Wednesday, September 18, 2013

Larry Summers Is Not the Main Problem

I'm as pleased as anyone that Larry Summers has withdrawn from consideration as the next Chair of the Fed. I thought he would do a terrible job. But Summers himself was never the real problem. His candidacy was only a symptom. The real problem is that we have a President who wanted to nominate Summers in the first place. Obama does not understand what's wrong with the American economy, and five years into his term, he persists in some basic misunderstandings.

There are two basic Democratic narratives to explain the 2008 financial meltdown, and they contradict each other. When Obama took office, he had to choose which story to believe. The first story is that the economy thrived under Clinton, and Bush's people screwed it up. I'll call that the Democrat vs. Republican story. It's partisan, but not ideological.

The other story is that Clinton's economic policies led to a short-term boom, but set us up for the long-term bust that started in 2008. The toxic securities that crashed the system in 2008 were deregulated under Clinton. Deregulation of banks started under Clinton. Clinton thought Alan Greenspan was a genius. The list goes on. The Bush people, at worst, only exaggerated what Clinton's people had already been doing. Their basic emphases (favoring investors over workers, worrying more about inflation than unemployment, etc.) were the same. Call this the Left-vs.-Right story. It's ideological, but not partisan.

You can't believe both of these stories if you're going to actually come up with a plan to improve the economy. You have to pick one. If the Democrat-vs.-Republican story is the right one, the best thing to do is to put Clinton's old academic advisers back in charge. But if the Left-vs.-Right story is true, then putting the old Clinton guys back in charge is the LAST thing you should do. Clinton's economic policies, devised by Robert Rubin and the so-called "Rubinites" associated with him, are either the way out of our country's economic mess or a way further into that mess. It can't be both.

Obama clearly chose the "Clinton knew how to run the economy" story at the outset of his first term. That makes sense. Obama had never had a strong personal vision for economic policy. (Read the economy chapter in The Audacity of Hope and you'll see what I mean.) He was immediately forced to take responsibility for a national economic crisis that had hit late in his election campaign, giving him almost no time to think our economic problems through or develop new policy ideas. And he had to stop the bleeding somehow. Going with the Democrat-vs.-Republican story gave Obama a ready-made team to put in charge and a set of basic policies to follow. (Larry Summers, Clinton's old Treasury Secretary, is one of the main Rubinites.) Going with the Left-vs.-Right narrative would have meant coming up with a completely new team and a completely new set of ideas. But who would he have picked? How would he distinguish good policy advice from bad? Accepting the Left-vs.-Right narrative meant moving into uncharted territory during a national emergency. Throwing out the old playbook and starting over is a much riskier move, and Obama hates unnecessary risks. Electing Hillary Clinton instead of Obama would not have avoided this problem. Hillary would have relied on Bill's old economic advisers, too.

While Obama's original choice might have been reasonable at the time, it has also turned out to be wrong. Five years later, growth is still sluggish, unemployment still high, and income inequality more rampant than ever. We've had five years of the Rich Man's Recovery, where the tiny fraction at the top have started growing even richer than they were in the Bush II years, but the rest of the country is still nowhere close to getting back to economic health. Not only is that not success, it's potentially a recipe for much bigger failure. The high levels of inequality make the whole system less stable and more prone to catastrophe.

Sure, we are almost certainly better off than we would have been if McCain, rather than Obama, had been calling the shots, and better off than we would be under President Romney. A move to the kind of Austrian economics that people like Rand Paul favor would have been a disaster. Obama understandably wants credit for keeping the economy from going off the rails completely and for whatever recovery has taken place over the last five years. He's committed on some level to defending his earlier decisions, and doesn't feel he has any room to maneuver on his left. He's right as far as that goes: his centrist policies are surely healthier than hard-right economic ideology would be. But "better than crazy" is not good enough. And while Obama's policies fit reality better than the right wing's do, the actual economic reality is still far to Obama's left.

Centrism is almost never the long-range solution to a fundamental crisis. A major crisis is usually a sign that a set of policies have major underlying problems. Sticking to the middle of the road makes sense in the good times, but disasters as big as 2008 are reality's way of telling you that you are on the wrong road. Proceeding cautiously down the wrong road and obeying a reasonable speed limit only changes how fast you get lost. To actually get out of trouble, you have to turn around and go in a different direction. That Obama wanted to put Larry Summers, the chief advocate of deregulating the exotic securities that caused the 2008 crisis, in charge of the Federal Reserve, shows that Obama still thinks that he can keep going down the Clinton/Bush economic road and it will all be okay if he just drives carefully enough. That he wanted to have Larry Summers riding shotgun with him is bad. But even if Summers isn't officially navigating, Obama is still following the wrong directions.

cross-posted from Dagblog

Thursday, September 12, 2013

Why Obama Won't Make College Cheaper, Part 1

Education reform in America is always an attempt to get something for free. It has been that way for at least twenty-five years. No matter what the scheme of the hour is (charter schools, Teach for America, No Child Left Behind, Race to the Top) or whether you're talking about K-12 or college, every reformer makes one of two promises. Either they promise to make education better without spending any more money, or they promise to make education better while spending less money. Education reformers basically say, "Four dollars is too much to pay for a hamburger. Bring me a three dollar steak."

If you ask why the reformer expects this strategy to work, or how it could, you will be told to "be realistic." It is of course deeply unrealistic to expect taxpayers to increase spending on education. So the only "realistic" course of action is to create excellence through funding cuts. Since no solution but a three dollar steak is acceptable, we just have to figure out a plan that gets us an especially juicy, delicious, and healthy steak for three dollars. There's always a clever new three-dollar-steak scheme, no matter what happened with the last one, and you just have to give the new idea a chance. Twenty-five years on, and education reformers are still talking about the newest, hottest plan. That's because none of the old plans did much good.

President Obama's new college affordability plan is one of these reform efforts. He plans to make college cheaper for everyone, and to do this without spending any more money. Instead, he will shift around the money the federal government already spends to create incentives. College costs are a real problem, and Obama is right to want those costs lower. His plan will not actually do that.

Why not? There is the problem of getting the plan through Congress.There is the problem that this plan (like No Child Left Behind) relies on crude and oversimplified metrics that pretend to measure complicated and slippery things, and then penalizes schools based upon that statistical pretense.But the real problem is that you can't set prices for things that you don't buy. Obama's plan won't change college prices, or colleges' underlying costs, because there simply isn't enough money on the table to make a difference.

The federal government is the biggest individual player in American higher education, because it's the only entity that contributes, directly or indirectly, to nearly every college or university in the country. That means a lot of money, in absolute terms: the country has nearly 4500 colleges, universities and community colleges, with well over twenty million students. But the federal government isn't the most important contributor to any of those 4500 college budgets. It isn't the second-biggest contributor to those budgets, either. (The only exception is the service academies. The United States government pays for the entire budget at West Point and Annapolis, and they get to set the tuition: free.) We don't have a federal education system. Washington doesn't run our colleges, and doesn't pay for them. Instead, we have a vast decentralized system with thousands of schools competing in a free market.

The federal government does pay enough money to influence college's actions. Title IX, for example, is enforced by a threat to strip all government grants and funds from schools that don't comply. Losing ten or twelve percent of your annual budget really hurts; think what a ten-percent pay cut would do to you. So paying ten (or twelve, or six) percent of every school's budget gives you a lot of say. What it doesn't give you is the power to make schools give up larger sources of revenue. Tuition is a bigger part of the budget than federal funding, hands down. A deep cut in tuition could very quickly add up to more revenue lost than the federal government adds. Even if you threaten to pull all of your financial contribution (and in practice the government would only be diminishing it, in gradual stages), that's not enough to make a school forgo MORE than what you're paying. If you tell a restaurant that they have to cut the price of a steak dinner in half or you'll stop leaving a fifteen percent tip, what do you think will happen?

The reason no restaurant will sell you a steak for three dollars is that no restaurant can buy a steak for three dollars. People don't generally sell things for less than those things cost them. In fact, the only thing for sale in America for less than it costs is a college education. Colleges are already discounting tuition as much as they feel they can afford. Tuition never covers the full cost of operating a college, and the wealthier the school, the more it spends in excess of tuition. (The Harvards and Princetons of the world have the luxury of spending much more than they charge.) So college tuition is already being set significantly below cost. Tuition grows because costs grow. Why?

If you want to be a successful education reformer, meaning you want to make a good living peddling your five-point plan for three-dollar steaks, your answer should be cast in moral terms. Costs are high because someone lacks character! High costs can only be a sign of laziness and corruption! After all, that's what makes those costs amenable to "reform." And of course, the moral explanation is satisfying, because it allows you to attack anyone who disagrees with you as a bad person.

But if you look around America's 4500 colleges, you see almost all of them behaving the same way. There isn't a group of "virtuous" colleges holding down costs and another group of decadent spendthrifts charging 50% more than other schools. There are only slight differences between institutions. It is not that all 4500 colleges happen to be run by weak and depraved characters. When you see thousands of independent institutions behaving the same way, it's a sign that there are actual economic reasons in play. Colleges act the way they do because they're responding to real pressures that "character" will not make go away. Colleges don't spend money because somebody at the college was raised wrong. Colleges spend money because they believe they have to. Colleges spend what they need to spend to survive.

Those costs keep growing for reasons that I'll try to explain in Part Two.

cross-posted from Dagblog