Why U.S. college tuition is so high

Interesting analysis by Dylan Matthews over at Wonkblog of why U.S. higher education is so expensive.  (Spoiler: It ain't tenured left-wing professors or the education lobby).  Basically, it's a messed up market.  Higher education is a market for what economists call an "experience good" whose ultimate quality is unknown for a long time even after a student begins to consume it; and there are too many customers involved in one transaction; and there's something called Bowen's Law at work:

The main signal that you can use is price, and in particular sticker price. The theory is schools that cost more will deliver a better education. That means schools have a real incentive to push up tuition for its own sake. And if the Bowen theorem is right, once tuition goes up, so too does spending, making it harder for the effect to be undone.

“It sets in motion some really bad incentives,” [Robert] Martin [of Centre College] says. “The first is that consumers tend to take their cue on quality from how much each institution spends. Even more damaging is that any institution that tries to compete on the basis of cost, consumers are going to construe that to mean they’re cutting quality. So you don’t have cost competition, and you thus don’t have a competitive pressure to reduce cost.”

Matthews offers evidence that administrative "gilding" is the real cause [emphasis mine]:

At public and private research universities, “institutional support” costs grew more than instruction costs from 2000 to 2010. Indeed, instruction costs accounted for only about 28 percent of cost increases (in those areas where they occurred) for public research universities from 2000 to 2010. It sure looks like administration, rather than instruction, is what’s driving this.

Meanwhile, as Matt Taibbi recently described in Rolling Stone, we have the federal government financing this zany college spending spree while loading up America's youth with onerous debt.

  

The Tuition is Too Damn High, Part VI — Why there’s no reason for big universities to rein in spending

By Dylan Matthews

September 2, 2013 | Washington Post

URL: http://wapo.st/17v6zOZ

Americans incentivized not to work?

So this friend of mine, let's call him Rusty, shares the opinion of many on the right that at some point in time, starting around the time Obama became President, (hmmm....), Americans lost the incentive to work, or more accurately, were incentivized by Big Gubumint not to work, thanks to food stamps, Medicaid, unemployment benefits, and unquantified "welfare" of all kinds.  Nothing I say can convince Rusty otherwise.  It's an article of faith.

Rusty and his Rush Limbaugh-listening ilk don't believe stats such as those from the Bureau of Labor Statistics that there are currently 3.1 applicants for every job out there.  (While still daunting, this rate is far down from 6.9 applicants for every job at the end of the recession in June 2009.)  Nor do they stop to think what would happen if all those "welfare" recipients decided to enter the workforce -- even more applicants for every scarce job, and downward pressure on wages.

In fact, Republicans oppose raising the minimum wage, which would give more Americans the ability to support themselves without welfare.  A poverty-level minimum wage is certainly a disincentive to work.  

In his latest Rolling Stone blog post, Matt Taibbi takes the piss out of another right-wing theory, this time of David Brooks, about why Americna men especially don't want to take all those "humiliating" jobs out there just waiting to be filled: "David Brooks Wonders Why Men Can't Find Jobs: Comedy Ensues."

Regardless of why Brooks' particular theory is stupid and unsupported by facts, it's alarming that almost all U.S. conservatives are living in a speculative alternative America where able-bodied Americans prefer to "lounge around" on $200 a month for food stamps, rather than accept one of the many job offers dangling in front of them, because they consider such work beneath them.  According to conservatives, for whatever reason, before Obama, these Americans were incentivized to work, no matter how.  Post-Obama, these people have no incentive to work.  

So what changed besides the color of the guy in the White House, I wonder?  It couldn't be the fault of the GOP majority that came in with Obama.  So what is it??

Corporations ain't people (redux)

Yeah, but Boards of Director are people, right?  Right, but what are their incentives?  Conservatives believe in incentives, so what's the company's officers' incentive to be human beings?  Zilch.  More precisely, those incentives exist, but they are not material or intrinsic to the corporation; they exist only in the ethics that corporate employees bring to their jobs.  Because there isn't any explicit reward in the corporate structure for individual responsibility and concern for the greater good, much less self-sacrifice, which in the corporate world entails a threat to one's job security, one's compensation, and perhaps to the company's bottom line.  

Furthermore, Tapscott is right to mention that corporations are psychopathic by the definition of the American Psychological Association (and psychopathic personalities are more common in corporations).  So what holds them back?  Regulators, first and foremost.  Without government regulators, corporations would be truly scary.  Second, what holds them back is whatever morality (or lack thereof) employees bring to their jobs, as mentioned. Third, we have the courts.

And so, the only meaningful checks on the abuses of corporations come from outside the corporation, and everybody agrees on that.  That's worth remembering.  

To wit, even right-wing ideologue Dr. Milton Friedman realized corporate excesses would have to be checked somehow.  Rather than regulations, he preached that society should rely on the courts to alleviate the externalities and suffering that corporations foist on their customers and non-customers alike.  (Never mind that sick people can't be made well, and the dead can't be resurrected, by courts, no matter what penalties or monetary awards they grant in retrospect.)  Even Milton Friedman acknowledged that corporations would do very bad things if left to their own devices.

Why?  Because corporations are not human.  When it comes to human beings in society, we're very particular about assigning responsibility (or blame) and holding individuals accountable.  Yet the genius, the key innovation of the corporation, is the limits it places on each shareholder, founder's or employee's liability for the bad stuff the corporation does, as well as the financial risks it takes.  

No such limits exist, nay, would be not tolerated, by society when it comes to individuals.  Conservatives are most adamant on that point; liberals, at least stereotypically, are the ones making all sorts of excuses for individuals' behavior: nurture, not nature, and societal forces and all that, they plead.  Such liberal "excuses" drive conservatives nuts.  And yet when it comes to corporations, whose main innovation in the history of mankind is to limit individual responsibility, and thereby make individual risk-taking more palatable, conservatives don't see any contradiction with their professed ethical-moral values.

This diffusion, or rather, dissipation, of moral responsibility has recently reached absurd proportions.  For example, how could one employee of Goldman Sachs, Fabrice Tourre, be held responsible (in a civil, not criminal, suit, mind you) for $3.2 billion fraudulent trades, and yet Goldman's management escape unscathed?  OK, Goldman paid a $550 million fine to the U.S Government while admitting no wrongdoing, but that fine was paid by Goldman's shareholders -- while investors in those fraudulent trades received nothing, and company officers kept their jobs.  Where's the accountability?  

And finally, Tapscott is right to mention the influence of the Internet on corporate transparency.  Is it any wonder that the fig leaf of Corporate Social Responsibility (CSR) coincides with the birth of the Internet?  But yet again, the Internet is external to the corporation; it depends on active citizens to monitor the activities of the corporation.  It is citizen-sponsored regulation, or external regulation by other means, and arguably not the most efficient means.

Tapscott's conclusion is dead on: "The blanket assertion that corporations are people obfuscates the complex issues at play in the changing business world. Corporation are institutions. People are people."

Are Corporations People (Redux)? Why Jack Welch Is Wrong

By Dan Tapscott

September 16, 2012 | Huffington Post

URL: http://huff.to/U1WQKD

Tax bad food, subsidize good food

See, liberals believe incentives work, too!

This is the kind of intrusive left-wing social engingeering we need more of.

Bad Food? Tax It, and Subsidize Vegetables

By Mark Bittman

July 23, 2011 | New York Times

URL: http://www.nytimes.com/2011/07/24/opinion/sunday/24bittman.html?pagewanted=1&ref=general&src=me

Taleb: Principles of a new, robust economy

10 principles for a Black Swan-proof world

By Nassim Nicholas Taleb

April 7, 2009  | Financial Times

 

1. What is fragile should break early while it is still small.  Nothing should ever become too big to fail.  Evolution in economic life helps those with the maximum amount of hidden risks – and hence the most fragile – become the biggest.

 

2. No socialisation of losses and privatisation of gains.  Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and risk-bearing.  We have managed to combine the worst of capitalism and socialism.  In France in the 1980s, the socialists took over the banks.  In the US in the 2000s, the banks took over the government.  This is surreal.

 

3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus.  The economics establishment (universities, regulators, central bankers, government officials, various organisations staffed with economists) lost its legitimacy with the failure of the system.  It is irresponsible and foolish to put our trust in the ability of such experts to get us out of this mess.  Instead, find the smart people whose hands are clean.

 

4. Do not let someone making an "incentive" bonus manage a nuclear plant – or your financial risks.  Odds are he would cut every corner on safety to show "profits" while claiming to be "conservative".  Bonuses do not accommodate the hidden risks of blow-ups.  It is the asymmetry of the bonus system that got us here.  No incentives without disincentives: capitalism is about rewards and punishments, not just rewards.

 

5. Counter-balance complexity with simplicity.  Complexity from globalisation and highly networked economic life needs to be countered by simplicity in financial products.  The complex economy is already a form of leverage: the leverage of efficiency.  Such systems survive thanks to slack and redundancy; adding debt produces wild and dangerous gyrations and leaves no room for error.  Capitalism cannot avoid fads and bubbles: equity bubbles (as in 2000) have proved to be mild; debt bubbles are vicious.

 

6. Do not give children sticks of dynamite, even if they come with a warning .  Complex derivatives need to be banned because nobody understands them and few are rational enough to know it.  Citizens must be protected from themselves, from bankers selling them "hedging" products, and from gullible regulators who listen to economic theorists.

 

7. Only Ponzi schemes should depend on confidence. Governments should never need to "restore confidence".  Cascading rumours are a product of complex systems.  Governments cannot stop the rumours.  Simply, we need to be in a position to shrug off rumours, be robust in the face of them.

 

8. Do not give an addict more drugs if he has withdrawal pains.  Using leverage to cure the problems of too much leverage is not homeopathy, it is denial.  The debt crisis is not a temporary problem, it is a structural one.  We need rehab.

 

9. Citizens should not depend on financial assets or fallible "expert" advice for their retirement.  Economic life should be definancialised. We should learn not to use markets as storehouses of value: they do not harbour the certainties that normal citizens require.  Citizens should experience anxiety about their own businesses (which they control), not their investments (which they do not control).

 

10. Make an omelette with the broken eggs.  Finally, this crisis cannot be fixed with makeshift repairs, no more than a boat with a rotten hull can be fixed with ad-hoc patches.  We need to rebuild the hull with new (stronger) materials; we will have to remake the system before it does so itself.  Let us move voluntarily into Capitalism 2.0 by helping what needs to be broken break on its own, converting debt into equity, marginalising the economics and business school establishments, shutting down the "Nobel" in economics, banning leveraged buyouts, putting bankers where they belong, clawing back the bonuses of those who got us here, and teaching people to navigate a world with fewer certainties.

 

Then we will see an economic life closer to our biological environment: smaller companies, richer ecology, no leverage.  A world in which entrepreneurs, not bankers, take the risks and companies are born and die every day without making the news.

 

In other words, a place more resistant to black swans.

 

The writer is a veteran trader, a distinguished professor at New York University's Polytechnic Institute and the author of The Black Swan: The Impact of the Highly Improbable

Socialized Bank Security

Socialized Compensation

New York Times Editorial
March 21, 2008

How can one feel sorry for James Cayne? The potential losses of the chairman and former chief executive of Bear Stearns must rank up there with the biggest in modern history. The value of his stake in Bear Stearns collapsed from about $1 billion a year ago to as little as $14 million at the price JPMorgan Chase offered for the teetering bank on Sunday.

Still, Mr. Cayne was paid some $40 million in cash between 2004 and 2006, the last year on record, as well as stocks and options. In the past few years, he has sold shares worth millions more. There should be financial accountability for the man who led Bear Stearns as it gorged on dubious subprime securities to boost its profits and share price, helping to set up one of the biggest financial collapses since the savings-and-loan crisis in the 1980s. Some might argue that he should have lost it all.

But that's not how it works. The ongoing bailout of the financial system by the Federal Reserve underscores the extent to which financial barons socialize the costs of private bets gone bad. Not a week goes by that the Fed doesn't inaugurate a new way to provide liquidity — meaning money — to the financial system. Bear Stearns isn't enormous. It doesn't take deposits from the public. Yet the Fed believed that letting it implode could unleash a domino effect among other banks, and the Fed provided a $30 billion guarantee for JPMorgan to snap it up.

Compared to the cold shoulder given to struggling homeowners, the cash and attention lavished by the government on the nation's financial titans provides telling insight into the priorities of the Bush administration. It's not simply a matter of fairness, though. The Fed is probably right to be doing all it can think of to avoid worse damage than the economy is already suffering. But if the objective is to encourage prudent banking and keep Wall Street's wizards from periodically driving financial markets over the cliff, it is imperative to devise a remuneration system for bankers that puts more of their skin in the game.

Financiers, of course, dispute that they are being insufficiently penalized. "I received no bonus for 2007, no severance pay, no golden parachute," E. Stanley O'Neal, the former chief executive of Merrill Lynch, told a House committee recently. That doesn't seem like much of a blow to Mr. O'Neal, who was removed earlier this year following gargantuan subprime-related losses.

Indeed, the pain that is being inflicted on financial-industry executives as a result of their own actions and decisions is not proving much of an encouragement. Rather, the knuckle-rapping seems only to encourage bankers to make up for any losses they may suffer by finding another way to navigate their companies, the financial system and the economy into the next maelstrom — from Internet stocks to what the industry calls zero-down, negative amortization, no-doc, adjustable-rate mortgages.

(Translation: derivatives based on incomprehensible mortgages with unpredictable interest rates given to people who have no reasonable chance of understanding them, let alone paying them back.)

Bankers operate under a system that provides stellar rewards when the investment strategies do well yet puts a floor on their losses when they go bad. They might have to forgo a bonus if investments turn sour. They might even be fired. Their equity might become worthless — or not, if the Fed feels it must step in. But as a rule, they won't have to return the money they made in the good days when they were making all the crazy bets that eventually took their banks down.

The costs of such a lopsided system of incentives are by now clear. Better regulation of mortgage markets would help avoid repeating current excesses. But more fundamental correctives are needed to curb financiers' appetite for walking a tightrope. Some economists have suggested making their remuneration contingent on the performance of their investments over several years — releasing their compensation gradually.

That's an idea worth studying. Certainly, trying to put specific limits on bankers' salaries is a nonstarter. But until bankers face a real risk of losing their shirts, they will continue blithely ratcheting up the risks to collect the rewards while letting the rest of us carry the bag when their punts go bad.

2007 Economic Nobel can help stop global warming?

What we talk about when we talk about "free markets"....


Why You Should Care About the 2007 Economic Nobel
John S. Irons | October 16, 2007 | Prospect.org

"Is there something interesting to say about this year's Nobel Prize winners?" challenged my colleague next door. Could I explain what Leonid Hurwicz, Eric S. Maskin, and Roger B. Myerson did that was so great?

"Yes!" I replied. "Their research on 'mechanism design theory' broadly, and incentive compatibility and preference revelation specifically, are an important part of several sub-fields including game theory, public economics, and even some social choice theory."

"No," he said, "something interesting to the broader public." Hmm, well that's harder. I sent him packing (literally -- he caught a flight to LA). And I also sent the idea to the back-of-the-brain.

Fortunately, the back-of-the-brain has lots of things bouncing around. While there, "mechanism design" met Al Gore and had a chat with carbon cap-and-trade policy. And I realized that the way to understand the importance of this year's economics Nobel was to take a look at how we debate the usefulness of markets.

A key insight of mechanism design theory is that real-world economic transactions differ from an abstract "market" where a price falls from heaven and trade happens. When engaging in trade in the real world, economic actors (buyers and sellers), must abide by certain rules and/or norms (e.g. Is it ok to negotiate? Can you make more than one counter offer?). Mechanism design shows that the economic outcomes, including market efficiency, can be dependent upon those rules.

Thus all "free-markets" are not equal. In fact a marketplace does not exist independently from its rules and norms -- they one and the same. Saying that "the market works" to allocate resources depends on the specific market design and conditions. Thus (and contrary to much conservative rhetoric) economic theory -- of which mechanism design is a part -- does not say that markets always achieve an efficient outcome. Mechanism design can help us better understand when markets do perform well. And when markets no not reach an efficient outcome, mechanism design theory can suggest mechanisms that might work better.

The theory also points out that economic actors have an incentive to hide their true feelings about the product. So, if you walk onto a used car lot, you would be foolish to let the salesman know exactly how much you like that '67 Chevy. And the seller would be foolish to let you know that he has not gotten a single offer on the car in the six months it's been on the lot. But at some point, either you or the salesman will have to make an offer to the other -- and in doing so, reveal some, but perhaps not all, of your true preferences.

The fact that people have an incentive to not reveal their true preferences has obvious important consequences for public policy. If people are asked if they want a new highway built, they might rightly worry that they will be asked to pick up some of the expense, and so might not fully reveal their true preference, opting instead to try to game the system as a free-rider. Economic research building from the Nobel winners' work analyzed ways to get around this -- to provide a mechanism by which people would volunteer their true valuation of the highway, and thus better evaluate the merits of a project that would benefit an entire community. (The key of this particular mechanism is to link an individual's valuation response to the decision to build or not, but to de-link the exact amount they would pay).

The Nobel prize in economics was awarded not so much for the particular insights noted above, but rather for working out all the implications for economic thinking in various situations -- for example, deriving conditions under which there are efficient equilibriums (an exercise only an economist would love). More generally however, the insights from the theory help to explain how we can better design markets and public policy to reach an outcome that works for more people.

This brings us to global warming and cap-and-trade policy. If we -- and by "we" I mean the entire planet -- ever take global warming seriously, we will have to adopt some mechanism for reducing carbon emissions. A real program will require nations to implement some form of regulation and/or market mechanism to reduce carbon. But what kind of mechanism? How do we design a program that reduces carbon across nations? Some nations will be harmed significantly by global warming, while others will be better able to adapt, but in a negotiation, countries will have incentives to hide their true valuations, just like in the used car example above. Can we design a mechanism that is more likely to get nations to commit to reducing global greenhouse gases?

Now some of this analysis of global warming problem is pretty much standard economics of externalities (a la fellow Nobelists A.C. Pigou and Paul Samuelson), where the abatement of carbon pollution is seen to be a public good. But I suspect that the information asymmetries across nations will make the problem more complicated at the international level than a simple analysis would suggest. And the research by this year's Nobel prize winners may prove to be very valuable indeed.

But that will have to wait for another day. For now, all I can think of is Al Gore riding around in a convertible '67 Chevy with three economists in the back seat.

Why Americans don't vacation like the French

Why We Don't Vacation Like the French

How come Americans don't take a month off every summer, even though we'd like to? Blame it on individualism.

Ezra Klein | July 19, 2007 | The American Prospect

The most astonishing revelations in Michael Moore's Sicko have nothing to do with healthcare. They're about vacation time. French vacation time, to be precise.

Sitting at a restaurant table with a bunch of American ex-pats in Paris, Moore is treated to a jaw-dropping recitation of the perks of social democracy: 30 days of vacation time, unlimited sick days, full child care, social workers who come to help new parents adjust to the strains and challenges of child-rearing. Walking out of the theater, I heard more envious mutterings about this scene than any other.

"Why can't we have that?" my fellow moviegoers asked.

The first possibility is that we already do. Maybe that perfidious Michael Moore is just lying in service of his French paymasters. But sadly, no. A recent report by Rebecca Ray and John Schmitt of the Center for Economic and Policy Research suggests that Moore is, if anything, understating his case. "The United States," they write, "is the only advanced economy in the world that does not guarantee its workers paid vacation." Take notice of that word "only." Every other advanced economy offers a government guarantee of paid vacation to its workforce. Britain assures its workforce of 20 days of guaranteed, compensated leave. Germany gives 24. And France gives, yes, 30.

We guarantee zero. Absolutely none. That's why one out of 10 full-time American employees, and more than six out of 10 part-time employees, get no vacation. And even among workers with paid vacation benefits, the average number of days enjoyed is a mere 12. In other words, even those of us who are lucky enough to get some vacation typically receive just over a third of what the French are guaranteed.

This is strange. Of all these countries, the United States is, by far, the richest. And you would think that, as our wealth grew and our productivity increased, a certain amount of our resources would go into, well, us. Into leisure. Into time off. You would think that we'd take advantage of the fact that we can create more wealth in less time to wrest back some of those hours for ourselves and our families.

But instead, the exact opposite has happened. According to the Bureau of Labor Statistics, the average American man today works 100 more hours a year than he did in the 1970s, according to Cornell University economist Robert Frank. That's 2 1/2 weeks of added labor. The average woman works 200 more hours -- that's five added weeks. And those hours are coming from somewhere: from time with our kids, our friends, our spouses, even our bed. The typical American sleeps one to two hours less a night than his or her parents did.

This would all be fine if it were what we wanted. But that doesn't seem to be the case. One famous 1996 study asked associates at major law firms which world they'd prefer: The one they resided in, or one in which they took a 10% pay cut in return for a 10% reduction in hours worked. They overwhelmingly preferred the latter. Elsewhere, economists have given individuals sets of choices pitting leisure against goods. Leisure doesn't always win out, but it is certainly competitive. Yet we're pumping ever more hours into work, seeking ever-higher incomes to fund ever-greater consumption. Why?

A possible answer can be found in Frank's work. He argues that the U.S. economy has set its incentives up so as to systematically underemphasize leisure and overemphasize consumption. Much of what we purchase are called "positional goods" -- goods whose value is measured in relation to the purchases of others. Take housing. Would you rather live in a land where you had a 4,000-square-foot house and everyone else had a 6,000-square-foot house, or one in which you had a 3,000-square-foot house and everyone else had a 2,000-square-foot house? Given this choice, studies show that most respondents pick the latter. They'd rather have less home in absolute terms if it means more home in relative terms. That makes housing a positional good.

Being concerned with one's relative position rather than one's absolute position is not irrational or merely motivated by envy. In order to retain your relative standard of living, you need to keep up with the purchases of others in your income bracket. Housing works as an example here, too: Part of the use of an expensive home is the nice neighborhood, which gets your child into good schools – what matters, again, is not your square footage, but your relative affluence. Good schools, of course, are also a positional good – your education largely matters in terms of how much better it is than everyone else's. Retaining your relative position also ensures that you don't send the wrong signals when a client comes over for dinner. Houses, cars, clothing -- they all help send those signals. And because the rich in this country keep getting richer, we're caught in what Frank calls "expenditure cascades" in an effort to keep up with them. Their purchases raise the bar for the group right below them, which in turn increases the needs of the next income set, and so on. To retain our position, we're constantly needing to increase our incomes and affluence.

This makes the purchase of positional goods more pressing and urgent than non-positional goods. And so they "crowd out" their less context-contingent cousins. People want to spend less time at work, but they also want to retain and improve their standard of living relative to their neighbors -- and the latter triumphs, time and again.

This isn't because people are stupid, or irrational, or don't know what they want. Rather, it's because the incentives are all fouled up. Frank calls it a "smart for one, dumb for all" problem, but it's really just a classic failure of collective action. An individual would be made worse off were he to unilaterally opt out of the positional competition. But we would all be better off if we decided collectively to ratchet down the economic one-upmanship and instead devote a bit more time and resources to the leisure goods we claim to desire.

Here in the sweltering D.C. summer, there's nothing worse than wearing a necktie when the thermometer reads 95 and the humidity is so thick you could swim laps. But on your own, there's not much you can do about this state of affairs. If you're the only one who shows up dressed down, you'll look bad for it. But if your office, or meeting, were to collectively decide to ease the dress code, all would be better off.

This is what the European Union just did, imposing new regulations on its bureaucrats barring ties in the summer. Cutting down on air-conditioning costs was the rationale, but centralized action was the only way to end the practice. Otherwise, every individual would still have had the incentive to show his commitment by dressing in a tie. Only the collective could remove that spur.

So too with vacations. Very few individual workers in the United States can ask for four weeks of vacation. It is not only outside the benefits of their job but far outside the culture of our workplace. The incentives for most every individual, particularly if they want to keep their position and amass a reputation as a good employee, is to abide by those norms.

But if the crowd outside Sicko was any indication, most people would love a substantial increase in vacation time. This is what other advanced nations have pursued, using the government's role as an enforcer of collective sentiment to legislate the preferences that individuals could not, on their own, enact.

In this country, we've left it to the individuals, and thus the average American worker only takes 12 days of vacation a year, and many get none. We could do better, but that would require sidestepping American individualism for a moment and engaging in some American collectivism.

Nobel economist J. Stiglitz on Globalization

Globalization Has Increased the Wealth Gap

By Terrence McNally, AlterNet

Posted on January 15, 2007, Printed on January 16, 2007

Globalization was meant to be the great equalizer. Goods would flow easily across borders. Standards of living in poor countries would be raised. Governments would become more stable. Instead it has brought citizen protests, greater economic disparities between first- and third-world nations, and a complex trade regime that may well benefit only the richest in richest countries. What went wrong?

In his new book, "Making Globalization Work," Nobel-prize winning economist Joseph Stiglitz argues that the special interests of governments, corporations, and international organizations like the IMF and the World Bank have thrown globalization off its proper path. But he doesn't stop there. He offers a practical vision for making globalization the equalizing force he believes it was always meant to be.

Joseph Stiglitz, University Professor at Columbia University, was chairman of the Council of Economic Advisers during the Clinton administration and later chief economist and senior vice president of the World Bank. His book, "Globalization and Its Discontents," was translated into 35 languages and has sold more than 1 million copies worldwide.

Why did you become an economist?

JS: Like one of the first Nobel-prize winners and one of the greatest economists of the 20th century, Paul Samuelson, I grew up in Gary, Indiana. When you grow up seeing the problems of the economy -- problems of poverty, discrimination, unemployment -- it's hard not to want to do something about them.

But why did you decide that an economist was someone who could do that?

JS: Well, maybe that was optimistic ... but it was always my hope that if I could understand the nature of the problems, maybe I could make them better.

In layperson's terms, what were you awarded the Nobel for?

JS: For 200 years or more, economists have constructed models to analyze the economy, under the assumption that there was perfect information. Not that they really believed there was perfect information, but they didn't know how to analyze markets where information was imperfect, at least not with the precision of the mathematical models that were fashionable.

I figured out how to do this in a rigorous way, focusing particularly on the problem of "asymmetric information." That just means when one person knows something that others don't, which, of course, is the way everything is in the real world. The startling result was that a world with imperfect or asymmetric information was very, very different from a world of perfect information.

Anyone who's bought a used car, anyone who's bought a house, probably anyone who's bought a salami, knows that people have differing amounts of information, and more or less accurate information. The fact that such an unrealistic assumption was embedded in economics for hundreds of years is a very strange thing.

JS: I thought so too. And it had some very strange implications. For instance, it implied that there was no such thing as unemployment. Now, remember, I had entered the field of economics because I wanted to understand unemployment. Yet the standard models I was taught as a graduate student implied that the problem I was interested in didn't exist.

How did you end up becoming interested and identified with the problems of globalization?

JS: I was always interested in the problems of developing countries, the poorest of the poor. Just out of graduate school, I was asked by the Rockefeller Foundation to go to newly independent Kenya and help them think about their economic policies. That experience gave me an enormous number of ideas that have influenced my thinking for the rest of my life.

Later, the major turning point came in 1996, when, after winning a second term, President Clinton asked me to stay on as a member of his cabinet and his economic adviser. At the same time I was approached by the World Bank to become its chief economist. I thought long and hard about it. At that point America was doing very well, and I finally decided that the real economic challenges of the world were in the very poor countries. Moving to the World Bank brought me into the center of an entirely new set of problems.

That led to your book, "Globalization and Its Discontents". Although you've written a book on fair trade in the interim, this new book is really the next big development, isn't it?

JS: That's right. My earlier book focused very particularly on the two major international institutions, the IMF and the World Bank. They help govern the international financial institutions and help direct how development occurs. In the United States we don't typically pay much attention to these institutions. But if you lived in a developing country, you would understand the power they have over your government to dictate economic policies, and how often the policies that they dictate are misguided.

That first book was directed at the discontent that these institutions had generated. My new book broadens the issue to take in a much wider set of problems. "Making Globalization Work" begins by saying that globalization isn't working in some very important ways. It tries to diagnose what went wrong and, on the basis of the diagnosis, to figure out how we can make it work better.

You write, "This book is as much about how politics has been used to shape the economic system as it is about economics itself. Economists believe incentives matter. There are strong incentives -- and enormous opportunities -- to shape political processes and the economic system in ways that generate profits for some at the expense of the many." Not news to a lot of us, but can you say a few words about that?

JS: One of the themes of the book is that economic globalization has outpaced political globalization. Because we are more interdependent, there's a greater need to take collective action and work together. But our political institutions and our mindsets have not really kept pace. We do have certain international political institutions, but they are very removed from democratic processes.

The World Trade Organization and the like --?

JS: Exactly. There's been a heavy engagement in these institutions by the multinational corporations who know how to shape the policies in ways that benefit themselves.

The WTO was basically created by them, wasn't it?

JS: Not really. The idea that you would have a rule of law in international trade is a very old idea, and actually ...

-- not the notion perhaps, but it's always seemed to me that the system of secret tribunals, for instance, in which a corporation is basically able to take a government to court, was set up to serve the multinationals.

JS: Very much so. But I want to point out that this is not inherent in globalization. The idea that a rule of law would govern international trade relations is a very important idea that many idealists thought was good. Back in the '20s one of the factors that contributed to the Great Recession was a series of trade wars, and one of the ideas behind the establishment of the WTO was to try to prevent that from ever happening again.

But you're exactly right; the agenda got seized. In the book I talk about how in the last round, patents and intellectual property rights got shoved into the WTO. The result was that access to generic medicines was reduced, forcing poor countries to pay very high prices that they cannot afford. That agreement, signed in Marrakesh in 1994, was in effect a death warrant for thousands and thousands of people in sub-Saharan Africa.

And as folks like Vandana Shiva point out, it has led to "bio-piracy," the patenting by corporations of things which were native to certain cultures for millennia.

JS: One of the most amusing ones I talk about is the patent on basmati rice, or on the medicinal use of turmeric. In the latter case it was actually an Indian doctor working in America that took out the patent. These are examples of what I call an unbalanced intellectual property regime. Interestingly, I was on the Council of Economic Advisers at the time, and in the office of science and technology policy, we thought these intellectual property provisions were not good for even the United States. They weren't good for science in America or for global science, and we opposed them. But in the end the drug companies and the entertainment industry prevailed.

Tell me if I'm wrong, but since 1999, very little has actually been agreed to ... ?

JS: The problem is, as you suggested, that Europe and the United States have both reneged on the commitment that they made in Dohar, November 2001, to remedy the problems of the past. There's been some progress on the particular issue of access to drugs. But that progress has been undone by the United States in a large number of bilateral trade agreements. These are not done at the WTO but country by country.

If a multinational's agreements within the WTO don't play out as planned, then they switch to bilateral ones, right?

JS: Exactly, and there the imbalance of power is even greater than in the multilateral context. So the United States is making agreements with small countries like Qatar or Chile. The good news is that none of them have involved a significant fraction of global trade. But for the people of these particular countries, these agreements have potentially been a disaster.

I was having dinner the other night with one of the main trade negotiators of the Morocco agreement. He was opposed to it, and pointed out it was hardly a negotiation. The United States made demands, which Morocco had to either accept or reject. Morocco was hopeful that signing it would at least lead to a burst of new growth, but it hasn't. All it did was reduce access to AIDS medicines.

Changing subjects, what is your take on the potential economic crisis facing the United States at this time -- the enormous amount of debt we carry as households and as a nation, our trade and budget deficits, the extent to which we're in hock to China and a few other countries? Some of your peers, Paul Krugman among them, are alarmed, but it seems under the radar to most Americans. How serious do you think this is, and if you have to guess, how do you think it's going to play out?

JS: I'm very strongly in agreement with Paul Krugman's analysis. I think we are in a precarious position. We might be lucky and wander our way through this mess. There is a significant probability, however, that global interest rates could rise. If that happened, households with a large amount of debt would find it very difficult to meet their mortgage payments, and home prices would go down, which would lead to a reduction in consumption. Last year Americans consumed more than their income, something that is obviously not sustainable. The only way they could get away with it was by taking out money from their houses. But if home prices go down, they won't be able to do that any more. So there is a significant risk of a large economic slowdown. And government, by piling on so much debt and having such a large deficit, does not have much room to maneuver.

In terms of housing, an awful lot of people bought or refinanced with innovative mortgages over the last few years. Some of their five-year balloon payments or rate changes are going to happen in 2007.

JS: That's what I'm worrying about too. When it comes to refinance, if interest rates are high, they're going to be in a difficult squeeze. They could almost pray for a global slowdown to keep interest rates low, but that's not good for the American economy either.

Though some numbers say the economy is healthy, growth has not been shared, and it has been propped up by the housing and mortgage market. I saw a study the other day that said, housing, pharmaceuticals and healthcare are the only things that have been growing.

JS: I would emphasize that the growth is not widely shared. The income of the median American household -- half the people are richer, half are poorer -- is lower today than it was five years ago. More broadly, for 30 years people at the bottom have seen their real wages not only stagnate but actually fall. Part of that has to do with globalization, but only part of it.

Let's return to globalization. What are some of the key issues for which you prescribe solutions?

JS: On the issue of health, access to medicines and intellectual property, one of the proposals we put forward here is a medical price fund. Right now the developing countries have to pay high prices and get essentially nothing for it. The drug companies spend more on advertising and marketing than they do on research. More on research for lifestyle drugs than lifesaving drugs, and almost nothing on lifesaving drugs for malaria and other diseases of tropical countries.

When your primary objective is shareholder value and short-term profit, these decisions make sense.

JS: Exactly, but if your concern were the diseases that are causing enormous losses of life and productivity, that's not necessarily where you'd direct your research.

How would you solve that?

JS: By offering a prize for innovations that lead to vaccines or cures for diseases that affect lots of people in very serious ways.

In other words, an incentive beyond the profit motive?

JS: We wind up paying the drug companies one way or another. We pay through Medicare or Medicaid, but under the current monopoly system, the drugs are only made available at very high prices. Under this alternative system, first you provide the incentives to do the research. Then you use market competition to make these things as available as possible at as low a price as possible.

You're not only saying globalization is not the problem, but also that market forces are not the problem. It's really comes down to their wise use.

JS: Exactly. The primary lesson of economics is that incentives are important. Markets don't always provide the right incentives, so in those cases you have to reshape them.

It also sounds like it's about timing -- an incentive that rewards controlling the drug for its lifetime versus meaningful incentives that reward discovery and licensing.

JS: Exactly, it makes a lot more sense to have the incentive linked to the discovery rather than to driving up the price and spending all this money on marketing.

Finally, how would you deal with the enormous power of multinational corporations?

JS: Corporations have brought forth many of the benefits of globalization, and I should make clear that there have been benefits. Some of the countries of the world, China and India, for example, have been growing very rapidly. China's been growing at 9.7 percent for 30 years, India for over 5 percent for a quarter of a century. Millions of people have moved out of poverty as a result.

Corporations have been an important vehicle for the transfer of technology and access to global markets that have improved the lives of people in these countries. The corporations also are a source of a lot of the problems. When they take natural resources out of countries, they often leave environmental devastation behind. They're often associated with bribing governments and contributing to corruption.

Here again, one of the simple ideas is to try to make incentives work better. Right now the only incentive for corporations is the bottom line, and that means if bribing a government official will get the natural resource at a lower price, that's what they're going to do.

I could argue that political forces also have to have the right incentives. There needs to be more understanding of these issues and more citizen engagement, in order to put pressure on our government officials to do the right thing. Because it will take government action to alter the incentives structures corporations face.

And I can't imagine that happening until we change how we finance political campaigns.

JS: Once again it comes down to incentives.

Interviewer Terrence McNally hosts Free Forum on KPFK 90.7FM, Los Angeles (streaming at kpfk.org).

© 2007 Independent Media Institute. All rights reserved.

More to Uncle T

Uncle T,

You wrote: "Now, after paying all those taxes, and still being able to 'manufacture some wealth,' you want to take that wealth and redistribute it to the person who couldn't manufacture any wealth 'just because' it is a 'moral incentive.'"

The moral question is: How much wealth -- created thanks in part to the freedoms, guarantees, and opportunities provided by our society -- should we let any one person accumulate before it's morally justified to say "Give something back"?

You call it "stealing" to tax the very rich (even though they're already taxed -- are they being "robbed" now, and if not, at what point does it become "stealing"??). Yet you see no problem with the fact that many of them got rich thanks to the fact they're living in the US of A. You act like they created wealth in a vacuum. You act like we should be down on our knees thanking them, and never vice-versa. You never once acknowledge that they owe the USA a great debt for their wealth creation. (If you need me to spell out the reasons why the rich should be thankful, I will, but I hope you know what I'm talking about).

I agree 100% that we should tax the working and middle class less, or nothing. You'll get no argument from me. They pay more than their fair share in income to run our government, and get much, much less in return than the rich, who get sweetheart trade deals, huge tax breaks, interest-free loans, an educated workforce, port and transportation infrastructure for their businesses, etc., etc.

If the current tax system, which unfairly burdens the middle class, isn't "class warfare," then I don't know what is. It's not class warfare if the rich admit that "we're all in this together" and they have a debt to pay to society for the wealth that they enjoy. People like Bill Gates and Warren Buffet have come out in favor of the estate tax, and have said that the super rich should pay more tax. They realize the current tax system encourages a hereditary aristocracy of wealth, thanks also to our money-fueled political system.

You've fallen into the same trap as a lot of smart market watchers: You think GDP and the stock market are the best indicators of the nation's economic wellbeing. Whether that wealth is accumulating at the top and not trickling down to improve people's lives, well... you don't worry about that. The economic statistics on that score are not so clear-cut, so it's easier not to think about the issue at all.

This may sound crazy to you, but "creating wealth" is not an end in itself. If that wealth, wherever it may be, is not improving people's lives, then it's not worth a hill of beans. That's where you conservatives fall flat on your faces -- you worry so much about Big Gubument and what it's taking from you personally, that you forget about the general welfare. If the current tax system isn't serving the general welfare, but instead allowing more & more wealth to accumulate at the top, then I say it's IMMORAL, BROKEN, and desperately in need of REFORM.

It's about people, Uncle T, not just dollars & cents.

Yet another reply to Uncle T

Uncle T,

Although I'm actually in debt right now, the fact that I'm relatively rich on a worldwide standard has very little to do with U.S. politics; because our debate right now is about poverty & wealth in the USA. Having worked on half a dozen overseas economic development projects, I would argue in all humility that I know a thing or two about strategies to improve living standards and raise employment in developing & transition countries; and it's really a different ball of wax than trying to do the same in a developed country like the USA.

Yes, I do think taking money (taxes) from the super rich and spending it on day care, health care, education, etc. will improve infant mortality rates and lower dropout rates. You only have to look at Western European countries to see that this works.

You continue to accuse me of supporting "giveaway" programs that "throw money at problems," yet I haven't mentioned any to you, including the above. These are targeted interventions to improve people's health & well being, freeing them up to be more productive. None of them involve giving money directly to recipients.

I gather that your attitude is, no matter how one got rich, by hook or by crook or just good luck, we must accept it. No matter why somebody is poor -- whether bad parents, bad health, disability, poor schools -- we must also accept it. AND THERE'S NOTHING WE CAN OR SHOULD DO. You believe in "teach a man to fish," but you can't do that without spending money -- that's a giveaway!

You whole tangent about your and your brother's opportunities in life ignores what I've already written: I don't believe in equality of opportunity, or even absolute equality. These are impossible, except perhaps in a communist system, and even then some people will be smarter, stronger, healthier, luckier, etc. Nor do most liberals believe we should enforce equal opportunity (I'm talking in the larger sense, not minority hiring). I do believe in equalizing opportunity to the extent practically and morally possible. We shouldn't do this haphazardly just to "bleed the rich," but under consensus according to what is the best for everybody in the long run. The rich ought to buy into this if they're good citizens who value domestic tranquility, and want a larger pool of qualified, productive, happy workers.

Apparently you wanted an exhaustive list of incentive programs. Sorry. And you ignored (again) my very important point about moral incentives. (Yes, liberals have the right to talk about morals). For example, why do rap videos show black people with gold, diamonds, fancy cars, champagne... and not blacks collecting welfare checks and milking the system to the tune of $30,000 a year? If welfare were all poor black people wanted in life, why wouldn't it be reflected in their popular culture? Because even though they're poor & black, they're still Americans; and they've been taught to want the "American Dream," which to them means flashy wealth and conspicuous consumption. They've also been taught to be ashamed of receiving government assistance. This is a perfect illustration of moral incentives in action! The shame is that many poor, urban blacks see more opportunity to realize that Dream thru selling drugs, being a rapper, singer, or professional athlete than thru traditional education and hard work. I agree, this is an indictment on them, but it is also an indictment on us, as their fellow citizens "all in this together" with them, who have failed to provide the keys to opportunity.

Since you ignore the crucial role of moral incentives in our capitalist society (moral incentives act as the "angels on the shoulder" of otherwise greed-obsessed, radical individualists, and the cash-starved politicians who cater to them), I must conclude that the only incentive you really believe in is greed, i.e. the profit motive. Yes or no? If no, tell me what other incentives you believe in.

Your opinion seems to be that American liberalism was frozen in time circa 1965. I would argue that many of the programs of FDR and LBJ were timely and necessary, and largely served their purpose. (FDR kept our country from falling apart during the Depression, probably averting the birth of a popular Labor or Communist party movement, good for you; and LBJ took on Jim Crow and racial and sex discrimination when no other president had the courage, and in the process, facilitated full & equal participation in civic and economic life).

But again, I don't hear many liberals urging us to go back in time. Despite everything I argue, why do you accuse me of being some kind of 1960's liberal? It would be just as unfair of me to accuse you of being the guy who wants to keep women out of the workplace and blacks in the back of the bus. In fact, one thing I like about liberalism is that it assumes and encourages CHANGE; whereas conservatives, as a rule, must harken back to a mythical Golden Age that never existed, except in propoganda.

Anyway, to answer your question again about the guy who won't work a 40-hour week: Clinton's Welfare to Work program solved that problem. People can't stay on welfare indefinitely. Yes, there may be some abuse of the system, but I'm willing to put up with that, if it means helping the truly needy, especially children, who didn't decide to be born or have the chance to choose their parents. Again, you are so enraged by the cases of abuse (and your rage can't be based on dollars & cents, but rather on emotion, because there is much more government waste in the Pentagon, bridge-to-nowhere pork programs, Iraq, etc.) that you'll condemn the truly needy to suffering. You'll throw the baby out with the bathwater.

Ditto with affirmative action. Your opposition must be based on emotion, not statistics. Remember, it only pertains to government jobs and state-funded universities. I'm sure there are cases of unfairness, but, again... baby & bathwater. You want to throw out the program because a couple of white men on the edge of average get rejected in favor of minority candidates. I think it's extremely naive of you to believe that government-supported policies enshrined in law like slavery & Jim Crow could be undone without equal or greater counterforce in law. They had to escort blacks into my school with Nat'l Guard troops for crap's sake! I know, I know: you and every other conservative believe that we've changed our ways, and ever since the "useless" Great Society movement of the 1960s (which wasn't really necessary?? -- explain that logic!), minorities face no racial discrimination in school and employment anymore. But I'm afraid not.

A tax credit does not address availability and affordability of day care for the working poor. A tax credit assumes that a poor person on a budget has enough money to pay for quality day care for a whole year before getting reimbursed; and it and assumes that quality day care is even available where they live, when it probably isn't.

I'm curious what evidence made you conclude that education has gotten better under Bush. Because he's testing kids uniformly (which infringes on state and local rights!), and more often? Tests a better student do not necessarily make.... BTW, ask S.W. about her experience teaching in public schools, and "teaching to the test" requirements. Without having any data, I can't say if Bush has improved education or not. But, I do believe it's a bit silly to impose uniform standardized tests for the whole nation, yet allow every local school board to set its own curriculum. I can't imagine that teaching a kid in Iowa is so terribly different than teaching one in Kentucky. Most nations have a central Ministry of Education which sets curriculum and determines funding for schools. But we've still got leftovers from "Little House on the Prairie"-type parochialism in our K-12 system....

The liberal approach to dealing with those who refuse to be productive is to give them a chance, or even two, and if they don't take those opportunities, that's it. But -- and this is a big "but" -- I do worry about that man or woman's children. Do we let them suffer for their parents' shortcomings? I say no. You seem to imply "Tough shit, junior."

In general, my approach to dealing with the deserving working poor would be to pay directly for their bare necessities in life, not give them handouts. For instance, WIC is great, I wouldn't take that away. It's food for crapsakes. I would build more & better public transportation so people wouldn't necessarily need a car in order to work. (Our systematic dismantling of public transportation and construction of the nat'l highway system perpetrated by the oil and auto industries has acted like a regressive tax, and penalizes the working poor). I would of course fully fund education; and find the money to train, recruit, and hire better quality teachers. I would get rid of funding education based on property taxes; or else supplement with federal funding the districts with below average property values. The current funding system creates a rich-poor imbalance in quality. Controversially, I would keep phys. ed. but get rid of high school sports -- at least gov't funded sports teams. Kids are in school to learn, not score touchdowns. Again, I would build more day care centers near the places where the working poor live and work, and give need-based discounts or free service (not tax credits). I would spend more money on college scholarships -- or just give everybody with a high enough GPA free in-state tuition. And spend more on university research, whence most of the scientific innovations that fuel our economy originate.

Those are just some of my lefty liberal policy ideas, but that's probably enough already to drive you nuts, so I'll stop there.

- Show quoted text -

Another reply to Uncle T

Uncle T,

To answer yet more of your must-answer questions:

1. Yes, in Bangladesh I would be rich. So what? That's why we look at Purchasing Power Parity (PPP) and inflation. How much does rent cost in Bangladesh, or a meal at a restaurant? When comparing developed and undeveloped countries, wealth is relative. A better comparison is between people in developed countries. Like, why does the U.S. have such a high infant mortality rate, or such high dropout rates from school? Why doesn't our wealth solve those problems? What's missing?

2. Because people don't always reap what they sow, and who are you to judge who is "deserving"? Is Paris Hilton deserving? Are Sam Walton's children deserving of being the 4th, 5th, 6th, and 7th richest people in the world? What did they reap to sow billions? You must be consistent and admit that people are not always to blame for being poor, just as people do not always deserve their wealth. Sometimes all the poor need is a hand to help pull themselves up.

3. In my last letter I gave you several examples of incentives that you may call "liberal" and disagree with, but they're still incentives.

4. We already have such provisions to prevent people milking the system, it's called Clinton's Welfare to Work program. It's already law that able-bodied people can't stay on welfare indefinitely. Isn't that good enough for you?

5. America allows the possibility for success for very many, but not all, people. The heart of many of our disagreements is that you accept people's starting position in life in morally neutral terms, while I do not. You and I have had many advantages in life that others have not. Yes, you worked hard and made the most of those advantages. But as a human being with empathy and sympathy, you must realize that not everybody gets such a great start in life. What do you say to those people, "Tough luck"? Or, "The world needs janitors, too"?

6. As long as people don't start out equally in life, there will never be such thing as equal opportunity. I'm realistic about that. Are you? The question is, what do we do about it? Do we just say, "Oh well, some people are born inheriting millions, others are born eating dirt, and we're morally compelled not to interfere in the status quo, because that would be stealing"? Or do we try to help people without making them dependent?

In my previous email, if you read carefully, I did answer all 4 of your questions, even though you may not have liked/agreed with my answers.

That program you liked... Which party pledged in its first 100 hours to lower the interest rate on government loans for college?

I wish you'd get over the "giveaway" issue. The kind of welfare which drives you to fits of rage is actually not so common. Most people who receive welfare get off and get back on their feet. I really don't understand why this enrages you so much. Again, I can't think of any liberals who are asking to increase "giveaways" like the ones you despise. They do, however, ask for things like: more college loans; more spending on education and pre-school programs; more spending on day care for working families; and universal access to health care. I don't consider these giveaways, since they would make working people healthier, happier, and more productive. They are also family-friendly, thus encouraging real family values.