Archives: January, 2008

Market Prices ≈ Slavery ≈ Child Labor?

That’s how Len Nichols of the New America Foundation described market prices for health insurance 41 minutes into this this webcast:

“We stopped child labor.  We stopped slavery.  We ought to stop extreme risk selection, too.”

I imagine more than a few actuaries and twentysomethings would be offended by the comparison.

Thanks to alert viewer Terry Holman for catching what I missed as I sat there listening to Nichols.

From the Ed Stats Truth Squad

Not long ago, Donald Luskin headed-up something called the “Paul Krugman Truth Squad,” a band of analysts devoted to keeping New York Times columnist Paul Krugman honest. Well, after years of seeing education stories in the media rife with misleading, incomplete, or just plain wrong “facts,” it seems that in the tradition of Luskin’s crusaders its time for a truth squad to get to work in education. Cato’s Center for Educational Freedom accepts that challenge, and will from here-on out work to debunk bad education data whenever and wherever in the media we find it (assuming we’re not working on other, bigger things, that is).

We begin with this today’s Washington Post, where a story about per-pupil funding in the nation’s capital—and the need to boost it—featured a very dubious statistic:

The recommendation to spend $8,770 a child when the school year begins in August came from State Superintendent Deborah A. Gist. Now, $8,322 is spent for each student [italics added].

Could it be true that only $8,322 is spent per child in the District of Columbia? Surely it is higher than that!

Indeed it is. According to the latest numbers from the federal Digest of Education Statistics, in the 2002-03 school year $14,419 was spent per-pupil in Washington, DC, a figure 73 percent larger than the one given by the Post and one that’s almost certainly even higher today.

The $6,097 question, of course, is how these different figures were arrived at. Unfortunately, the Post’s reporter didn’t give any details about how the $8,322 figure was determined, so we can’t explain the huge difference with absolute certainty. We can, though, probably make a good guess.

The first likely difference is that the federal figure includes not just operating expenditures such as outlays for transportation and teacher salaries, but also capital expenditures to finance construction or renovation of school buildings. Unfortunately, education officials usually only cite per-pupil expenditures based on operating costs either because they reason that day-to-day expenditures are what really matter, or that it’s easier to cry that you need more money when you discount how much you already have. The federal number also includes federal money spent on DC schools, which is generally a large sum and is likely not included in the numbers used by the Post.

One need not even look at federal stats, though, to see that the per-pupil figure in the Post story is low-balled. One can just use the figures reported in the article, which put the current budget at $796 million (presumably not including federal funds to come) and the total enrollment in DCPS and DC charter schools at “more than 70,000.” If you divide the total enrollment by the total budget you get a per-pupil expenditure not of $8,332, but $11,371!

And we wonder why people think public education is underfunded?

The second diabolical education statistic (or, at least, diabolical assertion that should be backed by statistics) that we will dispatch today was, according to Inside Higher Ed, put forth last night by former U.S Secretary of Education, and current U.S. Senator, Lamar Alexander (R-TN). Speaking at the annual meeting of the Council for Higher Education Accreditation, Alexander reportedly declared that “a primary reason that tuition has been rising is that state funding has been flat.”

Uggh!

It’s simply not true that state spending on higher education has been flat while tuition has skyrocketed, nor does it follow that changes in state funding are driving tuition increases. Indeed, without even looking at the numbers, Alexander’s thesis makes little sense. For one thing, state expenditures would have very little bearing on tuition levels at private schools, which receive little state support, yet private school tuition has long been inflating. Moreover, if state spending truly were flat, then it follows from Alexander’s argument that public school tuition levels should also be flat, not rising precipitously.

Let’s go to the numbers. Again using data from the Digest of Education Statistics, we see that while total state appropriations for higher education have fluctuated, after adjusting for inflation they rose from about $46.8 billion in 1990-91 to $53.9 billion in 2003-04, a solid 15 percent increase. During that same time, prices at public four-year institutionsrose at a much faster rate, with the average real cost of tuition, room, and board rising from $6,831 to $10,674, or 56 percent, at public four-year institutions, and in-state tuition and fees rising from $2,460 to $4,587, or 86 percent.

Maybe Alexander meant that public expenditures per-pupil have been flat. If that were the case then he wouldn’t be wrong about state largesse. Using data from the State Higher Education Executive Officers, the trend line for inflation-adjusted, per-pupil public expenditures on higher education is roughly flat over the last 26 years, and would go downward between 1990 and 2003. (Figure 3 in the linked report.)  Alexander would be wrong, though, about declining state appropriations driving tuition increases. Eyeballing the inflation-adjusted expenditure line on the graph suggests that the decrease in spending per-pupil in that period is probably only about 10 percent, versus an 86 percent increase in in-state tuition and fees. And again, at least according to Inside Higher Ed, Alexander didn’t say “per-pupil,” making the assertion contained in the article dead wrong.

And so we see that just because a statistic is reported in the media doesn’t make it true. But the truth is out there.

The New Secretary of Agriculture Plays Lucy

My American friends tell me that there is a recurring scene in the Peanuts comics whereby Lucy says she will hold the football for Charlie Brown to kick before she whips it away.

I was reminded of that yesterday when the new boy in school, newly conferred Secretary of Agriculture Ed Schafer, dashed the hopes of all American consumers, Lucy-style, by implying [$] that the long-awaited open trade in sugar between the United States and Mexico (one of the last NAFTA provisions to come into effect) could be delayed.

Two weeks ago, the Sugar Alliance circulated a proposal to lawmakers that would effectively divide up the United States and Mexico’s (combined) market into a protected cartel. That would significantly impede what was planned to be free trade in sugar between the two countries and downward pressures on the U.S. price of sugar: currently the U.S. price is about double the world price, although it has been up to triple the world price in previous years because of trade barriers to cheaper sugar (see more here).

Sec. Schafer, at least according to the article, was willing to listen to the producers’ plan to manage the sugar trade and was quoted thusly:

If producers in two countries can agree on an approach, that’s better than two governments…trade is all about the producer and providing opportunities and opening markets…

No mention of us consumers paying for it all. And quite why Sec. Schafer believes the market needs managing (either by producers or government) is not made clear.

The Very Models of a Modern Market School System

In an exchange with Sol Stern over at City Journal last week, I pointed out that existing school choice programs should never have been expected to transform American education, because they bear little resemblance to real education markets.

In response, Stern implied that real education markets are not real all, being instead “such stuff as dreams are made on.” (Did I mention we were waxing Shakespearean?)

As it happens, though, the free education marketplace of classical Athens was the first school system in the world that spread learning beyond a tiny ruling elite, and there have been numerous times and places throughout history where schooling was organized more or less as a free market. There are still such places today. And since I can’t think of a suitable Shakespeare quote to illustrate them, how about a little riff on Gilbert and Sullivan:

They are the very models of a modern market school system.
It doesn’t matter how often the punditocracy’s dissed ‘em.
In the shanty towns of India, Kenya and Nigeria
Are schools known to the readers of Cato and Edutheria.
They are private, parent-funded, and they outperform the public schools,
After application of the best econometric tools.
And poor countries are not alone; ed. markets thrive in rich ones, too –
For instance businesses that tutor children in Japan (“juku”).
Just think of “Kumon” here at home or of the “Sylvan” chain.
They thrive and make a profit ‘cause the ed. monopoly’s inane.

For a more extensive, if less poetic, rundown of the evidence on market education (and US school choice programs), have a look here.

Flex-Fuel Nonsense

Over at National Review Online today, Clifford May asks:

What if lawmakers could guarantee that the price you pay to fill your car’s tank will go down, not up, in the years ahead? What if they could launch a new industry that creates more jobs for more Americans? What if this would produce environmental benefits, too? Would that not send a message to the markets? And would that not represent the kind of change so many politicians have been promising?

All of this would come true, Mr. May believes, if the federal government would force auto makers to ensure that every new car sold in the United States could run on gasoline OR high blends of ethanol OR methanol OR fill-in-the-blank. After all, it would only cost about $100 up-front during the manufacturing process to make such “flex-fueled” cars a reality, a modest investment that would give motorists a ready-made ability to run their cars on whatever strikes their fancy.

Well, to answer Mr. May’s questions in the order they are posed, they can’t, they won’t, it wouldn’t, it would, and it wouldn’t.

Congress can no more guarantee that fuel prices will go down from now until the end of time than it can guarantee a robust sex life for fat, balding, middle-aged men. Fuel prices are subject to supply and demand curves that do not answer to Congress — particularly in global energy markets.

The conceit that government can create jobs by creating industries out of whole cloth glosses over the fact that the money needed to create those industries and those jobs starves other industries of cash that will, in turn, eliminate other jobs. While it’s not inconceivable that government could on balance create more jobs than it destroys in this manner (that is, that the industry created is more labor-intensive than the industries harmed), that’s still not a good reason to go forward. After all, one might on balance increase employment in the United States by banning modern farm machinery and food imports, which would put a lot of people into the fields. But no sane person would endorse such a thing on economic grounds. Economic growth occurs when we increase productivity, and we don’t necessarily do that by biasing investment toward labor-intensive activities.

Promoting alternative fuels is not necessarily good for the environment. Ethanol, for instance, increases urban smog without any corresponding reduction in greenhouse gas emissions. It drains already depleting groundwater reserves and pollutes those that remain. It puts millions of additional acres of land under the plow, which in turn kills ecosystems and further pollutes navigable waterways. In short, gasoline looks positively “Green” compared to many of the fuels Mr. May hopes to champion.

Mr. May is correct, however, about the fact a mandate like this would send a message to the markets. The message would be “Congress is not a serious legislative body.” But to be fair, it’s not as if the market hasn’t heard that message before.

Mr. May is wrong, however, to think that a flex-fuel mandate would represent the kind of “change” that most politicians are promising. Congress has told Detroit how to build its cars for decades now. Nothing new there.

The main reason that this sales pitch is hollow, however, has to do with the fact that, at present, there is no cheap alternative to gasoline. The problem isn’t that cars can’t use the fuel. The problem is the cost of the fuel. For instance, on wholesale spot markets as of Jan. 24, 87 octane was selling at $2.32 per gallon. Compare that to the price for alternative fuels (in the same spot wholesale markets) once you adjust for the differences in energy content:

• E100 ethanol — $3.53 per gallon
• B100 biodiesel — $3.97 per gallon
• Methanol — $4.22 per gallon

In short, there’s a good reason why auto companies aren’t popping flex-fuel capabilities into every engine sold: consumers don’t seem willing to spend the $100 extra for that extra. Well, to be precise, most consumers don’t seem that interested. Some are in fact buying flex-fueled vehicles right now — 4 million such vehicles are thought to be on the road at present and dozens of models are on sale right now. But some of us aren’t willing to fork over the extra money for the option to use those fuels over the lifetime of our new car.

Should Congress override consumer preferences in that regard? No. Given the high cost of alternatives, consumers are not acting irrationally when they say “no thanks” to flex-fueled vehicles.

Would auto companies be advantaged by a flex-fuel mandate? Mr. May thinks so, but auto executives tend to disagree. My guess is that Mr. May knows less about their business than they do.

If and when alternative fuels are cheaper than gasoline, you can rest assured that consumers will increase their demand for flex-fueled vehicles and that auto makers will supply them out of simple interest in profit. Government mandates are not necessary.

Less Fuel for the Trade Fire

John Edwards has announced that he is withdrawing his candidacy for the Democratic nomination for president. As I wrote in an op-ed the other week, John Edwards had by far the worst trade policy proposals of the front-running Democrats. It says something good about America that Mr Edwards’ brand of populist nonsense has been rejected by the primary voters.

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