two great 80’s bands singing what I think of as two very similar songs.

Mr. Mister “Broken Wings

The Cars “Drive

Again, I think these songs/videos are interesting to compare because they are both emblematic 80’s ballads with eerie techno synthesizer/piano work. Also though, both the videos are in black and white, and mainly involve the lead singer just singing.

28
Aug
09

school spending

In this post, I was gushing about Caroline Hoxby’s article, and I want to reiterate this judgment: it is awesome. There are about 15 interesting things to pursue from this paper, and hopefully I will lay out some of them in this blog.

Here’s one. It is apparently a huge misconception to believe that school districts with poor residents spend less on a per pupil basis than richer areas. Here’s Hoxby:

Another popular misconception is that per-pupil spending is very low in urban school districts with poor residents. As a statement of fact, this is just not generally true: for the 50 school districts in the United States that best fit this characterization, the ratio of the school district’s per-pupil spending to its state’s median spending averages more than one. If central city school districts were to spend (per pupil) what typical school districts spend, they would spend less on average. This is so partly because urban school districts with poor residents have commercial property that generates revenue but no additional students, and also because most of the state and federal modifications to local school finance in the past 25 years have had the effect of increasing spending in districts with poor residents.

Hoxby goes on to spell out what this means:

The most important trend in the problems facing school finance is that most states have experienced fast growth in per-pupil spending but rather stagnant student achievement for the last 25 years (Hanushek and Rivkin, 1994). This disjunction between spending and student achievement is the reason that so much interest is focused on explaining why the same school quality might cost more or less under different systems of school finance. The current ‘‘predicament’’ of school finance is a failure of productivity rather than a failure of spending—for most states.

In other words, the problem is similar to our healthcare problem. We spend a lot of money on education (compared to what we used to) but we don’t seem to be getting any more educated.

28
Aug
09

Jiffy lube and health care

jiffy lube

I went to get my car serviced the other day, and predictably, it transformed from a simple oil change to a type of critical mechanical surgery where the future of my car hung in the balance. After the technicians got a look under the hood, there was nothing but bad news. Did I want to make it all go away for an exorbitant fee? Did I want synthetic oil for double the cost? Did I want to pay 5,000 dollars for a new engine (the old one apparently had miles on it. Go figure)?

There are two components to this familiar pattern of behavior.

1. The technicians have an information advantage. They know which maintenance is urgent and which is not. Up to a point, I do not.

2. The technicians stand to gain financially from any maintenance they perform. They are diagnosticians and repairers all rolled into one.

So, since I don’t know what needs to be done and they do, they will suggest that the sky is falling. I knew this, and so assumed most of what they were telling me were filthy lies. But it’s hard to tell the lies from the truths. After all, I knew my car needed some stuff done, that’s why I brought it in.

See, in the usual market situation, I know what I want and then go out and find it at a cheap price. I shop and the market delivers. But with such an information disadvantage, jiffy lube becomes the shopper and the provider at the same time. They are shopping for me, but their interests are not perfetly aligned. If I were shopping, I would try to spend as little as possible, but since they’re shopping, more spending is good.

(Notice that one move might be to call jiffy lube ahead of time and promise them that I would not buy any maintenance from them, only diagnostic advice. Knowing that they would not profit from false diagnostics, they might give me straight talk.)

This scenario is very similar to healthcare. The doctor acts as shopper and provider, and has an information advantage. If you’re sick, he can tell you all sorts of things that you need to do, and not all of them may be necessary. Notice though that in some situations, the healthcare scenario is even worse than the jiffy lube scenario. This is because in healthcare, I usually have insurance of some kind.

In the jiffy lube situation, I’m the payer, even if I’m not the shopper or the provider, and so at the outside, I can call bullshit and refuse to have a new engine put in (my engine runs like a dream thank you very much). But if I had maintenance insurance that just paid whatever bill was put before it, then I would pay attention even less. I would ask for the new engine and the nitrous oxide tanks. I wouldn’t be footing the bill after all.

So, could I just use one physician for purely diagnostic services, and then just get the proper care from another physician, just as in the car maintenance scenario? Well, no, because in medicine there is not really such thing as a standard procedure. Even if I went to the second doctor and said “look, I know I have high blood pressure, just treat that,” this second doctor still has huge latitude to perform or suggest extraneous tests and procedures. Also, if a third party is paying, I will go right alone.

27
Aug
09

high school movies

I really love movies about high school, and this enduring genre has spawned some really good movies, but also some really bad ones.

Recently, I watched two high school movies that for some reason I had blurred in my mind. One was fast times at ridgemont high and the other was dazed and confused.

Originally, I was going to write a comparison between these two same-type movies, but after watching further, I realized that such a comparison would be like holding final fantasy X on equal footing with VII (see this post).

Nonetheless, I’ll do a little comparing. Fast times is from the 80’s and details a young girl’s attempt to get laid. All the characters are a little too cheery and inauthentic and the plot is a random series of short interactions between various characters. These kids are just too innocent and it really clashes with the supposedly risque sex quest that the lead character is on. Also, the movie just isn’t funny. The “mean teacher” archetype doesn’t really have any distinguishing characteristics, and the “stoner” kid, played by Sean Penn, isn’t really funny either. He just talks like he’s stoned, which he is. Again, in keeping with the strange innocence of the movie, the references to drugs are oblique and you never see him smoking I don’t think.

Dazed and confused on the other hand is certainly a master work, and after looking it up on wikipedia, I should have known that it would be in a different league than fast times.

First, the soundtrack is awesome — as many have pointed out before — but the real genius is the way that music is blended with the American fascination with the automobile. Because the characters are almost always in the car, they listen to the soundtrack too because its blaring from their 70’s muscle cars.

Also, these kids are real. They smoke up (all the time), get in fights, vandalize things, and try to get laid. The violent maturity of the world constructed by dazed and confused is wonderfully driven home by one of the very first scenes in the movie, in which a boy is making what looks like a massive wooden paddle in shop class. These paddles are then used by the seniors throughout the movie as a symbol of the hierarchical order they control. Also, their are names written on the paddles used by the different boys including “soul police” and my favorite “fuh q.” This is high school, and has all the power and importance that high-schoolers believe it to have when they’re walking the halls, watching out for the assholes and trying to make eye contact with the cute girls.

Finally, the endless driving around in this movie reminds a lot of my life in Texas. People kind of circle the same areas all night in their cars looking for something to do or someone to meet. This is not surprising given that the director, Richard Linklater, was from Texas.

O yea, and this movie has “tuesday’s gone with the wind” in it. Great.