Monday, April 30, 2007

Religion: Making the Impossible Possible

In 1950 Kenneth Arrow published an article in the Journal of Political Economy titled, “A Difficulty in the Concept of Social Welfare”. This and related work led him to a Nobel Prize in Economics. Arrow had set out to establish a method for aggregating individual preferences to come up with some sort of intelligent social welfare function. He couldn’t do it. So, like a good economist, he set about trying figure out why he couldn’t do it. He managed to prove it was impossible. The result is generally called, “Arrow’s Impossibility Theorem”. The theorem amounts to a relatively simple statement; any consistent well behaved aggregate preference ranking must be the preference ranking of a single individual, and that’s not very aggregate. There is no way to aggregate preferences and retain many of the properties we think preference structures should have. There are 5 or 6 properties a well behaved preference structure should have, depending on how you count. These properties include things like reflexivity, completeness, transitivity, etc. Most of these properties seem pretty mundane. The problem comes when we try to come up with a method for combining them.

What does all this have to do with religion? Consider a situation in which you have to get a large group of people (more than 3) to agree on a fairly complete set of principles to live by. This set of rules should be reflective of the preferences of the group, otherwise they won’t be followed. But Arrow’s impossibility theorem tells us that we can’t incorporate everybody’s preference or the set of rules will internally inconsistent. Any set of rules that is grossly illogical probably won’t last very long. This problem would tend to make large scale society impossible.

One solution is to impose one preference structure on the group. This is, of course, going to create resentment. This is one reason why dictators tend to have to use a “secret police” to rule. There is another way to pull this off. HereThis is religion is a solution to a secular problem. If the preference structure comes from outside the system – particularly from a divine being – there’s likely to be a lot less resentment and resistance. This is why the divine right of kings worked as well as it did in Europe.

With the loss of religion as a method of defining an appropriate social welfare function we’re kind of left at lose ends. It’s getting harder and harder to get large groups of people to agree on anything positive – negative is easy. We’re seeing politics and social movements become increasingly fractious. The result is going to be a movement toward ever smaller political units. We’re seeing this in a lot of the world already, and the trend is only going to continue.

I’m not saying God does or does not exist. Simply that society could not exist without such a concept.

Wednesday, April 25, 2007

The American Nightmare

or "How To Spend Yourself to Death".

This if for Anon - who needs a real handle.

Ever increasing attention is focused on the state of the American economy. The general agreement seems to be the down turn is nigh, the only question most people are still asking how bad will it be?

One of the most commonly cited concerns is the US government budget deficit. The Bush lead spending programs – particularly military – are one of the main focuses. The key concern is the run up of the deficit and debt. The implication seems to be the American government is now over extended in its spending and cannot engage in any further stabilization or stimulation policy. Basically, people are arguing that the US can’t afford its current spending practices.

This isn’t entirely the case, not on government front. The US deficit peaked in the late 1970’s and early 1980’s. It finally returned to surplus under Clinton. Clinton managed to ride personal tax increases and increasing transfers to a surplus. The Bush administration has, however, reversed both these trends and started running deficits again. My objection to the spending is what the population is getting in return. Bush has also been enjoying relatively low debt service costs. The bottom line is that budget situation in the US has been worse in recent memory, and is only a cause for small worries - right now.

The real terror is not government spending at all. What gives me the sweats is the personal savings rate. For the first time since WWII the US personal savings rate is negative. This is the continuation of a trend for an extended period of time. The average American’s net worth is declining rather than growing. Americans are consuming more than they earn. This is a definite cause for alarm, particularly when combined with the government debt.

How can the average American consume more than they earn? There are essentially two ways.

1) Draw down savings and assets. This is partially driven by demographics. As people move from work to retirement they tend to dis-save. That is, they spend their accumulated wealth. To do this they generally sell financial assets.

Selling something means that somebody else must be buying. But if the average American is selling, who’s buying? It can’t be other Americans,l it has to be foreign citizens. The US citizenry is selling off its assets, both domestic and foreign, at an alarming rate. This has dramatic implications for future consumption possibilities.

This has been going on for years. The US has been running a Current Account deficit for decades. This has meant a draw down of American assets. What makes the current situation a cause for worry is the speed at which its happening and the nature of the spending that’s taking place. It won’t take long for the US to hit a capital ownership crisis at this pace. What happens when they run out of assets to sell?

2) The other method of financing consumption beyond income is to borrow. Due to current monetary policy in the US, borrowing is cheaper than it has been in generations. Automotive manufacturers are offering financing at 0%. It was not uncommon to see mortgage rates advertised below 4% a couple of years ago. The low interest rates were in large part driven by the policies of the Federal Reserve after 9/11. The goal was stimulate the economy to avoid a recession. Largely it worked, for now.

Here’s the problem with lose monetary policy. If you run it for too long you get high inflation – which nobody wants right now. This means that lose monetary policy must be temporary. People, businesses, and governments tend not to realize it is temporary when considering borrowing. As a result they tend to borrow more than is reasonable. The problem arises when the interest rates do rise and the loan becomes unaffordable.

The other question is who are they borrowing from? A lot of the money that was lent to the sub-prime mortgage market was new money – part of the monetary expansion designed to keep interest rates low. The remainder of the funds have to be coming from outside the country. Again the US is transferring wealth abroad. The difference here is the payment will take place in the future, rather than today.

So why does all this mean the Americans are in real trouble? Simple, the sale of assets and borrowing is financing consumption not investment. Very little of the spending is going toward things that are going to expand consumption opportunities in the future. All they’re doing is transferring consumption between time periods, not generating more of it. The real problem will come when the younger American population figures out that they are going to have to reduce consumption to pay back what has been spent. I’m not sure what the response is going to be.

The best case scenario is this; with the US unable to consume a number of countries will be lead into recession, not just the US.

How hard the recession depends on how quickly lenders go after real assets and the response of the American consumer. My guess is it will be worse the ’91.

Friday, April 20, 2007

Losing the Frontier

For the last couple of days all you hear about on the news is the Virginia Tech shootings. Before we knew that the person had pre-existing psychological issues, it seemed like an excellent example of something I’ve been worrying about on and off for a while.

There are no more frontiers left in our society. We have both poles and a few other areas that we’re poking around in, but we’re currently (wisely) trying to limit their exploitation. This has huge implications for a society. There have been very few societies that have been able to survive without a frontier. Moreover, none come to mind that enjoyed much in the way of growth or personal freedom.

Why is the lack of a frontier so important? It means that there are no more outside options. If you can’t make it or don’t fit, there’s only three things you can do. Accept a place in the lower rungs of society, try to over turn the whole thing, or become so frustrated that you do something incredibly destructive. The problem gets even worse when one considers the issue of religion. Consider the current American, and to a lesser extent Canadian, divide between the fundamentalist Christian rightwing wingnuts and the dogmatic pseudo-hippie-dippies on the left. A huge part of the problem is that both sides are essentially fascist. Both sides think the world will be better if everybody behaved according to the unquestionable views of the person doing the talking. So any meaningful compromise that might be reached will be viewed as selling out by both sides.

I’m convinced one of the reasons why we’ve enjoyed so much growth in the last 500 years is that there’s been an outside option. If you were really unhappy with the rules of the land, you could try and make your ideal society work someplace else. The “pilgrims” in the US are a classic example. Few resources were lost fighting pointless battles. If these puritans weren’t able to try and make a go of it in North America it likely would have been a civil war or uprising. Currently both sides (wingnuts vs hippie-dippies) are locked into what looks like its going to be a long and drawn out political fight that’s not going to solve anything. No matter what the outcome, win, lose or unlikely compromise, there is nowhere for the dissatisfied to go. So the fight will start again. If there were a frontier, one side could largely have its way and those that didn’t like could go and try the frontier. Colonization also served a lot of the same purpose for the colonizers, but not the colonized.

Now that most of the earth is populated and settled, there isn’t a place to try and make a go of it under different or no rules. This tends to be when societies and cultures collapse, when the outside option is gone. We seem to be going down that some route in North America.

I don’t see any near term way out. The only possible hope seems to be space exploration and colonization. The resources appear to be there to make possible. There are a number of problems that need to be overcome to make pay financially. But remember, North America wasn’t originally discovered or explored just for profit, but for glory too. Increased social stability at home was the real benefit.

We need to start viewing space exploration and colonization in the same way. The main benefit won’t be the resources we’re able to capture and exploit. The main benefit will be the return of an outside option.

Thursday, April 19, 2007

Health Care Investment

As I sit here with my leg in a splint, I begin to ponder the Canadian health care system and the constant claims that health care spending constitutes an investment. {My leg is in a splint because I dislocated my kneecap (for about the 12th time). Its not bad, not even that painful any more, just annoying. But that’s a story for a different day.}

Creating a publicly funded health care system was probably one of the most intelligent things Canadian governments have ever done. The system provides coverage to the entire population and we end up spending a significantly smaller portion of GDP to get it done. (This is compared to the American private system). The current system is not perfect. There are a number of things that can be improved. The basis of the system, “universal” health care with public funding creates a problem that needs to be discussed. The basic stregnth of the system is also its greatest flaw. Health care is no longer treated as if it were scarce.

Providing health care is expensive. The expenditures for various procedures can easily run to the 10’s of thousands of dollars. If this expenditure is to be an investment, we must ask ourselves what the future benefit will be. If there is no future benefit, we’re talking about consumption, not investment.

There is one fact that brings the issue of consumption versus investment to the forefront. The average age of the Canadian population is getting older. The issue arises when we think about where health care spending goes. You tend to be the biggest user of health care when you’re very young and when you’re old. One expense can clearly be claimed to be an investment. Making sure people start out relatively healthy is a good investment. It tends to mean few medical costs in the future or at least delays those medical costs. The trick comes when we start to consider health care spending on people toward the end of their life.

Consider the following situation. A person is dying of some untreatable illness. This person is over 90 years old. They fall and break their hip, confining them to a wheelchair. Is it an investment to spend the 10 to 20 thousand dollars to give them a replacement hip? Or is it consumption? I think its consumption. I want to be clear. I’m not against this person getting a replacement hip. Heck, I’ll even chip in – granted I already do – what I’m objecting to is calling this expenditure an investment. There are ways we could think of this as an investment. The medical team gets to practise a procedure for use on other people. By creating a demand in consumption, we might be spurring some important research and development, but of course we could invest in research and development directly. The problem is that we aren’t doing it for these reasons. We’re doing because it makes us feel good. That’s consumption.

I guess the way to save the investment argument is really cynical. It is an investment from the point of view of politicians. By spending ever increasing amounts of our money on health care they earn a return of re-election.

I'm going to post something with a little more edge tomorrow. Tangentially related to the Virginia mess.

Tuesday, April 10, 2007

Ideally Organized University (IOU)

Let’s get one thing straight before we start. You’ll hear a lot of people talk about people having the right to education. Education is NOT a right. Access to education is a right. Education itself is an accomplishment. All should be allowed to try but not all will achieve an education. Saying education is a right is like saying everyone has the right to sing on a CD that goes platinum. We may as well say that everyone has the right to bowl a 300 game or get a hole in one. It’s easy to identify these things as accomplishments not rights. Let’s get it together and realize that education is something that a person accomplishes, not something somebody gives to another person. We tend to confuse education with a degree. A degree is supposed to be an indicator of accomplishment, nothing more, nothing less.

There’s another important point that a lot of people, particularly students, seem to forget. Universities are not just about teaching – research is also essential. It’s what makes university different from college or high school.

How is my ideal university structured?
1) Each university in the country would have a fixed maximum enrolment based on the potential number of students available – allowing for a maximum of 30% international students. Some smoothing would be required here. Potential students would then have to write a simple entrance exam guaranteeing that the student can read, write, and do basic arithmetic. The seats would be offered in sequence to students, with the highest scoring students selecting the university they wish to attend first. Once the seats at a university are full, on to the next one, or you can wait and re-write the entrance exam next year. This guarantees a basic skill set for incoming students and rewards bright or well prepared students. We clearly cannot depend on the public high school system to do this. This would also serve as a check on the public education system.
2) No distinct programs in first year. All university students will take a relatively common first year, consisting of some mathematics, English, a second language (in which they do not already have training), physical science, social science, and humanities. In all cases there should be at least 2 or 3 different levels offered. Students can challenge for credit in any of these courses with the exception of second language (they’re supposed to learn something new).
3) Classes would be large at the first and second year level (around 100) and much smaller (20 or so) at 3rd and 4th year levels.
4) Students not maintaining minimum standing would be "invited to reconsider their academic options". The basic idea would be you work or you leave.

The real trick will be figuring out how to pay for it. The ideal is to balance control between students and the academy itself. If left solely to students there is a strong likelihood of rapid swings in enrolment and program quality. So the funding would look a little different than what we see today.
1) Government (federal not provincial) would be directly responsible for the maintenance of buildings and grounds. That’s to say the fixed costs.
2) Government would also be responsible for library holdings and electronic journal access. Electronic access would be standardized across the country and institutions. Library acquisition budgets would be based on the formula $ = Base + b * students. The key to this system would be a vastly improved system of interlibrary loans.
3) Government would also be responsible for the 75% of the salary of faculty, but NOT administration. Faculty salaries would have the same base (with regional and discipline supplements).
4) The remaining operating revenue would be tuition driven. Tuition would cover 25% of faculty salaries plus any administration costs. It would thus be apparent to students and everybody else how much is being spent on administration. Any personnel not teaching a full course load will be classed as administration (if you only teach 2 courses – 50% admin).
5) Student loans would be available to any who have a seat at a university. These student loans will cover tuition, books, a room in residence, and a meal plan. Anything else is the student’s or the parent’s responsibility. The idea is loans will keep you alive and able to study but that’s it. No income testing or anything like that.
6) Student loans would be repaid through the income tax system. A portion (up to all) of the student loan maybe forgiven upon working in Canada or a specified region of the country. If we need more MD’s in PEI, the provincial government can buy and offer to forgive student loan debt for MD’s working in the province. Those leaving the country before paying off student loans must either continue to make payments or forfeit citizenship. International students would be required to pay the entire cost of their education.
7) The average employment outcomes of graduates will be publicly available to potential students. As student loans are being re-paid through the income tax system this data will be collected already.
8) Programs not maintaining minimum enrolments for extended periods of time(to be decided on a program by program basis) will closed. Programs with exceedingly heavy enrolments for an extended period of time will be first audited for quality and graduate satisfaction. If the audit is positive, resources may be transferred from closing programs. If the audit is negative no additional funds will be transferred.

That’s it. There’s still academic freedom. No service model- this isn't like going for pizza. The academy actually works as the difference incomes still shows. There are ways to make it better, but we’ve got to get over the idea that the system is fundamentally broken at the teaching end. The breakdown is at the administrative end. If graduate outcomes are known, students can vote with their feet. By fixing the number of seats we prevent the current race to the bottom. It’ll never happen this way, but that’s my dream.

Let's hear it for Good Ol' IOU!

Wednesday, April 4, 2007

"Investing" in Education

In my rantings on the provincial budget I said I’d talk about the “investments” in health care and education. I’m going to tackle education first. I’ll get to health care later this week and then I’ll attempt the state and future of the US economy (as requested).

Education has historically been one of the best investments a region could make. The return has been high and the risk low. This is starting to change for lower levels of education. There are a number of ways this can be explained. The most generous explanation to the public education system is to argue that as basic education becomes more available and open to people of all backgrounds, the skills associated with education become less scarce and thus can demand less of a return. This likely explains only a small portion of what we’re observing.

The other possibility is much more damning to the public education system. Even though the number of real dollars spent on public education has been increasing over time, the quality of education received by students has been falling. This is in fact a significant portion of the problem. The public education system in New Brunswick has lower expenditures per student than some other provinces but greater than others. Spending more may not be the only solution. Getting better value for the money we do spend might be a better way to go.

Consider the basic data. Approximately 86% of the population of New Brunswick has education of grade 9 or better. (gnb link) That’s a pretty good educational attainment. Less than 14% of the age 15+ population hasn’t finished the equivalent of junior high school. Less than 2% of the 15 to 24 age cohort has not completed grade 9. The New Brunswick school system is doing a good job of making sure people stay in school. This would tend to support the argument I first made about the return to high school education decreasing as more people achieve that level of education. If only it were the case.

The scary part happens when we consider the provincial literacy rates. Approximately 50% of the total population would have a hard time following written instructions. An even greater portion would have a hard time reading a newspaper article. People in this situation are described as functionally illiterate. 37% of the population aged 16 to 25 can’t follow written instructions remember less than 2% of this age group didn't finish grade 9. This is clear evidence of a problem. Combined with the PISA scores it’s evidence of a huge problem. The current system doesn’t work.

If we’re going to “invest” in education we should take steps to make sure we aren’t just throwing money away. It’s time to take a hard look at how education dollars are spent. We’ve got more and more teachers who are experts in teaching and fewer and fewer in who are experts in any subject matter. We’ve got more and more people working for the education system outside the classroom. I suspect it might be time to fire a number of teachers and a whole lot of administrators. It’s for time education spending to provide education not just jobs.