Comments on economics, mystery fiction, drama, and art.

Sunday, January 29, 2012

Cost.....or price?

Kevin Drum has an interesting--and in a lot of ways largely correct--post about the declining public support for higher education.  He writes, at one point, about support for "low-cost public universities."

What I'd like to do is make everyone realize that there are two issues here.  The first is the cost (C)of higher education.  This is what the colleges and universities of the U.S. spend (per unit of higher education, however you choose to define that).  The other is the price (P) of higher education, which we would generally equate with the tuition and fees paid by students in order to attend higher education.

In general, in the U.S., the cost is higher than the price:

C > P

Why? At private colleges and universities, at least some of the costs are covered by donations (often, not always, by alumni).  At public colleges and universities, historically a fairly large fraction of the costs have been covered by state appropriations.

Of late, what has happened in public higher education is that the state appropriation part has declined, often precipitously.  But unless the costs are also really declining, the only alternative is a rising price--higher tuition and fees.  How large is the decline?  According to the Chronicle of Higher Education, the decline in 2012 from the prior year is 7.6%.  According to a report issued in 2008 by an organization called "State Higher Education Executive Officers,", in 1980 tuition and fees accounted for 21% of the total budgets of public institutions of higher education.  By 2007, that had increased to 40%.  And it has continued to rise in the intervening five years; a good guess would be that tuition and fees now account for something like 45% of public higher education budgets in the U.S.

And, yes, the costs of higher education have increased, for a lot of reasons.  But what has driven tuition--the price of higher education--up so rapidly has been the declining state appropriation (as a percentage of the total cost of higher education).

So let's be clear.  The price has risen because legislatures across the country have decided that higher education is not as significant a state government priority as it was 30, 20, 10, or even 5 years ago.  A part of the debt burden now carried by many students is a consequence of the failure of state legislators to provide the same kind of support that those same states were providing when many of those legislators attended the colleges and universities they now decline to support.

If there is a way out of this, it is for voters to punish legislators who have adopted, voted for, and enacted these priorities.

I live in Indiana.

I am not holding my breath.

Friday, January 27, 2012

Tradeable output, balance of payments, and U.S. Defense dspending

Kevin Drum and Matt Yglesias have a little back-and-forth today about why what matters (as far as the international trade position of the U.S. is concerned) is tradable goods and services, not manufactured goods.  And they actually agree.  Yglesias goes on to argue that, right now, we really don't have a significant balance of trade problem (which is an arguable position), but I want to make a different point.

We know that the U.S. devotes hugely more resources to defense that any other country in the world; according to this web site, the U.S. accounted for more than 1/3 of worldwide defense spending in 2007 (and I can't think of a reason why that would have declined in the intervening 4-5 years).  U.S. defense spending in 2007 was about $2.2 trillion.  I think we need to think about all this defense spending a little differently than we have historically. 

In 2007, the U.S. exported about $1.65 trillion worth of goods and services, while importing about $2.54 trillion.  So the trade deficit was about $0.89 trillion.  But think about all that defense spending.  What percentage of that is actually the U.S. providing security services to Europe, to Japan and South Korea, to the Middle East, to, in effect, much of the rest of the world?  (We're doing that because it's in our self-interest to do so, I grant you, but it means that other countries are enabled to devote fewer resources to the production of defense services than they otherwise would.)  And then we give those defense services away--we don't charge anyone for them.

According to this wikipedia article, about 1/7 of all U.S. military personnel are deployed outside the U.S.  If we conservatively allocate only 10% of U.S. military spending to providing a "public good" to the rest of the world, then we're "exporting" about $0.22 trillion worth of defense services for which we do not get paid.

Which makes the balance of trade deficit look somewhat smaller.

A reminder, if we needed it, of how much the world has changed

"Consider that 30 years ago, Seagate introduced the world to the SG-506 with 5 megabytes of storage for $1,500. Today they sell a 4 terabyte drive for less than $450. Where you used to get 0.003333 megabytes per dollar, you know get 9,320 megabytes per dollar in nominal terms."

From Matt Yglesias.

Friday, January 20, 2012

Paul Romer Updates An Old Adage

"Give someone a fish, you feed them for a day.
Teach someone to fish, you destroy another aquatic ecosystem."

From his paper "Process, Responsibility, and Myron’s Law," presented at the International Monetary Funds recent conference on "Macro and Growth Policies in the Wake of the Crisis" (you can view a video here.)

"Myron's Law," according to Romer, was formulated by Myron Scholes (of the Black-Scholes formula for pricing complex financial instruments, and it says: "Asymptotically, any finite tax code collects zero revenue."