Economist's View

32+ Years...

Pessimism and the ZLB

DACA

The University of Oregon's statement on DACA:

Members of the University of Oregon community,

President Trump this week is expected to make changes to the Deferred Action for Childhood Arrivals immigration policy, also known as DACA. I join hundreds of university leaders as well as local, state, federal, and business leaders in strongly urging President Trump to continue this program. I also write to let our students know that we support them, and to provide information about where our students and their families can go for assistance, should the need arise. 

In a world full of ambiguities, there is no ambiguity for me about the importance of continuing DACA. My view of morality dictates that young people, many of whom were brought here as infants or toddlers, must be allowed to remain in the United States to learn, work, and make a life for themselves. The United States is their home. To uproot them would be wrong. Period.

But the argument for DACA doesn’t just rest on principles of morality; it is also good for our country. One of the reasons the United States became the greatest nation in the world is because it was founded, built, and shaped by immigrants. Millions and millions of people, including all of my grandparents, risked everything to come to the United States to escape religious, ethnic, and political oppression or to seek out a better life for their children. The very act of coming here showed grit and determination, the willingness to assume risk, and courage—just the skills necessary to build our nation.

The future of our nation’s economic prosperity also depends upon embracing immigrants and making sure that they are educated to become productive citizens and positive contributors to the economy. Birthrates are declining among our country’s native-born, and immigrants currently make up about 13 percent of the workforce. To uproot young immigrants from their schools and jobs or to force them into the shadows is the equivalent of shooting ourselves in our collective feet.

Regardless of what happens in our nation’s capital, I want to again make very clear that the University of Oregon supports every student, regardless of immigration status. Every person on our campus is valued and welcomed because of and not despite their diversity of thought, race, culture, background, religion, gender identity, sexual orientation, and birthplace. Our many differences enrich this institution’s learning environment, enhance the student experience, and are essential to our mission of teaching, research, and service.

As is currently our practice, the UO will continue to protect the privacy of students, follow the law, and treat every member of campus with respect and inclusion. This means: 

• The University of Oregon will not facilitate immigration enforcement on our campus without legal compulsion, such as in the form of a warrant or a clear demonstration of exigent circumstances such as the imminent risk to the health or safety of others;
• The University of Oregon Police Department will not act on behalf of federal officials in enforcing immigration laws;
• The University of Oregon will not share with immigration enforcement any information on the immigration status of students unless required by court order.

The university is reaching out directly to students who may be impacted by the president’s decision to provide them with information about support and services. Several important points of contact and sources of information will continue to be updated as needed in the coming days and weeks:

• For current information on the status of DACA and frequently asked questions about immigration issues, please see the Immigration FAQ webpage.
• Justine Carpenter, director of Multicultural and Identity-Based Support Services, is the campus point-person in support of undocumented and DACA students, and students of mixed-status families. Carpenter is located in the Office of the Dean of Students and can be reached at 541-346-1123 or [email protected] 
• For additional information on the UO's support for DACA students, please visit the UO DREAMers Workgroup website.
• Should an immigration official ask for information about a UO student, employee, or visiting scholar, please immediately contact the Office of the General Counsel at 541-346-3082 or [email protected].

In the coming weeks and months, I urge everyone in our community to reach out and embrace those students who now face the uncertainty of knowing whether they will be able to remain in the United States. As I have repeated on many occasions—we are a family. Families take care of each other, and we will do everything in our power to ensure that all of our students are supported.

Thank you.

Michael H. Schill President and Professor of Law

Syllabus for Monetary Theory and Policy

Everyone seems to be posting the syllabus for the graduate courses they are teaching this fall. Mine is simple. In my Monetary Theory and Policy course we are going to go through this book by Jordi Gali (don't tell anyone I actually know this stuff):

Blurb: This revised second edition of Monetary Policy, Inflation, and the Business Cycle provides a rigorous graduate-level introduction to the New Keynesian framework and its applications to monetary policy. The New Keynesian framework is the workhorse for the analysis of monetary policy and its implications for inflation, economic fluctuations, and welfare. A backbone of the new generation of medium-scale models under development at major central banks and international policy institutions, the framework provides the theoretical underpinnings for the price stability–oriented strategies adopted by most central banks in the industrialized world.

Using a canonical version of the New Keynesian model as a reference, Jordi Galí explores various issues pertaining to monetary policy’s design, including optimal monetary policy and the desirability of simple policy rules. He analyzes several extensions of the baseline model, allowing for cost-push shocks, nominal wage rigidities, and open economy factors. In each case, the effects on monetary policy are addressed, with emphasis on the desirability of inflation-targeting policies. New material includes the zero lower bound on nominal interest rates and an analysis of unemployment’s significance for monetary policy.

• The most up-to-date introduction to the New Keynesian framework available
• A single benchmark model used throughout
• New materials and exercises included
• An ideal resource for graduate students, researchers, and market analysts

I'm looking forward to it. The revised version has lots of new, up to date material, and I really like the fact that he uses variations on a core model throughout the text (it makes the math and intuition a bit easier since you don't have to redo everything with each new topic). I'm a bit torn to move away from Carl Walsh's book, both books have their advantages and I'll still draw quite from the Walsh text. But my focus this quarter is Gali.

Graduation

It was Monday afternoon

Sending the Wrong Message

I'm not sure I see the connection, but when you blog they ask you to be in the course catalog:

I really wish I'd brought a smaller computer along when they shot the picture. That thing is huge. If the message is supposed to be "look how connected we are here at the UO," that computer sends the opposite message.

Tax Evasion and Investment, Trade and Greenhouse Gases, Football and Grades

Travel day today, so it seems as good a day as any to have a post featuring research by colleagues. First, Bruce Blonigen and Nick Sly (and a coauthor, Lindsay Oldenski):

The Growing International Campaign Against Tax Evasion

The growing international campaign against tax evasion, by Bruce Blonigen, Lindsay Oldenski, and Nicholas Sly, Vox EU: The most recent G20 summit led to a multilateral agreement to facilitate information sharing between tax agencies, with the US currently negotiating bilateral tax treaties with the tax havens of Switzerland and Luxembourg. But before celebrations begin, this column points out that cracking down on tax evasion comes at a cost. International investment may well suffer.

One of the few solid agreements that came out of the latest G20 summit in Cannes was that governments will increase their cooperative efforts to curb tax evasion. The agreement, called the Convention on Mutual Administrative Assistance in Tax Matters, allows national tax agencies to request greater amounts of information from foreign governments on the activity of multinational enterprises and private citizens that are otherwise outside their authority to monitor. Under the new agreement, countries can choose voluntarily to transmit tax information about foreign parties in bulk to their resident country’s tax agency. There are also provisions of the convention that will require nations to assist in the recovery of foreign tax claims if a business or individual is in noncompliance.

Several leaders of G20 nations cited reports from the OECD that recent efforts to reduce tax evasion have resulted in more than $14 billion of additional tax revenue being collected, with hints that there are much greater amounts of offshore tax liabilities yet to be collected. With mounting government debt in most nations, the incentives for them to reduce tax evasion are clear.  But if we take a closer look, this may be just the next step in the ongoing efforts of developed countries to recapture lost revenues by multinational firms.  In particular, most bilateral tax treaties include similar requirements for cooperation in sharing of tax information between the two governments. The signing and renegotiation of tax treaties has proliferated in recent decades and Easson (2000) reports that there are nearly 2,500 treaties in force worldwide. The current US activity on tax treaties is also telling.  The US Senate has pending agreements with Switzerland and Luxembourg, two countries that are typically on lists of tax havens, and in June of this year the US Treasury Department announced a plan to renegotiate its tax treaty with Japan, where provisions for information sharing are relatively weak. Deterring tax evasion has long been a priority for governments in coordinating the international tax system.

Despite the recent attention, information-sharing provisions of tax treaties are typically not the first attributes touted. The stated goal of the OECD and UN model for tax treaties is to limit the incidence of double taxation and promote efficient flows of capital in the world economy through the coordination of tax rules and definitions.  For this reason, prior studies of the effect of tax treaties on the FDI activity of multinational enterprises have expected to find positive impacts.

Yet finding systematic evidence of such positive effects has proven elusive. Di Giovanni (2005) fails to observe any significant impact of tax treaties on cross-border mergers and acquisitions, while Louie and Rousslang (2008) find no evidence that tax treaties affect US firms’ required rates of return from their foreign affiliates. Likewise, Blonigen and Davies (2004, 2005) do not find any discernible effect of tax treaties on US and OECD FDI activity. There is some evidence provided by Davies et al (2009) that the number of firms entering a foreign country grows once a new treaty is signed. But many more studies support the conclusion that foreign investment flows do not appear to take advantage of the double-taxation relief afforded by tax treaties.

The lack of evidence that tax treaties impact foreign investment flows between treaty partners is surprising because there is a clear relationship between foreign capital flows and tax rates. Papke (2000) finds that the elasticity of reported foreign earnings to differences in withholding taxes rates is near -1, indicating a tight relationship between the location of reported income and the tax liabilities across countries. Furthermore, Hines and Rice (1994) find that real aspects of multinational firm operations, such as the location of production, employment, and equipment purchases, also respond to differences in tax rates across countries.

In recent work (Blonigen et al 2011) we provide an answer to the puzzling insignificant effects of tax treaties and find it is rooted in the tax-sharing provisions of tax treaties, which are intended to reduce tax evasion and, thus, can have a negative influence on FDI activity. Our premise is that firms in industries which use relatively homogeneous inputs will be most affected by the information-sharing provisions of tax treaties, since arms-length prices for intermediate goods are easily verified in these industries once tax authorities share information and can verify activity across MNEs’ affiliates. In contrast, firms that use fairly differentiated and specialized inputs will retain a much greater ability to mitigate their tax liabilities across countries by engaging in strategic transfer pricing.

We look across more than two decades of investment activity by US multinational firms, spanning 73 different industries and more than 150 countries. During the time span of our sample, 1987–2007, the US signed several new tax treaties, and renegotiated agreements to increase the degree of information sharing with several existing treaty partners.

The evidence strongly supports that provisions for tax-information sharing, such as those included in recent G20 convention, can alter the pattern of international investment activities. For a firm with average use of homogeneous inputs, increased cooperation between national tax agencies when a tax treaty is put into place is associated with a gross reduction in the firm’s foreign affiliate sales by $26 million per year.  Looking at the US economy as a whole, this equates to an estimated reduction of outbound investment activity of $2.29 billion annually. We also find that tax-sharing provisions of tax treaties lead to gross reductions in the number of firms that choose to invest in countries for the average industry as well. 

We do estimate a positive impact of the other features of the tax-treaty agreements, which counterbalances the negative effects from the information-sharing provisions. For the average firm in our sample the average net impact of tax treaties on FDI activity is positive.  Yet, it is clear from our analysis that the negative effects of the information-sharing provisions of tax treaties are large and a main reason why prior studies have puzzlingly found little evidence for any effect of tax treaties on FDI.

Final thoughts

International policy can obviously pursue many different goals.  Our research suggests that governments may be pursuing tax treaties just as much to reduce tax evasion as to promote more efficient international capital allocation.  The recent economic troubles seems to have focused governments even more on the short-run goal of capturing tax revenues, apparent from the G20’s recent signing of the multilateral Convention on Mutual Administrative Assistance in Tax Matters. However, agreements that allow for greater information sharing between governments deter multinational enterprises from engaging in foreign investment in the first place.  It seems that the longer-run policy goal of facilitating international investment has taken a back seat in recent accords.

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This is research by Jason Lindo, Glen Waddell and their student Isaac Swensen:

Are Big-Time Sports a Threat to Student Achievement?

Guys' Grades Suffer When College Football Teams Win, by Rebecca Greenfield, The Atlantic: ...college male's grades tend to go down when their university's football team wins games, new research finds. ... More victories means more celebrating which means less studying. ...

Looking at University of Oregon student transcripts over 8 years and football wins over that same period, researchers Jason M. Lindo, Isaac D. Swensen, Glen R. Waddell calculated that a 25 percent increase in the football team's winning percentage leads males to earn GPAs as if their SAT scores were 27 points lower. ...

In addition to looking at grades, the researchers also collected surveys, asking students if football success decreases study time. "24 percent of males report that athletic success either 'Definitely' or 'Probably' decreases their study time, compared to only 9 percent of females," ... leading them to attribute the grade drop to partying. ...

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Finally, research by Anca Cristea (along with two coauthors):

Trade and Greenhouse-Gas Emissions

Trade and greenhouse-gas emissions: How important is international transport?, by Anca Cristea, David Hummels, and Laura Puzzello, Vox EU: It is well known that international trade leads to greenhouse-gas emissions but policymakers often focus their attention on the production of goods and not their shipment. This column presents findings based on a unique database that allows researchers to calculate emissions for every dollar of world trade. It suggests that international transport emissions warrant serious attention in current climate-change negotiations.

As the first commitment period of the Kyoto Protocol comes to an end in 2012, member countries of the UN’s Framework Convention on Climate Change (UNFCCC) are meeting in Durban, South Africa, to decide on future actions to curb worldwide greenhouse-gas emissions.

International transport is absent from existing agreements on climate change, and negotiations to include this sector in carbon balances are progressing slowly. Differences in the willingness to regulate the greenhouse-gas emissions from international transport became apparent just a few weeks ago, when air carriers and officials around the world reacted strongly against the EU’s decision to include the aviation sector in its emission-trading scheme (Krukowska 2011).

One of the main difficulties in regulating emissions from international transport is the paucity of data on their magnitude and incidence. The little we know about these emissions comes from the ‘life-cycle analysis’ of very specific products such as Kenyan cut-flower exports. Unfortunately it is difficult to extrapolate from these highly detailed case studies to a systematic evaluation of transport emissions in trade.

In a recent paper (Cristea et al 2011) we provide such an evaluation. The key to our analysis was building a database on how goods move; for every product and country pair we track the share of trade that goes by air, ocean, rail, or truck. This allows us to calculate the transportation services (kg-km of cargo moved), and associated GHG emissions, for every dollar of trade worldwide. Combined with data on GHG emissions from production we can calculate total emissions embodied in exports.

International transport is a significant share of trade-related emissions

In our baseline year of 2004, international freight transport generated 1,205 million tonnes of CO2-equivalent emissions, or 146 grammes of CO2 per dollar of trade. By comparison, production of those traded goods generated 300 grammes per dollar of trade, meaning that international transport is responsible for one third of trade-related emissions.

The aggregate numbers understate the importance of transport for many products. Figure 1 shows the share of transport in trade-related emissions, and it varies significantly over industries. At the low end are bulk products (agriculture, mining), and at the high end are manufactured goods. For important categories such as transport equipment, electronics, and machinery, transport is responsible for over 75% of trade-related emissions. Relatively rapid growth in these industries means that transport emissions will loom ever larger in trade.

Once we include transport, clean producers look dirty

Table 1 provides calculations of output and transport emissions per dollar of trade and shows large differences between regions in emission intensities. Differences in output emissions are driven largely by the commodity composition of trade, with manufacturing-oriented exporters at the low end. Less known and perhaps more surprising are the large differences in transport emissions. The transportation of US exports is nearly eight times more emissions-intensive than the transportation of Chinese exports, and six times more emissions-intensive than Europe.

Table 1. Output and transport emission shares and intensities, by region and country

Note: Total emissions per dollar are calculated as the sum of transport and output emission intensities. *For comparability with transport emissions, output emissions are constructed as a weighted average of sector level output emissions, using trade rather than output weights.

Accounting for transport significantly changes our perspective on which regions have “dirty”, or emissions-intensive trade. India’s production of traded goods generates 143% more emissions per dollar of trade than the US, but after incorporating transportation, its exports are less emissions-intensive in total.

We also see a strong imbalance in transport emission intensities between imports and exports. This is a critical issue for mechanism design when regulating emissions. Do international transport emissions ‘belong’ to the exporter, or to the importer? Given the imbalance shown here, the US would presumably prefer an import-based allocation while East Asian countries would prefer the opposite.

The value of trade is a poor indicator of associated transport emissions

To understand the differences across products and regions shown above, we must recognise that transport emissions depend on the scale and composition of trade. Intuitively, as countries trade more they employ more transportation services and emit more GHG. However, the partner and product composition of trade critically affect the type and quantity of transportation services (kg-km of cargo) employed. When France imports from Japan rather than Germany, a dollar of trade must travel much longer distances. A dollar of steel weighs vastly more than a dollar of microchips, requiring greater fuel (and emissions) to lift. And the choice to use aviation rather than maritime transport involves as much as a factor 100 increase in emissions to move the same cargo. This last fact, along with the unusually large reliance on air cargo in US exports, explains why US exports are so emissions-intensive.

Trade can reduce emissions, in some cases

If two countries have similar emissions from output, then increasing trade (ie shifting from domestic production to imports) will require more international transport and higher emissions. However, if a country with high output emissions reduces production in order to import from a low-emissions country, the savings in output emissions could be enough to offset the higher transport emissions from trade. Which of these cases is most likely? We find that trade flows representing 31% of world trade by value actually are net emission reducers. This happens most commonly in those industries in the left side of Figure 1 – where output emissions are both a large fraction of trade-related emissions and very different across producers. It is much less common in manufactured goods where transport emissions dominate.

Figure 1. The contribution of transport to total trade-related emissions

Eliminating tariff preferences will shift trade toward aviation and maritime transport

With a better understanding of the emissions associated with both output and trade we can examine how changes in trade patterns will affect trade-related emissions over time. In a final exercise we simulated likely trade growth from 2004–20 resulting from tariff liberalisation and GDP growth using a dynamic version of the GTAP model.

The trend toward preferential trade liberalisation in regional trading blocs such as the EU and NAFTA means that tariffs are lower for more proximate trading partners and especially for land-adjacent partners. Rail and truck transport dominates these trade flows. Tariff liberalisation that removes current preferences in favour of a uniform MFN structure will shift trade toward more distant partners (higher kg-km per dollar of trade) and increase the use of aviation and maritime transport. This wouldn’t necessarily raise total emissions (maritime has lower emissions than rail and trucking; aviation much more), but it does mean that a rising share of trade will be outside current monitoring efforts. Getting aviation and maritime transport emissions in the system becomes critical.

Growth in the developing world will cause international transport emissions to skyrocket

We forecast that likely changes due to tariff liberalisation would be somewhat modest but likely GDP growth will yield profound changes in output, trade, and GHG emissions. Our projections have the value of output and trade rising at similar rates, accumulating to 75-80% growth by 2020. International transport services will grow twice as fast, accumulating to 173% growth. Why? Simply put, the fastest growing countries (China, India) are located far from other large markets, and their trade requires greater transportation services.

Some propose that international aviation and maritime transport should be treated as separate entities, essentially countries unto themselves, for purposes of allocating and capping emissions. If this approach is employed, as opposed to including international transport in national allocations or simply taxing the GHG emissions from fuel use, it is difficult to see how future trade growth can be accommodated.

Summary and implications

International transport emissions are a surprisingly large fraction of trade-related emissions that will grow relatively fast as world output increases and trade shifts toward more distant partners. Policymakers must carefully consider how to include international transport emissions in protocols designed to slow emissions growth. Our emission calculations – based on the most accurate trade and transportation data available to date – provide some necessary tools to advance the policy debate.

"Using Blackouts to Help Understand the Determinants of Infant Health"

This is based on the work of a new colleague, Alfredo Burlando:

What happens when the power goes out? Using blackouts to help understand the determinants of infant health, by Jed Friedman: Low birth weight, usually defined as less than 2500 grams at birth, is an important determinant of infant mortality. It is also significantly associated with adverse outcomes well into adulthood such as reduced school attainment and lower earnings. Maternal nutrition is a key determinant of low birth weight...

But what about the down-side risk of temporary income fluctuations - do short-lived negative income shocks have equally significant effects on low birth weight? Households may be able to prioritize the consumption and care of pregnant mothers during adverse shocks, but of course households must know about the pregnancy in the first place. This knowledge doesn’t usually manifest until after the first 6-8 weeks of pregnancy and those initial weeks of pregnancy are also critical ones to ensure the health of the fetus. One recent study by Alfredo Burlando focuses on this critical window of time when households do not yet have sufficient knowledge and thus do not sufficiently protect against the changing economic circumstances.

In May of 2008, the undersea cable that brings power to the Tanzanian island of Zanzibar was ruptured, plunging the island into a blackout that lasted 4 weeks. As a result, households employed in sectors such as manufacturing or tourism that relied on electricity experienced income declines while households in more traditional sectors such as farming did not suffer noticeable shortfalls. Fortunately any income decline was short-lived – the power was only out for 4 weeks – and in a matter of months income in all affected sectors had recovered to previous levels. Despite the brief duration of this income shock, could there have been any long-lasting consequences?

Well it turns out that infants born 7 to 9 months after the blackout were significantly smaller – an average of 75 grams smaller – than infants born within 6 months of the start of blackout or beyond 9 months after its end. This reduction translates into an 11% increase in the probability of a low weight birth. Burlando proposes reduced nutritional intake and heightened maternal stress, brought on by the blackout induced income shock, as the main transmission mechanism for lower birth weights. ...

The findings suggest that women who were known to be pregnant at the time of the black out, i.e. those who were visibly pregnant, received insurance from the shock where as women who did not realize they were yet pregnant (or who had conceived during the blackout) did not receive the same protection.

For me, the take away messages from this study are threefold:

• These findings highlight the importance of behavioral responses and that people in the face of a crisis can be resilient when they are armed with relevant knowledge – households with women who knew they were pregnant apparently prioritized maternal nutrition. It also underscores the obvious point that any protective program that targets pregnant women faces the challenge of improving the informational barriers that prevent early pregnancy awareness.
• The study also highlights the long-lasting effects of even very brief income shocks if (a) they occur at critical moments in fetal development and (b) households cannot fully smooth consumption or otherwise insure themselves from temporary declines. ...

"Macroeconomic Dynamics and (Present and Future) Income Distribution in Argentina: a Lucas’ Critique View"

From the Latin America EconoMonitor, a colleague, Nicolas Magud, on plans for fiscal stimulus in his native home of Argentina:

Macroeconomic Dynamics and (Present and Future) Income Distribution in Argentina: a Lucas’ Critique View, by Nicolas Magud: The export tax law that Argentina’s president submitted to Congress ended as a complete failure for the current administration—the more so since it was finally rejected by the negative vote of the vice-president. However, I look at the episode as the best outcome possible for the current administration. It actually gave the government the ability to start afresh. The vice-president rejection actually enabled the president to obtain an elegant way out of an economic mistake—with potential social unrest. Will the president take advantage of this? Although I truly hope that “words” will actually be contradicted by “facts”, as of today I am inclined to think the answer is not—details follow.

Graduation

My Father's Day gift came yesterday afternoon:

Video Lectures - Econometrics

There's nothing special about my teaching or anything, and I always regret it after I post these (hence, the late Saturday night attempt to sneak by unnoticed), but if anyone happens to be interested, my econometrics course is available on video. (Just scroll down to the individual lectures or to the index at the top to find them, the course is the second in our undergraduate sequence covering departures from the assumptions required for OLS to the best linear unbiased estimator. They are live videos from the class. My other classes are on video as well, e.g.)

I don't watch the videos - I can't - so I have no idea what's on them other than from recollection, but this is one example (the topic is heteroskedasticity corrections). Hopefully there aren't any YouTube moments [Update: list of video lectures for other classes I teach]:

Economics 421 - Econometrics - Winter 2008 - Lecture 6

From the Inbox...

Mark,

Your kilt for Saturdays Burns' night festivities is in my office.

Slainte

"Cyber Scholars"

PZ Meyers reports:

Cyber Scholars?, by PZ Meyers: Those sneaky alumni organizations — they've always got new angles on how to get to you. The alumni magazine for the University of Oregon has a writeup on me and a current member of the UO faculty, Mark Thoma. Apparently, we are Cyber Scholars, professors who use the blogosphere to teach the world. I think we need some new academic robes to go with that designation — preferably something in silver fabrics, and with a jetpack.

Here's the write-up. This kind of thing - the picture, the story, etc. - makes me self-conscious, so please feel free to scroll on by (I should note that one or two of the statistics are a bit off, but not by much, and that I wasn't going to post this until convinced to do so by others):

Cyber Scholars, by Katie Campbell, UO Quarterly: Mark Thoma compares the problem with the national deficit to dieting.

“People eat more in anticipation of a diet, which makes the diet that much harder once the time comes,” the UO associate professor of economics explains. It’s with that type of everyday language that Thoma reaches beyond the walls of academia to explain complex economic issues to average folks. That’s what he does everyday—on his blog (short for web log).

Many view the blogosphere less as a scholarly realm and more as a perilous information wasteland where the average blowhard can present himself as an expert. But a growing number of people with Ph.D.s, such as Thoma, are using blogs to connect with colleagues beyond their university departments and with the greater nonacademic community.

Pure Altruism?

When I presented my colleagues Bill Harbaugh, Dan Burghart, and Ulrich Mayr's research recently, the title I chose, "Paying Taxes Can Make Citizens Happy," was unfortunate since it diverted attention from the main point of the research. A column by John Tierney in today's New York Times provides another chance to highlight the important results from the work.

The big finding in the research is not that individuals enjoy paying taxes, though that certainly captured the headlines. Instead the result to pay attention to is the finding that we may be motivated by pure altruism, though as noted at the end, the concept of pure altruism is trickier to define than it might seem:

Taxes a Pleasure? Check the Brain Scan, by John Tierney, NY Times: The University of Oregon announced a new piece of research last week with a startling headline: “Paying taxes, according to the brain, can bring satisfaction.”

Could this be true? The research is in the new issue of Science, so it’s got the right pedigree, but still. ...

Before any campaign strategists start poring over brain-scan data in the paper, let me temper the happy news. First, this study did not exactly involve a nationally representative sample of taxpayers. The sample consisted of 19 female students at the University of Oregon. And they were not exactly paying taxes as the T-word is understood on the campaign trail.

It is a fascinating bit of research, not so much for its political implications but for what it reveals about humans’ compulsion to be nice.

Psycho Statz Rappers

Grad students in our Psychology Department attempt to increase the demand for statistics courses:

Amy Finkelstein: The Costs and Benefits of Universal Health Insurance

This WSJ commentary from Amy Finkelstein of MIT discusses the costs and benefits of adopting universal health insurance:

The Cost of Coverage, by Amy Finkelstein, Commentary, WSJ: Thanks to widespread concern about the millions of Americans without health insurance, several states have recently mandated universal coverage... Massachusetts enacted legislation...; other proposals are brewing in California, Pennsylvania and elsewhere. Such reforms are likely to affect health-care spending...

For evidence of how such programs can lead to increased spending, just look at the effects of the introduction of Medicare in 1966. Medicare provides health-insurance coverage to virtually all Americans aged 65 and over. Prior to its enactment, only about one-quarter of these individuals had any meaningful health insurance. As a result of Medicare's introduction, about three-quarters of the elderly ... gained health-insurance coverage. (For perspective, this is a similar increase in the share .. as ... will happen in Massachusetts under its new universal coverage program.)

Research I conducted shows that Medicare had a substantial effect on the health-care sector. By 1970, the program caused a 37% increase in hospital spending. This is an enormous number. If I extrapolate from the Medicare ... to ... the ... overall spread of insurance -- both public and private -- between 1950 and 1990, it suggests that it is responsible for about half of the sixfold growth in real per capita health-care spending during this period.

Why does increased health insurance lead to increased health spending? One factor is that when individuals have insurance, they tend to consume more health care. ...

Another reason is that hospitals and doctors respond to the increased demand for health care by changing some of the ways in which they practice medicine. For example, hospitals were more likely to adopt new medical technologies after Medicare... because ..., with greater insurance coverage, there were more people who could afford these new technologies. ... All of this contributes to higher health-care spending.

Of course, the effect of health insurance on health spending tells us only of the costs of expanding health insurance coverage. We can also ask, what are the benefits? And once again, we can learn something from the Medicare experience. Robin McKnight of the University of Oregon and I have examined the data, and as best we can tell, Medicare did not have any effect at reducing elderly mortality in its first 10 years of existence. Of course, mortality is only one measure of health, and it is possible that other aspects of health improved. It is also possible that in the long run, the new technologies adopted ... because of Medicare had important health benefits that our 10-year analysis would not capture.

While the health benefits from Medicare therefore remain uncertain, we found clear evidence of a different type of benefit: It provided substantial financial protection to the elderly. Prior to Medicare, they faced the risk of large out-of-pocket medical expenditures. About one in 10 of elderly individuals spent one-fifth of their annual income on medical expenses... By 1970, we estimate that Medicare had reduced this risk of extremely large out-of-pocket medical expenditures by half.

What all this means is that, as best we can tell, the elderly were not foregoing life-saving treatments prior to Medicare. Rather, they were getting these treatments, albeit at large or even enormous personal financial cost. But overall Medicare did not so much save lives as it did provide financial security. This is the goal of insurance -- not to prevent an awful event from occurring, but to make sure that if it does occur you are not devastated financially.

The Medicare experience offers valuable lessons for today. Recent state efforts to create universal health-insurance coverage would reduce the fraction of the population in a state without insurance by similar amounts as did the introduction of Medicare... And if that program is any guide, we may perhaps see changes in the structure of the health-care system, such as the development and adoption of new medical technologies. We are likely to witness an improvement in the financial security of the currently uninsured. There are also likely to be increases in health-care spending -- quite possibly substantial ones.

The paper she co-authored with Robin is noted and briefly discussed here. The paper itself is here. Here's a non-technical summary.

Here are some statistics related to the paper Robin has used in presentations. This table shows that medical spending is very skewed: If you order people according to their spending on health care, the top 10% of spenders account for 72% of all spending and the top 1% of spenders account for 30% of all spending. 

Share of health care spenders	Cumulative share of US medical spending
Top 1%	30%
Top 5%	58%
Top 10%	72%
Top 30%	90%
Total population	100%

Source: Berk & Monheit (1992)

It's the people in the tails, of course, that use most of the resources and receive most of the benefits from adopting universal insurance coverage.

An Insider's View of the Bretton Woods Negotiations

Sadly, a colleague who was believed to be the last surviving U.S. economist involved in the Bretton-Woods negotiations, Ray Mikesell, has died of natural causes at age 93:

UO professor, Bretton Woods economist, dies at age 93, by Rebecca Nolan, The Register-Guard: A University of Oregon professor, believed to be the last surviving economist from the 1944 Bretton Woods conference that led to the creation of the World Bank and the International Monetary Fund, died Tuesday at his home in Eugene. Raymond Mikesell died of age-related causes. He was 93. ...

Toward the end of World War II, he became an adviser to Assistant Treasury Secretary Harry Dexter White, who led U.S. efforts to shape the world's economy after the war. Mikesell was present at the Bretton Woods conference, where White and the British economist John Maynard Keynes negotiated the design of the World Bank, the IMF and the General Agreement on Tariffs and Trade. The institutions funded the European recovery and laid the foundation for the postwar economic expansion.

Mikesell provided data for White to use against Keynes' attempts to preserve British interests. ...

After the war, Mikesell worked as ... as an adviser to the State Department on currency reform in Saudi Arabia and as economic adviser to the Joint British-American Cabinet Committee on Palestine. In the 1950s, he served as a senior economist at the Council of Economic Advisors and then on the Paley Commission, designing policies that encouraged worldwide development and trade in natural resources. He served as a consultant to the United Nations, the World Bank, the Organization of American States and to Oregon Sen. Wayne Morse and the Committee on Foreign Relations. ...

Mikesell was a firm believer in free markets and economic development, causing him to resign from the Sierra Club over the group's opposition to the North American Free Trade Agreement... [Update: NY Times story]

Among all countries involved in the Bretton Woods negotiations the last surviving economist is, as far as I'm aware, Dr. Jacques J. Polak who was a member of the Netherlands delegation. He is 92, lives in Washington, D.C., and maintains an office at the IMF where he continues to write.

I should also note that Ray gave the Department a million dollars to fund our endowed Chair in Environmental and Resource Economics now held by Trudy Cameron. How did he get a million dollars to spare?:

In 1998, Professor Mikesell endowed a chair in environmental and resource economics at the University of Oregon. At the graduation day speech announcing his gift, Ray walked slowly to the podium, then stopped and looked up at the students and their parents. “Some of you might be wondering how a professor got to be so well off that he could afford give this much money away.” he said. “You do it like this. Save 5% from every paycheck and invest it, even if it’s only at 3%. Eventually, you’ll have a million dollars too.” He looked up again, and then with perfect timing added “Of course, it helps if you live as long as I have.” The crowd broke into laughter, then applause. Ray smiled, and walked off the stage.

One of Ray's many books, Foreign Adventures of an Economist written in 2000, gives details of his experiences in all sorts of negotiations and advisory capacities.  One part of the book details his experiences at Bretton Woods and it's a history worth preserving. Ray's main lasting contribution at the conference was to determine the IMF and World Bank formula used to set quotas:

This exercise required many calculations with a 1940s-style calculator, using a number of variables and weights for each country. If I had had access to a modern computer, I could probably have come up with a better formula. ... My formula was ... used as a basis for determining the IMF and World Bank quotas at Bretton Woods for most member countries represented at the conference. Thereafter, it was used in a somewhat revised form for new members joining the Fund. In fact, the formula is still used, but with special adjustments for individual countries. I take no pride in having authored the formula and sometimes apologize for it as my claim to infamy! It has continued to be used in large part because the Fund wanted to apply the same conditions in determining quotas for new members as were applied to the original members.

The book has a lot of interesting detail and insider information on the negotiations, and I've included the pdf's for the chapters on Bretton-Woods below for anyone who is interested. Here's one small section:

A Note on Personalities
John Maynard Keynes

As a young academic who had studied and taught both The Treatise on Money and The General Theory I was awed by Keynes and grateful that I could sit in meetings with him. Although he fought hard for positions he regarded as important for Britain's welfare, his economic arguments were academic and dispassionate. Keynes could accept philosophically the economic advantages of multilateral trade while continuing to defend a discriminatory sterling area in terms of Britain's national interest.

There was a sharp contrast between the literary quality of Keynes's ICU proposal and the legalistic formulation of the July 1943 version of the White plan. Keynes displayed arrogance in the elegant language of an educated British lord. He disliked the style and format of the Fund's Articles of Agreement. He said they were written in Cherokee, and he blamed the language on the Treasury Department's lawyers. Keynes frequently complained that Americans were too dependent on attorneys, and once suggested that "when the Mayflower sailed from Plymouth, it must have been entirely filled with lawyers."

Keynes was capable of displaying temper and once threw one of White's drafts to the floor, but he usually expressed his anger through sarcasm. He always had an air of dignity and did not join the revelry at the Bretton Woods nightclub. I never saw him in sport clothes. Nevertheless, he was approachable. Junior members, such as myself, were able to talk privately with him, and I always found him willing to answer my questions. If we took too much time, however, Lady Keynes would tiptoe over to protect him from becoming too tired. Those of us who were privileged to shake his limp hand on the train from Savannah to Washington following a light heart attack were left with the memory of saying farewell to a truly noble man.

Harry White

Personalities played an important role in the Bretton Woods debates and in the final outcome. I saw White in numerous meetings and on dozens of other occasions when we talked alone in his Treasury Department office. His Monetary Research staff was largely composed of former academicians, and many of us returned to universities after the war. The staff was intensely loyal to White, and he respected us as scholars and strongly supported us even when he thought we had made mistakes. I do not recall White's embarrassing any staff member by dressing him down, but he showed another side when he was involved in negotiations outside the Treasury Department. He was often brusque, even crude, in his meetings with Keynes and the British delegation.

When annoyed, he sometimes cynically addressed Keynes as "Your Royal Highness" or "Your Lordship." Lord Robbins, who participated in many of the pre-Bretton Woods meetings but was not close to White, described White well in his book Autobiography of an Economist:

It is true that White was not a very beautiful character. He was brash, truculent, and, I suspect, somewhat unscrupulous where his own interests were concerned. In his younger days he had been the victim of academic unemployment, possibly due to the discreditable anti-Semitism which at that time tended to affect the policies of the great university with which he had been associated; and I am fairly clear that he was determined that henceforth Harry White should not be worsted in the struggle for survival-- or eminence. But that he was in any way associated with the groups in the United States who actively wished harm or wished to exploit our [Britain's] position of weakness will not stand up to examination for a moment. (Robbins, 1971).

White often expressed to his staff his hostility toward the State Department, with which he frequently struggled for power within the U.S. government. Like Morgenthau, he wanted the Treasury Department to be the center of postwar economic policy and planning. This helps to explain the comprehensive nature of the original White plan. International financial institutions were not a high priority in the State Department; without White's zeal, there probably would not have been a Fund or a Bank. The Bretton Woods institutions might not have come into being if they had not been well advanced before the end of the war, since by then there was a plethora of immediate economic problems that these institutions were not equipped to handle.

White sought to conduct his own foreign policy independently of the State Department. He dealt directly with foreign officials in Washington, and members of the Monetary Research staff in American embassies in Allied countries, including myself, secretly reported directly to White without going through their embassies. White sometimes used the press to promote his policies that were in opposition to those of the State Department. On one occasion, while I was alone with him in his office, he dictated over the phone a long, top-secret State Department statement to a reporter. I do not know the reasons for White's antipathy toward the State Department, but it was not directed at individuals since he had close relations with some of them. I believe it was a reaction to the State Department's traditional insistence that it have commanding responsibility over foreign policy.

White believed that the U.S. government should have sought closer cooperation with the Russians. Through certain members of his staff, he provided information to and discussed policy with Soviet embassy officials. These relations were later discovered by the FBI and led to White's dismissal from the government, but they were not known to most of us in Monetary Research.

Many people have asked me if White was a Communist. I am convinced that he was not. White believed in free markets and capitalism and devoted his energies to planning for a postwar world with free and nondiscriminatory trade and payments. He was, however, quite willing to deal with Communist officials to achieve his objectives. The Soviet Union shared his political objectives regarding postwar Germany, and he believed that Soviet officials would support the Fund and the Bank proposals. He did not share the pervasive fear that the Communist ideology would spread to the rest of the world, or that the Soviet Union might dominate the world by military conquest. He believed that a Communist state could operate under a system of nondiscriminatory trade rules, abiding by the trade and exchange obligations of his plan.

White's associates who were later accused of being spies for the Soviet Union -- Sol Adler, Frank Coe, and Harold Glasser -- never indicated to me that they were not completely loyal to the United States or that they did not believe in a democratic capitalist society. I knew them so well personally that it is difficult for me to believe they could have concealed communist ideology from me. Although they may have had some association with the American Communist movement in their youth, as did many of my college acquaintances in the 1930s, I believe that the accusations directed against them arose from White's propensity to carry on direct relations with the Soviet government outside regular diplomatic channels. If these same activities had been carried on with the British or Canadians, they would have been acceptable. White and his closest associates simply ran their own foreign ministry.

A few weeks before White's death, he and I were speakers at a conference of the American Academy of Political and Social Science in Philadelphia. After the evening meeting on April 19, 1947, I spent a couple of hours with him in the lobby of the Benjamin Franklin Hotel. He was in a reflective mood, and we reminisced about the events leading to the creation of the Bretton Woods institutions. White had already been compelled to give up his position as the U.S. executive director of the Fund. He had been working as a consultant to the Chilean government and had recently returned from Santiago. He was scheduled to testify before the House Committee on Un-American Activities, but he spoke very confidently of being able to disprove the charges against him and appeared to look forward to the opportunity. White was charged with providing confidential information to the Soviet Union, but I have never believed he gave any information that was harmful to U.S. national interests. White did speak of his heart condition and, when we parted, he apologized for taking the elevator rather than walking the two flights to where both of our rooms were located. Some say he committed suicide to avoid testifying before the House committee. I do not believe it.

More from the book which may not be as well known as it should be (I may excerpt more of the book later as there are quite a few interesting, informative, and entertaining episodes):

Cover and Table of Contents
Chapter 2: Bretton Woods: Preconference Negotiations
Chapter 3: Bretton Woods
Chapter 4: Ratifying the Bretton Woods Agreements

One last note those who knew him will appreciate. This was Ray:

He loved mountains, the Pacific Northwest, hiking, and skiing. His PhD students – and there were many – each has a story about how Ray would take them hiking, wear them out on the trail, and then sit around the campfire while they recovered, smoking cigars and telling them what they needed to do for their dissertation.

Ray traveled everywhere from Antarctica to Nepal. It seemed like he knew every mountain, trail, and stream in the southern Cascades, and his favorite camping spot was Linton Meadows. Ray was still skiing downhill at Willamette Pass in his nineties – and said it was a lot easier with a new heart valve. He was also an avid tennis player, and played his last doubles match a year before his death.

Ray will be missed.

Learning About Rational Expectations Solutions

This paper by Bennett McCallum extends the work of a colleague, George Evans, on the least-squares learnability of rational expectations solutions. Rational expectations models require agents to understand how to calculate the solution to the model, but that is a very complicated mathematical problem so it is unclear how agents accomplish this task. The question in this work is whether agents can use simple linear learning rules (linear regressions) to learn about the complicated rational expectations solutions.

The paper shows that previous results of Evans and Honkapohja (and others) on the types of models that are learnable pertain to a broad class of models, broader than many might have suspected from the original work. This is important because, as McCallum argues, "learnability (and thus E-stability) should be regarded as a necessary condition for the relevance of a RE equilibrium" and this broadens the class of such models.

Since I don't expect many of you will be interested in wading through the paper which is necessarily technical, or even the introduction, let me highlight the part of the discussion on the relevance of RE equilibria.

Remember that, in RE models, agents are assumed to be able to calculate the solution. Suppose we give agents an ideal learning environment, i.e. they use the correct model, correct estimator, the structure is invariant, and so on. In such an idealized world, if agents cannot learn the RE equilibrium, then it is very unlikely they would be able to learn about it in a more complicated set-up. This helps us determine which models are useful representations of the economy. Models with RE solutions that cannot be learned in an ideal world are generally uninteresting and can be set aside:

The position that learnability (and thus E-stability) should be regarded as a necessary condition for the relevance of a RE equilibrium begins with the presumption that individual agents must somehow learn the magnitudes of parameters describing the economy’s law of motion from observations generated by the economy; they cannot be endowed with such knowledge by magic. Of course any particular learning scheme might be incorrect in its depiction of actual learning behavior.

But in this regard it is important to note that the LS learning process in question assumes that (i) agents are collecting an ever-increasing number of observations on all relevant variables while (ii) the structure is remaining unchanged. Furthermore, (iii) the agents are estimating the relevant unknown parameters (iv) with an appropriate estimator (v) in a properly specified model. Thus if a proposed RE solution is not learnable by the process in question—the one to which the E&H results pertain—then it would seem highly implausible that it could prevail in practice...

While I'm discussing colleagues, I also want to welcome the newest member of our Department, Jeremy Piger, mentioned today by Jim Hamilton in his discussion of the debate over business cycle dating that came in response to a question from Greg Mankiw, among others. I'm pretty happy to have Jeremy as a colleague. Here's the introduction to McCallum's paper:

State Universities, Competition, and Access for Low-Income Students

Here's a bit more on public universities and the effects of falling state support. As support has fallen, there has been an increased reliance on tuition, private sector funding of research, and donations as a means of funding, all of which subject state universities to market pressures that did not exist in the past.

How will universities respond? Of particular interest is whether the change will affect the ability of universities to provide access to low-income students. Do universities face competition and does that impact their ability to provide access? This is the enrollment manager at Oregon State University, which is about 40 or so miles north of us here at the University of Oregon, in an interview with The Atlantic magazine:

The Best Class Money Can Buy,  by Mathew Quirk,  The Atlantic:  I asked Bob Bontrager what he thought about eating other people's lunches.

"I personally prefer kicking their ass," he replied. "It's a zero-sum game. There's a finite number of prospective students out there. Are you going to get them, or is your competitor going to get them? You face the pressure and say, 'That feels burdensome to me; I don't want to deal with that.' Or you say, 'That's a pretty interesting challenge; I'm going to go out there and try to eat their lunch. I'm going to try to kick their ass.' That defines people who are more or less successful and those who stay in the position."

Bontrager, who works at Oregon State University, is the school's head of enrollment management—a relatively new but increasingly essential post in higher education. Three quarters of four-year colleges and universities employ an enrollment manager to oversee admissions and financial aid. The position is standard at private schools, and is spreading quickly across public institutions.

Over the past twenty years, often under cover of the euphemisms with which the industry abounds, enrollment management has transformed admissions and financial aid, and in some cases the entire mission of a college or a university. At its most advanced it has a hand in every interaction between a student and a school, from the crafting of a school's image all the way through to the student's successful graduation. Any aspect of university life that bears on a school's place in the collegiate pecking order is fair game: academic advising, student services, even the curriculum itself. Borrowing the most sophisticated techniques of business strategy, enrollment managers have installed market-driven competition at the heart of the university.

With their ever-expanding reach, enrollment managers are inevitably dogged by controversy. But it's the way they have changed financial aid—from a tool to help low-income students into a strategic weapon to entice wealthy and high-scoring students—that has placed them in the crosshairs of those who champion equal access to higher education. Adopting data-mining and pricing techniques from the airline and marketing industries, they have developed a practice called financial-aid leveraging that allows a school to buy, within certain limits, whatever class it wants. Often under orders from a president and trustees, enrollment managers direct financial aid to students who will increase a school's revenues and rankings. They have a host of ugly tactics to deter low-income students and to extract as much money as possible from each entering class.

All this, understandably, has given the enrollment-management industry a black eye. "It's a brilliantly analytical process of screwing the poor kids," says Gordon Winston, an economist at Williams, and an article last year in The Chronicle of Higher Education included a warning that "enrollment managers are ruining American higher education." But some in the industry use its techniques responsibly—to guarantee enough revenue to support the academic mission, or even to expand low-income access to higher education. Indeed, the sophisticated methods of enrollment management may be the only way for schools to hang on to their principles while surviving in a cutthroat marketplace. [... continue reading ...]

I'm told Bontrager was asked to use different language when descibing his competitive spirit to the media. We have an enrollment manager, and she relies on the results of an econometric model that has been developed over many years by colleagues to help uncover the responsiveness of enrollment to changes in enrollment policy and the implementation of programs designed to affect recruitment and retention. It's been a helpful tool.

The effect on access for low-income students is a big concern, though I know both the Admissions/Enrollment Manger and Financial Aid Directors here and they certainly fall into those trying to preserve the core mission of equal access and are among the most devoted advocates of these principles.

But the tension is there -- our funding and ability to provide quality education depends critically on these revenue sources -- and we have also instituted scholarship programs designed to attract quality students irrespective of need. These programs are based, in part, upon knowledge about elasticities gleaned from the econometric estimation of enrollment decision models and other statistical work and they do pay attention to the revenue that is generated.

My view from the inside, for what it's worth, is that people are worried about these issues and doing their best to preserve access, but the pressure is there and the argument that always carries the day is that we must survive to serve any low-income students at all even if that means serving fewer low-income students than we might desire to fulfill our commitment to equal opportunity. Over time, in a competitive marketplace, that leads to incentives and outcomes that bear watching as a matter of public policy.

If you are interested in these issues, the article does a good job or presenting the tensions universities feel to maximize revenue at the expense of other values such as equal access, though it may be a bit strident on the access issue.

The Decline of Liberal Arts Education

Reading this piece in Project Syndicate about the future of European universities reminded me of discussions about the decline of classic liberal arts education in the U.S. Let's start with this essay by Warren Goldstein, chair of the History Department at the University of Hartford, appearing in the Yale Alumni Magazine.

This echoes my own experience. When I was Department Head, I began bringing back former students who had found success in the business world to talk to our undergraduate majors about how best to prepare for the working ("real") world. Time and again I heard the view expressed in this article, that businesses want people who can think, write, analyze, develop persuasive arguments, they want the type of skills a liberal arts education is intended to promote. With that foundation, they would tell me, they can teach the people the skills needed to do the job effectively. Some were adamant in their refusal to hire business school graduates, preferring instead to hire people with the broad set of skills acquired with a broader education. Economics generally received praise, not so much for specific theoretical tools we teach, but rather for the way it taught students to think about the world and approach problems:

What would Plato do? A (semi-)careerist defense of the liberal arts, by Warren Goldstein, Yale Alumni Magazine:

Nahh, don't tell me -- I bet I can guess your major: art history, right? -- Tom or Ray Magliozzi

If you're an NPR listener, you've probably heard some version of this line on Car Talk. Usually the hapless college student on the phone is female, and Tom and Ray (aka Click and Clack...) are showing their avuncular concern for her employment prospects. ...[L]iberal arts-bashing is one of their favorite sports. As far as I can tell, from my turret in the besieged educational outpost of the liberal arts, nearly all parents of college-age students agree with them. ...

My Father's Day Gift

And it's a good one:

Tim Duy, who does Fed Watch here, giving Paul his diploma at the ceremony today:

Congratulations Paul, you earned it! Paul will be starting the graduate program at UCLA next fall.

iDollhouses: Playing with The Sims

It is well known that males play video games much more than females. However, there is one game, The Sims, where this is not true, a game that is becoming the dollhouse of the computer age. This article on the topic quotes the wife of a colleague, Bill Harbaugh, who is the Head of the Psychology Department here and an expert on the imaginary friends children create, and his daughter is quoted  in the article as well (Bill's post on violence and video games is interesting and somewhat controversial).

As I read this, I wondered how many dads realize they are buying a dollhouse for their boys when they buy this game, and if sales would change with that realization. There is an important policy question here, but I'm not sure I know how to ask it without assuming things I don't know about whether girls should be more like boys and vice-versa, but vaguely the question is if we are doing the best we can to interest our kids, girls in particular, in technical areas involving computers, math, and science. In addition, there are the usual and important questions about how video games, The Sims in this case, interact with the emotional development of children:

Video Games Welcome to the New Dollhouse, by Seth Schiesel, NY Times: Around lunchtime one recent Sunday, Francesca Rookwood, 9, and her brother Richard, 6, were hard at play in Pelham, N.Y., renovating the four-bedroom house they share and picking up after the wayward family they look after. "Who left food on the floor?" Francesca sighed, turning toward Richard and almost rolling her eyes. ...

Francine is Francesca and Richard's mother, but that's not who they meant. Instead, the children were referring to the other Francine — the matriarch ... of their family in The Sims, the wildly successful computer game that has found its most fervent audience among millions of children across the country.

The Growing Education Gap

David Brooks says:

The Education Gap, By David Brooks, NY Times: Especially in these days after Katrina, everybody laments poverty and inequality. But what are you doing about it? For example, let's say you work at a university or a college. You are a cog in the one of the great inequality  producing machines this country has known. What are you doing to change that?

Let me defend universities against the implied notion that colleges aren't doing anything to address these problems. I apologize that this post is a bit "me" oriented, but Brooks struck a nerve. First, there are whole offices devoted to this problem, e.g. see here, but that by no means exhausts the available resources. On another front, I am currently Chair of the University's Scholastic Review Committee and an elected member of The Undergraduate Council. Both committees are concerned with these issues, but let me back up to the many years I chaired the University's Scholarship Committee, the committee responsible for allocating the entire pool of University scholarship money. As Chair, I had the committee reexamine each step in our process to try and identify hidden bias in the award of scholarship money. As an example, one part of our evaluation process used the number of AP courses a student completed as a measure of academic quality. However, there is a wide disparity in the number of AP courses across high schools and it varies with both the size of the high school and its demographic characteristics. To overcome this, we changed the standard to something along the lines of "The student takes full advantage of available educational opportunities" and distributed a list identifying the number of AP courses available at each high school. Some schools offered no AP courses at all and those students were no longer penalized for not having AP courses on their transcripts. In Oregon, there are a few large cities with large, high average income high schools and lot of smaller and less affluent schools spread out across the state. Subsequent data indicated that this change was successful in, as we saw it, more fairly distributing scholarship money according to merit across high schools with such varied demographics. This is not all we did, at the evaluation orientation each year we discussed these issues with regard to the evaluation process, e.g. when looking at a student's extra-curricular activities to be sure and account for circumstance and we would cite examples of how that might work, and the committee has members to specifically represent the interests of the students Brooks is writing about. The extra-curricular expectations for a single mom or an older sibling with imposed child care responsibilities are different from those of a student without such time or resource constraints. In any case, from my experience on this and other committees, I resent the implication that we do not care, are not sensitive to, or are not taking action to address these problems. We are.

Brooks goes on:

As you doubtless know, as the information age matures, a new sort of stratification is setting in, between those with higher education and those without. College graduates earn nearly twice as much as high school graduates, and people with professional degrees earn nearly twice as much as those with college degrees. But worse, this economic stratification is translating into social stratification. ... The most damning indictment of our university system is that these poorer kids are graduating from high school in greater numbers. It's when they get to college that they begin failing and dropping out...

Why is this an indictment of the university system and not our under funded primary and secondary education systems? I have no idea when assigning grades to the 50-300 people in a course what a student's economic circumstances are. I can only assign the grade the multiple choice or essay test supports and if a student fails, I can't pass them on some other basis. They need to come to college prepared and that starts long before they get to universities. Having done the University's grade inflation study and having examined high school grades as part of that process, I have my own ideas about why high school graduation rates might be rising. Take a look at the pressures and incentives current education policy gives primary and secondary schools for a start, and I've already mentioned funding issues. In any case, that we get more under privileged students coming through our doors but many fail along the way is something we do our best to address, but students need to arrive prepared and that is a social problem that extends far beyond the reach of our universities. Finally,

...I'm going to come back to this subject and write about what some colleges are doing to help these students and how most colleges are neglecting them. But let me conclude with the thought that while we have big political debates in this country about equality of results, all those on the left and right say they believe in equality of opportunity. This is where America is failing most.

I'll agree with that, equality of opportunity is essential, but I'm guessing we will disagree about the source of and solution to this problem.

UPDATE:  Arnold Kling comments on this post and writes:

In my view, the issue is larger than universities' policies concerning admissions and financial aid. It concerns how universities are financed, and how this affects the distribution of income. First, consider state subsidies for universities. These are almost certainly regressive. Much of the subsidy goes to raise the rents earned by administrators and professors. Much of the rest goes to affluent students. The taxes that pay for the subsidies come from all economic classes. Second, consider university endowments. Again, they serve to increase rents of employees and to subsidize those students who attend the most elite institutions--a student population that is disproportionately affluent. Imagine instead what might happen if state funds and alumni donations  funded vouchers for student tuition. Compared with reforming university finances, tinkering with admissions and scholarship policies is beside the point. It may "show that you care," but has little practical significance.

A couple of quick notes.  First, I was answering the question Brooks posed, what have I done personally.  If I controlled state taxes and expenditures, my approach would be different!  Second, I disagree it is of little practical significance.  That's not what our numbers told us, that's not what the people on the committee that work with students tell us, and if you are one of the students who gets a scholarship, it is of huge significance.  Sure, we need to work on the issues Arnold identifies, but is he implying we shouldn't do this too? 

One final note, we are a state institution, but our "subsidy" is 13 cents per dollar, down from around 30 cents fifteen years ago.  The impact of this is that we have increased tuition to make up the difference at a rate far greater than the rate of inflation and this has reduced access.  A lot of our work internally has been to counter the trends in enrollment the changes in state funding have caused and scholarships are one part of that strategy. The changes have not been insignificant. Some figures:

1990:  Tuition was 23% of budget, state funded 32% of budget
2004:  Tuition was 33% of budget, state funded 13% of budget

That's a big change in funding over the last 15 years and this is common across universities.  The disinvestment you hear about is real and it has harmed educational access.

An Educated Approach to Job Creation

I wish my state legislators, and yours, would hear this message.  But they won’t:

Sweet home Oregon, The Oregonian: Alabama thought for sure it had the parking place for Toyota Motor Co.'s new $655 million factory and 1,300 jobs. It offered $200 million in tax breaks and other incentives. But Toyota chose to build in Ontario, Canada, which offered half the tax breaks but a better educated, more skilled workforce.  Why should Oregon care?  Because Oregon has Alabama's so-so schools and its poorly funded higher education system. It has the same bitter school spending fights in its legislature, and roughly the same per-student funding. Oregon, like Alabama, tries to woo business with low taxes and incentives, not a highly skilled, homegrown workforce.  It is like looking in the mirror. … If Toyota were to look at Oregon and consider bringing 1,300 family-wage jobs to this state, what would it see? The only state in the country that closed its schools early during the recession. A state that provides as little public support for its universities as any in the nation. A state that still has no substantial rainy day fund to cushion schools in the next downturn.  It would see a lot of what it saw in Alabama.  Oregon has spent 15 years now chiseling away at its schools and universities. ... Today there is not one prominent elected official or candidate -- not one -- pushing for a major new investment in education.  But there are many who still cling to the fiction that keeping the state's overall tax burden in the bottom 10 or so states will draw more business and jobs than investing in quality schools and powerful universities.  If you believe that, we could sell you a place in Alabama. An empty place in Alabama.

Or an empty place in Oregon.  I hope you have smarter legislators than we do.

Input Substitution and Grade Inflation

I have a colleague whose father, a highly respected historian, taught for many, many years at a university we have all heard of. I have also been working on a report concerning grade inflation at the University of Oregon (we have it, are average in terms of severity, and input substitution appears to play a role) and he thought I might be interested in seeing his father’s grade book. This is a principles level history course taught in 1949. After showing the grade book, I’ll calculate some statistics and give you an idea how this compares to grade distributions today. I'll also present some statistics for the U.S. overall since the mid 1960's and some preliminary results from the study I'm doing.

When my colleague showed this to one of his students, the response was an incredulous "Whoa, dude, this is for a history class?":

How does this compare to today? The mean grade for this distribution is a 2.22, between a C and a C+ (ignoring + and -, the numbers are A-13, B-45, C-54, D-19, and F-9; there are 140 students). Here are some statistics for the U.S. for comparison (these are from www.gradeinflation.com which presents additional statistics as well as links to the source data for each school):

There are two episodes that account for most grade inflation. The first is from the 1960s through the early 1970s. This is usually explained by the draft rules for the Vietnam War. The second episode begins around 1990 and is harder to explain. High school GPAs rise during the same time period (entering students at the UO had a high school GPA of 3.30 in 1992, 3.31 in 1996, 3.37 in 2000, and 3.47 in 2004 while SAT scores remained relatively flat, though they did increase modestly in math).

My study finds an interesting correlation in the data. During the time grades were increasing, budgets were also tightening inducing a substitution towards younger and less permanent faculty. I broke down grade inflation by instructor rank and found it is much higher among assistant professors, adjuncts, TAs, instructors, etc. than for associate or full professors. These are instructors who are usually hired year-to-year or need to demonstrate teaching effectiveness for the job market, so they have an incentive to inflate evaluations as much as possible, and high grades are one means of manipulating student course evaluations. I used a market basket approach much like with CPI inflation where the basket was a set of courses highly influential in the average students GPA to try and separate "real" from "nominal" changes in grades over time. Changes in course composition, student composition, faculty composition, and institutional rules were all examined, and changes in faculty composition associated with tighter budgets was an important factor. But that does not explain all of the inflation that I observed in our data and I am looking into this further over the summer.

Update: Here's one measure across faculty rank, %A (other measures also show this). We have three levels of courses, level 1 is principles and level 3 is upper division. Here are the numbers:

Full professors (%A in Levels 1, 2, 3) 26% 31% 35% Assistant professors (%A in Levels 1, 2, 3) 30% 45% 42% Adjunct professors (%A in Levels 1, 2, 3) 38% 50% 42%

For comparison, the grade distribution from 1949 given above has a %A of 9% for a level 1 class (13/140).

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Economics Can Help with Environmental and Resource Problems

From The Oregonian:

Back from the Dead, The discovery of an ivory-billed woodpecker in Arkansas is an inspiring story about wildlife habitat and hope, May 03, 2005, The Oregonian

It is a long way from the old-growth forests of Oregon to the Big Woods of Arkansas. Yet when researchers said last week that they discovered an ivory-billed woodpecker swooping over the swampland 60 years after it was declared extinct, you could stand in any forest and hear the beat of wings.

It was the sound of hope taking flight.

If this ghost of a bird can rise in the heart of the Old South, then almost anything seems possible. To share the excitement, to feel the goose bumps, you don't have to be one of those hard-core birders who sat down and sobbed after they first saw the large, red-crested woodpecker fly across the Arkansas bayou. You don't have to know an ivory-billed woodpecker from a common flicker. You just have to love wildlife.

This spectacular bird, the largest woodpecker in North America, is not from here. But the spirit and dedication that led to the protection of the Big Woods, and the rebirth of the ivory-billed, live right here in the Northwest.

This bird is, at heart, what the Northwest is struggling to protect on the Columbia and Snake rivers, in the old-growth fir forests of Western Oregon, in the big ponderosa pine country of Eastern Oregon. This woodpecker represents what Oregonians fight about, worry about, sacrifice for.

Too often, it feels like we're losing. Conservation groups publish bleak lists of species on the brink, animals around the world that are about to blink out, never to be seen again. Most of the time, it feels like all we can do is slow or delay the loss. Even the rare good news -- a big run of hatchery salmon, a single chick hatched in captivity -- seems so manipulated, so far from nature, that it is hard to celebrate.

But this is different, a bird that everyone believed had died off by the middle of the last century, suddenly soaring back into view. They had said it was gone forever. Hunters had killed the birds off for their showy red plumage. Loggers and developers had cut and dried their bottomland hardwood and swamp habitat.

Yet here it is, showing up in the middle of a forest carefully pieced back together and protected by a number of state and federal agencies, conservation groups, hunters and landowners. The Big Woods is 550,000 acres of bayous, bottomland forests and oxbow lakes. The discovery of an ivory-billed woodpecker there is powerful evidence that how we manage land and resources today can have an enormous impact on the fate of wildlife in the future.

No one yet knows how many of the birds are alive in the Big Woods, or whether there is a mating pair. More than 50 field biologists and other experts have spent more than 7,000 hours in the past year searching the Big Woods for ivory bills. They have confirmed at least 15 sightings of the woodpecker.

It is hard to imagine the rush of seeing a species come back from the dead. It is exhilarating enough to see a wild chinook salmon charge up the Columbia River, watch a bald eagle circle over Portland's Ross Island or see gray wolves lope across Yellowstone 's Lamar Valley.

In the end, you don't need binoculars or a bird book to identify what they have discovered in Arkansas' Big Woods.

It's hope for all wild creatures.

At the UO we established a Center for Environmental and Resource Economics. One of the goals of the Center is to use economics to advise environmental and resource policy decisions, something there has been far too little of in the past.

In my view, there is too much conflict between various groups trying to solve environmental and resource problems and economists are often viewed with suspicion as they weigh in on the debate. Even on campus there is difficulty getting various groups to work together to form a comprehensive cross-disciplinary environmental and resource program. It is equally difficult to do so when forming actual policy.

Economists can help to get incentives correct in achieving desired environmental and resource outcomes, and in analyzing which types of policies are likely to be cost effective in achieving those goals. The quantity of resources available to address environmental and resource problems is limited, and economists can help to enlighten policymakers about how best to allocate those scarce resources to address important environmental and resource issues.