Sunday, September 30, 2012

A Capitalism for the People

The following are a couple of excerpts from Luigi Zingales' A Capitalism for the People. On culture/civic capital:
Until 2002, when the law was changed, UN diplomats from other countries were exempt from paying parking tickets. The New York City police, though, regularly issued them tickets, which piled up unpaid. The only obstacle to free parking was each diplomat's civic sense. During a five-year period, the study showed, Italians accumulated fifteen tickets per diplomat, German diplomats one, Swedes zero, and Canadians zero. Fortunately for my national pride, Italy wasn't the worst offender, though it performed poorly when compared to other developed countries. Brazilian diplomats, meanwhile, accumulated thirty tickets per person. Kuwait, at the bottom of the list, racked up 246!

* Kuwait is one of the top 15 richest countries in the world, so the unwillingness of Kuwati diplomats to pay the tickets is presumably not a function of ability to pay.

* This sense of civic duty no doubt also explains why countries such as Sweden, Germany and Canada are such well functioning societies, with features such as low crime, poverty and good health (which is in large part determined by behavior). A person who takes care not to rack up unpaid parking tickets, it stands to reason, is probably also responsible in other aspects of their life. This is something to keep in mind when making cross-country comparisons and also why people like to talk about the outcomes of the Swedish welfare state instead of, say, the Spanish one. Outputs are largely a function of inputs.

On the higher education sector:
The market for higher education is far from competitive. A combination of government subsidies and industry-controlled accreditation makes entry for new educational institutions extremely difficult. Consider accreditation first. Vocational schools and for-profit universities rely heavily on federal student loans that enable their students to pay tuition. But the federal government will only provide loans to attend schools that been accredited -- and accreditation boards are typically staffed by the deans of existing schools, who have an interest in protecting their franchise from further competition. The fox is in charge of the chicken coop. 
This shielded market position apples to nonprofit colleges and universities, too. Comparing a repetitional study of American universities in 1906 with the influential U.S. News and World Report school rankings for 2011, two education professors found that only one private university, Cornell, had dropped from the to thirteen. (By comparison, only one of the twelve top companies on the Dow Jones Industrial Average at the beginning of the same period was still there at the end: General Electric.) Among the top ten liberal-arts colleges in U.S. News, only one change has taken place in the last twenty years. 
The stasis at the top is due less to the accreditation barriers than to the superstar nature of the academic business. The schools with the best reputations attract the best students. The presence of these bright students attract the best faculty. But the stasis is reinforced by huge government subsidies, even to the less exalted colleges. Lacking any threat to their survival, colleges have no reason to compete aggressively, including on prices, which grow and grow.  
The government subsidies come in many forms. Recall that universities were among the pioneering beneficiaries of earmarks. In 2010, they received $2 billion in such transfers, including $14 million for a Research Center for Southeast Weather and Hydrology at the University of Alabama and $4 million for the National Center for Natural Products Research in Oxford, Mississippi.  
Nor are federal earmarks the only higher-ed subsides. Student loans are subsidized as well. According to the Congressional Budget Office, the federal direct loan program costs taxpayers 12 percent of the amount lent. With student loans reaching $107 billion in 2010-2011, the total cost for taxpayers that year was $13 billion. To these subsidies we need to add student grants. In 2010, 8 million students received Pell Grants, for a total of $28 billion. Thus including earmarks, the total amount of subsidies to university education was $43 billion a year, even before we start counting tax subsidies (for college funds); tax breaks (for example, the fact that returns from university endowments are not taxed); and subsidies dedicated to research. 
Arguably the three most problematic/inefficient parts of the US economy are the financial sector, health care and higher education. All three are also rent with government distortions in the form of tax code provisions, subsidies and regulation. This is not a coincidence. That problems in these sectors are met with further calls for additional government interventions only compounds the problem. 

Zingales continues on for another two pages about problems in the higher education sector, and those wishing to read them should use Amazon's "look inside" feature, by searching for "Pell" which takes the reader to page 151. 

No comments: