Advertising claims that don't always mean what they seem to mean

While watching (sporadically) Monday Night Football and reading John LeCarre's The Lookingglass War, I noticed a claim by Toyota: "80% of all Toyotas sold over the past 20 years are still on the road."

And just what do they want you to think? Well, one possibility is that they want you to think that 80% of the Toyotas sold in (not just since)1990 are still on the road.

Suppose that Toyota's sales have increased at a constant 5% per year over the part 20 years. Then, it's possible that the oldest Toyotas still on the road were sold 14 years ago.

(The faster the rate of growth in sales, the closer in the past 80% of the sales would be; at 7% per year sales growth, it'd take only the last 13 years.)

I guess the moral of this is to be wary of advertising claims. (Did anyone need to learn that? I hope not.)

Productivity and the Employment Situation

When I read the productivity report for the third quarter (July through September) on Thursday, November 5, I knew we would see a disappointing employment report for October on Friday, November 6.

Productivity rose at an annual rate of 9.5% in the third quarter. And output did not rise nearly that fast. It's clear that when productivity rises more rapidly than output, employment will fall. And if output does not rise sufficiently faster than productivity growth, employment will rise very slowly.

Now, productivity growth can change a lot from one quarter to the next, and the correlation between this quarter's productivity growth and last quarter's productivity growth is what one might call modest (0.018, which is not significant at any conventional level of significance). Nonetheless it does suggest that a higher rate of productivity growth last quarter does not suggest a slower rate this quarter.

The productivity growth that occurred in the third quarter is hardly bad news. But, assuming productivity growth did not suddenly slow down in October, and that output growth did not suddenly accelerate, then, we were likely to be facing an employment decline. And decline employment did. If you want the gruesome details, they are here.

Tuition and Enrollment at Elite Private Universities

As I think about the article (“The $50K Club: 58 Private Colleges Pass a Pricing Milestone”) in the November 1 edition of the Chronicle of Higher Education on the breakthrough into $50,000+ annual college costs, I find myself puzzling over one issue. What has happened to undergraduate enrollment at these institutions?

Since I entered college (at a small, selective, private liberal arts college) in 1965, the population of the United States has increased by about 70%. Median family income has increased by about 50%. So the number of students with the academic qualifications to succeed, and the family income to support, enrollment at elite universities has probably close to doubled. In addition, rising populations, expanded access to education, and rising incomes in the rest of the world has expanded still further the pool of fully qualified students.

But what has happened to undergraduate enrollment at elite private universities?

If the experience of the school I attended (DePauw University) is any guide, the answer is—almost nothing. Undergraduate enrollment at DePauw in 1965 was about 2,400. It is now about 2,200 (and the decline was planned). If the experience of the other highly-regarded small, selective liberal arts schools that I know of personally is any guide, the answer is—almost nothing.

So in a market for enrollments at elite private universities in the U.S. that has at least doubled in size, and probably more like tripled or quadrupled in size, if I am right, undergraduate enrollment at these elite institutions has responded little, if at all.

Now I know that one response to this is that the educational experience would not be the same if the school doubled or tripled in size. And I think I agree with that (although undergraduate enrollment at DePauw did roughly double in the 20 years before I entered). But expanding enrollment on the current campus is not the only way for elite private universities to have responded.

The number of institutions that have referred to themselves (or have been referred to by others) as “the Harvard of the Midwest” is quite large. So why not the real Harvard of the Midwest? Why not Sarah Lawrence-Santa Fe? Or Middlebury-St. Petersburg?

Why hasn’t Harvard built a campus in Chicago? I don’t think it could be the cost of doing so; Harvard’s endowment would easily allow the school to have done so, if it chose. It has chosen not to.

A private, profit-motivated business, seeing an increase in demand that allows it to roughly triple its price (in inflation-adjusted terms), would almost certainly seek to expand. It would leverage its brand name to find new locations (at the very least) from which to offer its products.

Elite private universities have chosen, in large part, to leverage their brand names, not to provide increased access, not to expand, but to increase tuition. (And, yes, I know that technologies have changed, that costs have changed. But do we really think that accounts for the entire increase in tuition? I sure don’t.) Unless I’ve missed something. Unless I’m wrong about enrollments.

So let some enterprising reporter find out.

The issue is not just that tuition and other costs have soared; it’s also that elite institutions have responded by not expanding. Let’s ask about that, as well.

Tuition

An article in this week's Chronicle of Higher Education (unfortunately paywalled here) notes that "...58 private colleges and universities published rates for tuition, fees, room, and board totaling $50,000 or more in 2009-10. Last year only five institutions did so." Recalling the tuition I paid when I entered college in 1965, at a selective private liberal arts school, I thought it would be interesting to bring that up-to-date in 2008 prices.

Entering tuition, 1965: $1,400 per year.
Adjusted to 2008 prices: $9,569.
Tuition at that institution in 2009/10: $32,800.

At least my school is not one of the $50K institutions. Makes it a bargain, right?

The leader nationally is Sarah Lawrence University, at $55,788. Northwestern leads the schools inthe midwest at $50,164. Harvard isn't on the list, somewhat to my surprise...

To be fair, the "list price" is not what many-to-most students pay, because of various forms of financial aid, whether need-based or merit-based. Nonetheless, tuition and other direct expenses private, non-profit, four year schools averaged nearly $36,000 this year, nearly 60% of median family income. My 1965 tuition was less than 25% of the median family income then.

Whatever one might say, this looks not like a sustainable trend to me. And, as Herb Stein once said, if a trend can't be sustained, it won't be.

Jack Gilbert

Jack Gilbert has published a new collection of poems, his fifth over a span of 47 years. His first book (Views of Jeopardy) appeared in the Yale Series of Younger Poets. 20 years later, Monolithos appeared. In 1996, The Great Fires (a Pulitzer Prize finalist). Refusing Heaven came out in 2007. He's 84 now, and The Dance Most of All is brilliant. Here's one very short example:
------------------
WINTER IN THE NIGHT FIELDS

I was getting water tonight
off guard when I saw the moon
in my bucket and was tempted
by those Chinese poets
and their immaculate pain.
------------------
Not surprisingly, I suppose, death--or, at least, the end of life--is a frequent visitor.

If you have not made his acquaintance, and if you love poetry, I urge you to spend some time with his words.

FINALLY!! Some Good News

The preliminary GDP numbers for the third quarter are now available, and they show that real GDP has increased at a 3.5% annual rate. Following as this does four quarters of decline, I think we should be in something of a celebratory mood.

The increases were pretty much across the board: "...positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, federal government spending, and residential fixed investment..." Nearly half of the growth in GDP comes from motor vehicles (1.66 percentage points of the 3.5). (This is a potential issue, given that much of this may be a consequence of the "Cash for Clunkers" program, and that program has ended.) Durable goods consumption (motor vehicles are part of that) rose at an annual rate of 22.3% in the third quarter, after falling at an annual rate of 5.6% in the second quarter--a huge turnaround.

A piece of data that suggests caution--nonresidential fixed investment fell at an annual rate of 2.5% in the third quarter, still better than the -9.6% rate of change in the second quarter.

But, overall, this report is really good news. Let's hope the revisions don't change our view, and that the next report continues to be strong.

On the basis for non-profit organizations

Earlier today, Tyler Cowen (answering a reader request to comment on under- and over-researched topics in economics) suggested the economics of non-profit organizations as an under-researched topic. Matthew Yglesias did a little follow-up. One of Cowen's commenters made one of the less-well-informed comments I think I've ever seen: "The non-profit sector is an artifact (or maybe excrudesence) of the tax code. Get rid of that and it goes away."

This betrays an appalling lack of knowledge of the development of a large chunk of the US economy, a sector dating back well into the 18th century, if not further.

Hospitals (and this is true for Europe as well) in the US have been, from their beginning, largely off-shoots of charitable organizations, most often religious organizations. Catholic hospitals are, of course, well-known, but the Methodists, the Baptists, the Presbyterians, the Jews, the Lutherans, and clearly others as well, have long sponsored and supported hospitals. Local, and sometimes state, governments have also established and supported hospitals as well. Yes, for-profit hospitals have become a presence in the last quarter century, but they are still a fairly small minority of the total.

In general, non-penal institutionalized care facilities (nursing homes, orphanages, etc.) have been created and run by not-for-profit organizations.

Education at all levels has also been largely a not-for-profit (or local and state government) activity. Private, not-for-profit institutions dominated higher education, in particular, until the Homestead Act (1862) provided states with strong incentives to create the "land-grant" universities. Privately-run, profit-motivated institutions have largely focused on training--apprenticeship programs (run by individual firms, industrial organizations, and unions, often in cooperation with employers); narrowly skill-focused "schools (beauty colleges, truck-driver schools); technical institutes (DeVry Technical Institute, ITT Technical Institute, and, one from the city in which I grew up--Indianapolis, Mallory Technical Institute). All these profit-motivated places have one thing in common. They do not emphasize intellectual development, or scholarship; they all emphasize acquisition of narrowly-focused, immediately job- and employer-focused skills. (And, yes, states and local governments did get into this as well; in Indiana, the Indiana Vocational Technical College, before it morphed into a community college system, did this kind of training.)

Other private activities operated by not-for-profit entities include such things as the YMCA/YWCA/YMHA movement, providing places for young people to live and gather, with (subsidized) places to live and eat, and with organized activities, generally with some religious overtones. These could be national movements, or local. In Chicago, for example, the Parkway Eleanor Foundation (founded in 1898) provided housing, meals, and activities for young women on their own in Chicago.

The entire settlement movement of the late 19th century, perhaps epitomized by Hull House (also in Chicago) allowed immigrants, and other struggling people, access to various forms of education, culture, and social services.

With much of this, the emphasis was not just on the education, or the housing, or the social services, but on the provision of some moral or ethical guidance, more or less heavy-handed, depending on the inclinations of the organizations involved. So, yes, young people on their own could find housing (and most of them did), but the organizations like the Ys provided housing--and something else. Elementary and secondary schools, and colleges and universities, founded largely by various churches, provided education--and something else. Hospitals and other custodial institutions provided care--and something else. And that something else was not something that would have been provided by profit-motivated entities. (And I write this as someone who has as little contact with organized religion as I possible can.)

The current tax breaks were not the source of these developments, and removing the tax breaks won't (and shouldn't) put an end to them. They have fulfilled a role, and will continue to fulfill a role, that profit-motivated business firms cannot. To refer to them as an "excrudesence"* of the tax code is both wrong and ignorant.

*Clearly, the poster meant "excresence"--"an abnormal outgrowth, usually harmless, on an animal or vegetable body."

It's Ostrom and Williamson

The Royal Bank of Sweden announced the winners of their Nobel Memorial Prize in Economics this morning, and they are Elinor Ostrom (Indiana University) and Oliver Williamson (University of California--Berkeley). Here's what the New York Times has to say:

In its announcement, the committee said Ms. Ostrom “has challenged the conventional wisdom that common property is poorly managed and should be either regulated by central authorities or privatized. Based on numerous studies of user-managed fish stocks, pastures, woods, lakes, and groundwater basins, Ostrom concludes that the outcomes are, more often than not, better than predicted by standard theories.”

Mr. Williamson’s research, the committee said, found that “when market competition is limited, firms are better suited for conflict resolution than markets.”

Addemdum 1:
This, from John Nye's comments on Ostrom (see the link below), is, I think, particularly important: "...creating and accessing markets is often quite costly and hence organization, hierarchy and collective agreement can, under the right conditions, serve as viable or even superior alternatives to market competition." One could say similar things about Williamson's work on corporate structure and governance.

This award probably surprises a lot of people, but it seems to me to be an interesting and deserved one,

Addendum 2:
Somewhere, I read a prediction that economists would be disturbed by Ostrom's share of the prize, because she is a political scientist. Yet that has clearly not been the case, largely, I think, because many economists know and use her work routinely (see some of the appreciations below).

Addendum 3:
Here's Alex Tabarrok's take on Williamson and on Ostrom at Marginal Revolution.
Paul Krugman at the New York Times on the prizes.
Peter Klein at Organizations and Markets promises more comment to come.
Steven Levitt (the Freakonomics guy) chimes in at the Times.
Henry Farrell, a political scientist, comments at Crooked Timber.
And another set from Marginal Revolution, Tyler Cowen on Ostrom and Williamson.
John Nye provides more insights.
Paul Romer (himself a possible winner, sometime), adds this.
Vernon Smith's views are here.
Add in David Henderson, writing in the Wall Street Journal.
Peter Klein gets around to it (at Organizations and Markets).
Nobelist Michael Spence parses the awards.

Addendum 4:
Justin Fox informs us that "...I can report that this means Williamson now gets the most coveted possession in Berkeley: his own free campus parking spot..."

The September Employment Situation

Things are getting better, aren't they?

The (revised) second quarter GDP data show a decline (on an annual basis) of only 0.7% (compared with the preliminary estimate of 1%). And even the 1% decline is a lot less than the fourth quarter 2008 and first quarter 2009 nnumbers.

But, as we (sadly) have come to expect, the employment situation continues to show little or no strength.

*The unemployment rate (as usual, the headline number, but perhaps not the most important piece of information) rose slightly, from 9.7% to 9.8%. And it's up from 6.2% in September 2008, and from 4.6% at the peak of the business cycle in November 2007.

*The employment-population ratio (the percentage of the non-institutionalized population with jobs) continued its decline, to 58.8%, down from 59.2% in August, down from 61.9% a year ago, and down from 63% at the November 2007 business cycle peak.

*The labor force participation rate (the percentage of the non-institutionalized population that is actively participating in the labor force--either employed or actively seeking work) is down to 65.2%, from 65.5% in August, from 66% a year ago, and from 66.1% in November 2007. Furthermore, it has now declined from its all-time high of 67.3% (in January and February, 2000).

*Employment continues to decline. As measured by the household survey, employment fell by 0.56% between August and September, and has declined by 4.25% over the past year and b y 5.32% since November 2007. The other employment measure, based on a survey of businesses ("establishment" employment) fell by (slightly) less than did household employment; it's down by 0.2% compared to August. But the longer-term declines are similar--4.23% over the past year and 5.13% sice November 2007.

If we compare the current recession to the 1980-82 twin recessions, the employment-population ratio has declined by more (down 4.2 percentage points so far, compared with a decline of 2.8 percentage points from January 1980 to November 1982). The unemployment rate has risen more (up 5.1 percentage points, compared with an increase of 4.8 percentage points then). And the percentage declines in employment are larger as well (down more than 5% in this recession, down--depending on our measure--somewhere around 3% then).

This is increasingly feeling like it's going to replace the 1980-82 twin recessions as "The Worst Recession Since the Great Depression" (TM), which doesn't make me, or anyone I know, particularly ecstatic.