Saturday, July 7, 2012

A quick look at debtors' prisons

It was fascinating to learn a bit more about the debtors' prison issue on Chris Hayes' show this morning.

This has been an issue that has been around since the founding of the country - but has recently come to the spotlight again with a recent article in the New York Times.

And one the root causes of the problem is:
It is, rather, about the mushrooming of fines and fees levied by money-starved towns across the country and the for-profit businesses that administer the system. The result is that growing numbers of poor people, like Ms. Ray, are ending up jailed and in debt for minor infractions.
Yes, indeed. Cash-strapped localities are once again turning to quick ways to raise revenue. Unfortunately, raising fees on services provided by the court in disproportionately impact the poor - who are more likely to fall into debt. 


In many of these cases, probation companies who are responsible for monitoring and collecting all fines will notify the court - and the court will issue an arrest warrant and yadda yadda yadda, you're back in jail.


The NYTs article references a study released in 2010, by the Brennan Center for Justice. It finds the following things:
• Fees, while often small in isolation, regularly total hundreds and even thousands of dollars of debt. • Inability to pay leads to more fees and an endless cycle of debt.• Although “debtors’ prison” is illegal in all states, reincarcerating individuals for failure to pay debt is, in fact, common in some – and in all states new paths back to prison are emerging for those who owe criminal justice debt.• As states increasingly structure their budgets around fee revenue, they only look at one side of the ledger.• Criminal justice debt significantly hobbles a person’s chances to reenter society successfully after a conviction. • Overdependence on fee revenue compromises the traditional functions of courts and cor­rectional agencies. 
Yes. It is illegal to imprison people for failing to pay debts. Let's look at that a little more.

In 1883, the U.S. federal government outlawed the practice and many states did, as well.

And in 1983 - the Supreme Court ruled:
A sentencing court cannot properly revoke a defendant's probation for failure to pay a fine and make restitution, absent evidence and findings that he was somehow responsible for the failure or that alternative forms of punishment were inadequate to meet the State's interest in punishment and deterrence, and hence, here the trial court erred in automatically revoking petitioner's probation and turning the fine into a prison sentence without making such a determination.
However, it seems that this is referring to when a citizen has been convicted of a crime and has gone through the judicial sentencing and then is being let out on probation. The problem today is that many of the people who are affected by these fines are people who never actually commit an offense, but are nonetheless found in contempt of civil court.

Of course, this is not a straight forward issue. Each state and each locality has taken its own unique way of raising fines and dealing with people who cannot pay for them - and as a result, it's created different problems. But this kind of system is not wholly beneficial to the goals of the judicial system - which in the end is supposed to "reform" criminals and reinstate them back into society. Unfortunately, the people are most affected by this seem to have the least criminal activity, but are being penalized for their economic status. I hope this issue doesn't go far from the national spotlight.






Thursday, July 5, 2012

The limits of Congress's spending/regulatory power


I found an answer to my legal question.

From the decision:
Permitting the Federal Government to force the States to implement a federal program would threaten the political accountability key to our federal system.  “[W]here the Federal Government directs the States to regulate, it may be state officials who will bear the brunt of public disapproval, while the federal officials who devised the regulatory program may remain insulated from the electoral  ramifications of their decision.”  Id., at 169.  Spending Clause programs do not pose this danger when a State has a legitimate choice whether to accept the federal conditions in exchange for federal funds.  In such a situation, state officials can fairly be held politically accountable for choosing to accept or refuse the federal offer.  But when the State has no choice, the Federal Government can achieve its objectives without  accountability, just as in New York and Printz. Indeed, this danger is heightened when Congress acts under the Spending Clause, because Congress can use that power to implement federal policy it could not impose directly under its enumerated powers. We addressed such concerns in Steward Machine. That case involved a federal tax on employers that was abated if the businesses paid into a state unemployment plan that met certain federally specified conditions.  An employer sued, alleging that the tax was impermissibly “driv[ing] the state legislatures under the whip of economic pressure into the enactment of unemployment compensation laws at the bidding of the central government.” 301 U. S., at 587.  We acknowledged the danger that the Federal Government might employ its taxing power to exert a “power akin to undue influence” upon the States.  Id., at 590. But we observed that Congress adopted the challenged tax and abatement program to channel money to the States that would otherwise have gone into the Federal Treasury for use in providing national unemployment services. Congress was willing to direct businesses to instead pay the  money into state programs only on the condition that the money be used for the same purposes.  Predicating tax  abatement on a State’s adoption of a particular type of unemployment legislation was therefore a means to “safeguard [the Federal Government’s] own treasury.”   Id., at 591.  We held that “[i]n such circumstances, if in no others, inducement or persuasion does not go beyond the bounds of power.”  Ibid
They even answered my high way funding reference! (These guys are good.)
In South Dakota v. Dole, we considered a challenge to a federal law that threatened to withhold five percent of a State’s federal highway funds if the State did not raise its drinking age to 21.  The Court found that the condition was “directly related to one of the main purposes for which  highway funds are expended—safe interstate travel.”  483 U. S., at 208.  At the same time, the condition was not a restriction on how the highway funds—set aside for specific highway improvement and maintenance efforts—were to be used. We accordingly asked whether “the financial inducement offered by Congress” was “so coercive as to pass the point at which ‘pressure turns into compulsion.’”  Id., at  211 (quoting Steward Machine, supra, at 590).  By “financial inducement” the Court meant the threat of losing five percent of highway funds; no new money was offered to the States to raise their drinking ages.  We found that the inducement was not impermissibly coercive, because Congress was offering only “relatively mild encouragement to the States.”  Dole, 483 U. S., at 211.  We observed that “all South Dakota would lose if she adheres to her chosen course as to a suitable minimum drinking age is 5%” of her highway funds.   Ibid. In fact, the federal funds at stake constituted less than half of one percent of South Dakota’s budget at the time.  See Nat. Assn. of State Budget Officers, The State Expenditure Report 59 (1987); South Dakota v. Dole, 791 F. 2d 628, 630 (CA8 1986).  In consequence, “we conclude[d] that [the] encouragement to state action [was] a valid use of the spending power.” Dole, 483 U. S., at 212.  Whether to accept the drinking age change “remain[ed] the prerogative of the States not merely in theory but in fact.”  Id., at 211–212.
So witholding all funds from the states for not expanding their programs is too much like coercion rather than encouragement. And in previous decisions, (such as South Dakota v. Dole), Congress has not directed how to use the funds, rather other requirements for receiving them.

Next steps for the ACA

Hope everyone had a great 4th! Also thankful to have the power back on...

Before heading out for the night, I wanted to opine on some post-SCOTUS-ruling thoughts:

A lot the recent news cycle has shifted from the individual mandate to the the court's ruling on Medicaid. Officially, the courts have ruled that the federal government does not have the right to withdraw funds from states for refusing to comply with the expansion. So now the ball is in the Governors' courts for deciding to expand their Medicaid program - in which the federal government would flip the bill (for 3 years, I believe).

This, actually, came as kind of a surprise.

In the decision, that provision of the law was likened to "holding a gun" to the heads of the states. But - isn't that how all federal programs work? Congress or the bureaucracy creates programs and says that the states must fallow X guidelines in order to receive funding, and changes are made to the program that the

My father actually likened it to road funding. When the federal government funded road construction for the states - they said they had to set certain speed limits. Those requirements have changed over time, and the states have had to comply with them in order to receive their funding. I haven't delved into this issue too much - but there must be another Supreme Court case where this issue has come up...

Anyway - back to the policy talk.

As I said, many governor's (i.e. Republicans) are saying that they will simply turn down the funds and not expand their medicaid programs. This raises a point about the health care bill that has largely been left out of the discussion for some time: How does the bill reduce costs other than through increasing coverage (i.e. through the mandate and medicaid expansion)?

I think this is part of the discussion that Obama should be focusing on when talking about health care - because it gets left out a lot of current debates. Though the conversation among policy wonks seems to be shifting. (See here and here.)

Another key provision of the ACA is the establishment of Accountable Care Organizations (ACO).

I'll write about some of the specifics later - but the general idea is pretty simple. Accountable Care Organizations can consist of health care providers, physicians, and hospitals to better coordinate care for patients.

Two things drive the goals of these organizations: efficiency and low cost of care. They work to provide the most effective treatments at the lowest cost. And what's really great about it - is that it's primarily private-sector driven. I'd love to see how conservatives feel about it if this provision of the bill ever comes to the national spotlight.

Friday, June 29, 2012

Dallas Fed is making the same mistake Perry made

Last night - The Atlantic posted a short story about how Dallas Fed Chairman Richard Fisher was doing a bit of bragging about his region.


And rightly so! I mean, come on! Texas is destroying the rest of the nation when it comes to job growth. 

Here is some:
"We have the same monetary policy as the rest of the United States," he said. "Why are we outperforming the rest of the country?" He ticked off a number of qualities that make Texas stand out. "We have made ourselves more business friendly. We have no income tax. We have a regulatory environment that is more business and job friendly," he said. "I'm convinced since we all have the same monetary policy, if we had differentiation for pro-growth policies, we'd have more economic growth." 
This conversation sounds oddly familiar.

Back when Rick Perry was running for President, he said essentially the same thing about fiscal policy. Texas was growing under his policies as Governor - policies that are certainly different from Obama. And yet, many came forward (see here and here) to point out that Texas's success could also be attribute to plenty of other factors that have nothing to do with fiscal policy - i.e. immigration.

I'm going to take a wild guess that it's probably the same situation with monetary policy. So Mr. Fisher: The country is a big complicated place! But I understand how hard it is to think about the world outside of Texas.


Thursday, June 28, 2012

There's a problem

So let's say that the individual mandate gets overturned this morning, as well as other related provisions - but the rest of the law stays.

President Obama will be hard pressed to immediately wage a fierce campaign defending the remaining of the health care bill. Mitt Romney, on the other hand, won't (or shouldn't) lift a finger.

Apart from spending a few days mentioning that Obama spent a lion's share of his first term on a piece of legislation that got swept out from under it - Romney shouldn't harbor too much on the subject. For independents and conservatives, a Supreme Court ruling will simply codify their arguments (in their eyes), so what more needs to be said.

Two things can happen from there:

1.) Democrats and the press will want to know what Romney will do about health care - which will be an even more interesting (devastating) answer, considering the model of his own health care plan was deemed unconstitutional on the federal level. And I sure hope he doesn't think he can get away with avoiding policy positions forever...especially when the debates start up.

2.) Romney will gently say: "You see, this legislation went against the nation's constitution. But that's in the past. Now let me tell you more about jobs." If this is the case, and the Obama campaign (or at least Democrats in Congress) brings out its rage on the SC, then Romney will probably look like the higher figure.

But hey, who's to say.

Wednesday, June 27, 2012

Politics of the Eurocrisis

Not that anyone could have truly predicted where the Eurocrisis would be today - but was the idea of enhanced political consolidation really on the table?

It seemed like only a month ago everyone was saying that either the entire Euro system would unravel, or the "weakest links" would be booted out. And now, with the upcoming conference, there are plans to rework the entire system and bolster the fiscal union.

Though the plan is still being reworked, and it's unsure what consensus (if any) will come out of the conference, some of the new provisions include:

  • Giving EU institutions the ability to rewrite national budgets
  • Single European banking supervision and a common deposit insurance and resolution framework
  • More coordinated economic policy

The full document is here.

Of course, as pointed out in the FT article, this is a scaled back version of the original plan. There are no time tables or concrete provisions that explain what would happen on the bureaucratic level. We'll have to wait and see how it turns out.



Tuesday, June 26, 2012

Two graphs on how us youth spend our time

Good news: We don't watch (as much) TV!

Bad news: We don't read!



Addition:

Forgot to give credit to Derek Thompson from The Atlantic for posting these.

Monday, June 25, 2012

Lock-In at Silicon Valley

Bill Davidow from The Atlantic has a great post on the new business model that defines many giants in Silicon Valley:
Facebook is a perfect example. You can spend a lot of time and energy learning the ins and outs of the site, and building your image on the site by posting pictures, videos, and messages. You spend a lot of time getting friends to pay attention to you, and you in turn spend a lot of time keeping track of them. If you leave Facebook, you leave both your virtual friends and your investment in the site behind.
The so called "lock-in" strategy that is pursued by Google, Twitter, Facebook, and others, is building an internet consumer culture that is limited by choice, and punished for pursuing other outlets.

You definitely see this happening in a number of places. Davidow points out that when it comes to listening to music - Apple blocks you in with it's technology (iPhones, iPads, iPods) and its software (iTunes).

But I think when it comes to social networking sites - something more is happening than an effective business strategy.

Let's look at Google+ and Facebook.

I wouldn't argue that the failure of Google+ is because of policies by Facebook. Google+ wasn't super successful because of the very nature of social media sites. Consumers want to tap into their network of friends, and the tighter and more interconnected their network is, the better. That's how Facebook beat out MySpace in the first place. We have a whole generation of people (of which I'm included) who literally can't be on the computer for more than 10 minutes without checking Facebook. And you know why? Because it's the closest thing we having to being a room with all your friends. You have a birds eye view of your entire social life That is pretty remarkable. 

It's kind of like this. I have a core group of friends. We hang out. We do things together. You get the picture. Isn't there a lock-in strategy there? It's more of a pain to explore new friends and social circles because you have to completely rebuild those friendships.

You could infer the same thing about Facebook, and other big internet companies. So why would we (as consumers) even lift a finger to look for substitutes, when it's all right there! 


I'm not saying that these companies actively pursue ways of keeping us on their websites, but it seems like a lot of the work is already done for them.  

Update on the ACA

So the ruling for the ACA won't come until Thursday (hopefully). Until then - I wanted to do a quick post on some alternatives to the individual mandate, in case the provision gets shot down while the rest of the law stays.

Thankfully, WonkBook, this morning, linked to a document by the Government Accountability Office that outlines some incentives to spur voluntary enrollment. 

Here's the list:
• Modify open enrollment periods and impose late enrollment penalties.
• Expand employers’ roles in autoenrolling and facilitating employees’ health
insurance enrollment.
• Conduct a public education and outreach campaign.
• Provide broad access to personalized assistance for health coverage
enrollment.
• Impose a tax to pay for uncompensated care.
• Allow greater variation in premium rates based on enrollee age.
• Condition the receipt of certain government services upon proof of health
insurance coverage.
• Use health insurance agents and brokers differently.
• Require or encourage credit rating agencies to use health insurance status as a factor in determining credit ratings.  
A public education and outreach campaign will have extremely limited success. I mean, come on, the Obama administration tried to have a education campaign on the ACA itself, and now everyone hates the law but loves the provisions...

Of course, if the individual mandate is knocked out, there is no way Congress will act on any of these provisions. Even if Democrats maintain a slight majority in the Senate, the desire to touch health care again will be minimal. 

Sunday, June 24, 2012

Cultural misunderstanding

I wanted to comment briefly on a post by Arnold King about the lack of high-skilled labor:
Perhaps the seemingly low "supply of high-skill" (aka highly-credentialed) workers is a reflection of low demand for the lifestyle of high-skilled workers. Maybe at the margin many people would prefer more leisure to higher cash incomes.
One of the first things that we learn in econ is that you can't demand things that you don't know are in existence. I'm not responsive to price changes of Australian candybars because I don't have the opportunity to consume them (assuming I can't order them over the Internet).

The same thing can be said about "foreign lifestyles" and being aware of how other people live. As an upper middle-class, white college student, I don't have a very good understanding of what a lower class lifestyle is like. Sure, I know what it entails, but I don't truly understand it. The same can be said for other cultures when they are observing my life. So all in all, it's hard to determine if you really want or don't want another lifestyle if your understanding of it is limited to what you see out of your windshield.

Perhaps our understanding of other cultures has increased over the decades, but we also seek out others who are similar to us, so it's hard to say.

I'm not saying that King is wrong - but that perhaps cultural misunderstanding may play into this debate somehow.

Fantastic quote on evolution

Understanding the fundamentals of evolution is key because we so often get it wrong. Think of Darwin's lament. Evolution is part of our everyday parlance, and even though the game of life is a fact of life, we intentionally and unintentionally misrepresent, steadily. We think, incorrectly, that individuals evolve, that individuals act for the good of the species, that some species are primitive and others are advanced, that a ladder of life describes descent with modification, and that evolution is always working to make species better. We incorrectly intuit that complexity is always more evolutionarily advanced than simplicity, that evolution is goal driven, that evolutionary change is linear and in one direction, that any anatomical structure evolved long ago for the function it fulfills today, and that humans aren't evolving anymore - wrong, wrong, wrong!
Jon Long
"Darwin's Devices"
Of course, I first heard about this book from Tyler Cowen (hat tip). It's a fantastic study of how we can use robots to better understand minut evolutionary changes.

Monday, May 28, 2012

Very Cool Picture

Showing where tourists and locals go in the D.C. area.


Here's the link with other cities included.

Sunday, May 27, 2012

The Emergence of Micro(scopic)economics

I know discussion on this topic has already gone through the blogging cycle - but I still wanted to express my fascination with it.

A couple of weeks ago, Tyler Cowen posted an article by the Boston Globe that surveys a group of economists working on a new sub-field called "genoeconomics." (The group of economists includes Edward Glaesar - one of my favorites.)

The article previews a bit of the world of genoeconomics - a new field in economics that takes a look at how genes impact certain economic traits. Pretty cool stuff, indeed.

Of course, this isn't the first time that there have been crossovers between the hard sciences and economics. At the turn of the century, neuroeconomics was starting to gain some traction, though I'm certainly not in-tune enough to gauge its success.

Either way, I would argue that genoeconomics is a pretty big frontier for economists. When I was taking my first microeconomics class, my professor emphasized that economics tried the answer the affects of how people behaved, not why they behaved that way. Well it certainly looks like that's about to change.

So why is this a good thing?

1. If you find a way to effectively measure the influence of genes (which is where 90% of the work lies) then you're making way for some very strong microfoundations from which to analyze other economic phenomenas. It's a lot harder to take an abstraction from genetics - because it's all right there. Now this doesn't mean that if we figured out every nook and cranny of the human genome, that we won't have to do any abstractions at all. I'm just saying that what pushes our behavior will be a lot more concrete than just saying "everyone is rational."

2. Just by the very fact that economists are wading into harder science is exciting - because it's making more economists think like scientists.

3. There are more possibilities for natural experiments. (Just look at twin studies.)

But at the same time, there are certainly downfalls to pursuing genoeconomics.

1. For one, you're giving social darwinism a lot of tools to work with. This is a point that is made clear in the Boston Globe article. There is definitely a fear of banks requiring DNA testing before receiving a loan, and other such discriminations.

2. Figuring out the statistical methods of genoeconomics will also be incredibly hard, and will have to take time. Because it's easy for someone to say - "Hey look, these people all have this gene, and they all are rich. Therefore, you will be rich if you have this gene." Bad science. I know that papers like these will emerge eventually, but we should be wary of them. 



Wednesday, May 23, 2012

Game Theory is a little too hip for Ronald Coase

An interesting quote from an interview with Ronald Coase:
Roberts: “What was your reaction to [game theory] and its influence on the study of the firm?” 
Coase: “I think the influence was wholly bad, because people developed high theoretical approaches instead of approaches based on what actually happens.”
The full interview is here.


So is he saying that the models are bad? Because I actually think game theory does a pretty neat job of showing the different choices people will make when they have incentives. In many cases, you can break down the relationships that are happening in a firm or institution.

Monday, May 21, 2012

Scratch that.

Calculated Risk posts that this is the fourth consecutive months with a year-over-year increase in miles driven.


The lack of growth in miles driven over the last 4+ years is probably due to a combination of factors: the great recession and the lingering effects, the high price of gasoline - and the aging of the overall population. 
I had suspected earlier that the "driving stagnation" could be attributed to structural payoffs in urbanization - i.e. people don't have to drive so much to get where they want to go. I had not thought about the impact of an aging population. Nevertheless, I don't actually think that gasoline prices are a cause. It'll be a fascinating trend to follow.

Sunday, May 20, 2012

Microfoundations is spreading

Interesting link from Mark Thoma yesterday:
Cultural entities and characteristics do require microfoundations, and it is in fact a fruitful avenue of sociological and ethnographic investigation to discover the concrete social mechanisms and pathways through which these entities come to be embodied in various populations in the ways that they are.  
The author is Dan Little from Understanding Society - a blog that I will be reading more often.

I think it's excellent that other branches of social sciences are thinking about microfoundations and their affect on understanding aggregate behavior. Maybe other fields will find creative methods of aggregation that will benefit economics.

As a side note - I'm reading Maarten Janssen's Microfoundations as a bit of light reading for the summer. He uses two very good examples for using microfoundations in a way that builds fairly strong aggregate models. The first is Mancur Olson's optimal utility hypothesis, and the second is the Ideal gas law. I found the aggregation used in the IGL to be a remarkable use of microfoundations, and I will probably post more about it in the future.

Saturday, May 19, 2012

It's the end of the Valley as we know it.

Very interesting interview with Steve Blank in The Atlantic:
If I have a choice of investing in a blockbuster cancer drug that will pay me nothing for ten years,  at best, whereas social media will go big in two years, what do you think I'm going to pick? If you're a VC firm, you're tossing out your life science division. All of that stuff is hard and the returns take forever. Look at social media. It's not hard, because of the two forces I just described, and the returns are quick.
Here is a bit more:
In the last bubble, venture capitalists went into a frenzy if anything had an ear and eye. I don't think this a bubble. I think the valuations are a bit of a bubble, but social media is real.
But weren't some of the companies that came out of the dot-com bust "real"? Part of their problem was that they weren't making revenue and valuations were way off-base. It still seems like that is happening again.

Blank notes that federal small business and research grants are important in driving research in long-term return industries - such as the life sciences. I think so too. But it still means the market will need to naturally support these investments.


Thursday, May 17, 2012

Deurbanization was a leading cause of the Dark Ages


Pretty cool comment from user on Reddit (all sourced, and everything):
The Medieval Warming Period that started in the 900s and the discovery of new crops in the New World in the 1500s increased Europe agriculture capacity. This led to more urban living and education which led to the development of new agriculture technologies and even more dense populations (return of urban civilization like Rome). 
The bubonic plague happened in the 1300s which screwed up Europe's economy for a temporary 150 years and in the 1400s you got the Gutenberg Printing Press which lead to 20 million copies of books being printed by 1500 spreading literacy to the masses. 
It took 150 years for Europe's population to recover.  
The Medieval Warm Period, the period from 10th century to about the 14th century in Europe... 
This protection from famine allowed Europe's population to increase, despite the famine in 1315 This increased population contributed to the founding of new towns and an increase in industrial and economic activity during the period.  
A lot can be said about the rise in power of Western Europe once it collected itself from the collapse of the Roman Empire but I dont want to make this too long.
He was refuting the idea that the Catholic Church was behind the European Dark Ages.

The logic actually makes a lot of sense. I wonder if the initial gains from urbanization were greater than the gains now. Is there a diminishing marginal benefit for every person that enters a city?

Chris Dixon on the Facebook Business Model

Now that final's season is over - I'm trying to dive back into daily blogging.

Chris Dixon has a great post on Facebook's business IPO that I think complements some points I was making in a previous post (albeit much more clearly):
The key question when trying to value Facebook’s stock is: can they find another business model that generates significantly more revenue per user without hurting the user experience? (And can they do that in an increasingly mobile world where display ads have been even less effective.) 
Here is the link.

Chris is certainly right that Facebook has a lot of resources to use if it's going to alter its business model. When Google+ was first coming out, I remember some people talking about the prospects of inserting a search engine into Facebook (probably using Bing). If Facebook is going to stick with display ads, they should shift their "social lock-in" strategy to include consumer habits - which involves expanding Facebook beyond purely social interactions.

Wednesday, May 9, 2012

Was Aristotle a governmental Malthusian?

"Experience shows that a very populous city can rarely, if ever, be well goverened. To the size of states there is a limit, as there is to other things (plants, animals, implements), for none of these retain their natural power when they are too large or too small." 
Aristotle (322 B.C.) 
This quote was posted on the top of a report from the Indian Census on population density.

It seems that he believes jurisdictions that are ungovernable if they grow too large.

Saturday, May 5, 2012

Vehicle miles traveled is falling

It appears...for the first time in 40 years, the the total miles driven per year is taking a downward shift. 


Of course, some would say that these reflect patterns in rising gas prices. But as you can see in the graph below: Gas prices have been rising for the past 40 years, as well!


Obviously, this requires much more in-depth research. But I suspect these are real structural pay-offs of urbanization. More people are living in areas that require driving or no automobiles at all. 


Greece has a Nazi problem

Here is some disturbing news coming out of Greece:
At Greece's last general election in 2009 Golden Dawn, whose members use the Nazi salute and whose party symbol is an adapted swastika, polled fewer than 20,000 votes nationwide. Now as the country goes to the polls on Sunday, national politics more closely resemble those of the embattled area.
Fascism is on the rise among the Greek youth. And it isn't very surprising. Over half of Greece's youth are unemployed - paving way for nationalist political sects to pin Greece's problems on foreigners.

A fascist Greece, while concerning, would not pose a daunting threat to international security, and they would almost surely be thrown out of the EU. However, if these political trends were to gain more popularity, it would not pose well for investor confidence.

I think the Greek government needs to focus on short-term policies that will give Greek youth some support. Of course, living in the age of austerity, there isn't much room for creative solutions.

One proposal would be lowering the minimum wage. As you can see in the graph below, the minimum wage has risen by about 300 euro over the past decade. (I'm not even going to get into what's going on in Ireland.)        
        

Greek youth need jobs, even if they don't pay well. It'd help companies hire low-skilled youth if their wages were lowered to market levels. 

There are strong relationships between high unemployment and radical political activity. Will lowering the minimum wage employ all youth? Definitely not. But it's a policy that could help stem off growing Nazi power. If the government isn't prepared to make these changes, they're going to have some tough coworkers in a year or two. 


Friday, May 4, 2012

Technology innovations are only half the story

A quick quandary for the afternoon:

When it comes to big technology innovations - there tends to be a stagnation period where the technology doesn't make a sizable impact on growth or the economy until someone figures out to really apply it. The same was true for electricity, engines and computers. People come up with all these inventions - but all the real value came out of Microsoft's ability to retrofit them into everyday use, or Henry Ford's ability to run automobiles through the assembly line.

All of these things developed new systems. And with all the venture capital/Internet technology talk this week, the big question is: How do we apply the new age of Internet technologies?

Wednesday, May 2, 2012

From the Lecture Hall: The Euro Crisis and U.S. Debt

Every once in a while, I like to talk about things that my economics professors say in class. My last post about my class was on the history of recessions.

As I've said before, a lot of my criticism isn't directed toward my professor's conclusions - rather how they got to those conclusions. An economics class is supposed to push students to explain and prove why something is happening based off of the tools that we know. And I like to blow the whistle when they relax that requirement.

So yesterday, we're brushing over capital utility and interest rates. Throughout class, my professor enjoys diverging from the material and applying what we're learning to the real world. Of course, this being George Mason, those applications often involve anti-liberal, anti-government, pro-liberty themes.

Yesterday's divergence was about Greece and the United States. We were calmly told that the US was on the same path as Greece given our debt-to-GDP ratio (shown below), and that we should invest $45-50k in gold so that we can get out of the country when it collapses. 



I believe what we have here is a breakage of Noah Smith's Principles of Arguing with Economists: Arguments by accounting identity almost never work. 
Accounting identities are mostly just definitions. Very rarely do definitions tell us anything useful about the behavior of variables in the real world. The only exception is when you have a very good understanding of the behavior of all but one of the variables in an accounting identity, in which case the accounting identity acts like a budget constraint. But that is a very rare situation indeed.
My professor says that America will become the next Greece because both dept-to-GDP ratios are on the same path. That sounds like an argument by accounting identity to me.

So that's all scary and everything. But how much is it really telling us? Because while our debt ratios are on the same path, just take a look at U.S. interest rates:


I don't see many people fleeing from U.S. bonds with that trend. I haven't done Macro in a while, so I'm still a little rusty at comparative economics. But what I'm trying to show is that there is more to the Euro crisis than just debt and output. A lot more. Some of these things are applicable to the U.S. (like fiscal policy, interest rates, bond yields) and some of them are not (like the political structure of the EU, monetary unions).

But here's my point. If you're going to tell the class that the U.S. is will become an apocalyptical hell zone in the next few years, don't just casually tell us why. I think we're grown up enough to get the full picture of why you think that's happening. 



Monday, April 30, 2012

Micro 101 Lesson: The Price System Matters

I wanted to add a little more from yesterday's post on Venture Capital.

The New York Times had an interesting piece about how a lot of start-ups (at least in the social media/Internet market) aren't generating revenue and would like to keep it that way.
When small start-ups I’ve spoken with do make money, they often find it difficult to recruit additional investment because most venture capitalists — and often the entrepreneurs they finance — are not interested in building viable long-term businesses. Rather, they’re interested in pumping up enough hype and valuation to find a quick exit through an acquisition at an eye-popping premium.
The full article is here.

This is a very interesting trend. Here are a bunch of start-up companies with a bunch of investors waiting in line to fund them. And the entrepreneurs are trying to avoid concrete results, and focusing on speculative growth. The article used one obvious example. Instagram has $0 in revenue, but sold for $1 billion.

I think this pattern, in particular, will be a key cause of bubble growth (and bust) in this industry. One of the first things I learned in my Micro 101 class is the importance of the price system. Revenues are pretty good signaling devices for producers and investors. They show how valuable a good is to a consumer. No one really knows how much the big social websites (Facebook, Twitter, Google+, etc.) are valued by users, because they're all free!

This means that it's difficult for investors to know whether all these new start-ups are going to do well. Is there ever perfect information and predictability in a company? Of course not. But if the price of lead tennis balls was $0 - you would expect that investors would avoid investing in lead tennis ball factories. The only problem is that there's no way to tell which start-ups are making lead tennis balls and which are making the next Facebook.

I'm sure there has been more in-depth research on this. But the main point is that we should be wary of investments that aren't based off of much information.


Sunday, April 29, 2012

Why blogging is a good way to learn

As both a student and a young individual, I rely on the internet for a lot of the information I learn. I almost never think to browse my bookshelf or invest in an encyclopedia set when I'm looking for answers to questions. (Haha physical encyclopedias.) The Internet is essentially a gateway to the vast accumulation of human knowledge.

Now there has been a lot written about the affects of the new information age. Some think us youngsters don't think anymore and use the Internet like information-hungry parasites. Others think unlimited access to the Internet will lead to super brilliant children. And a lot of people are in the middle.

My fear is that we are breeding a new generation of Google Intellectuals.*

Allow me to explain. Young people are plugged into the Internet all the time. And use the Internet to learn and answer questions. In fact - I would argue that we use it so much, that we often forget that we might already have the tools to answer the question. We're becoming so dependent that we don't really need to use in-depth thinking to answer uncomplicated questions.

Of course, one could argue that not having to know the easy stuff just gives us more time to focus on more complex questions. It's kind of like saying that advanced math students can use calculators to focus on the theoretical topics.

That could be an answer, but I think it's a weak one.

Here's what I'm trying to get at - younger generations need to understand the value of consuming information more rigorously. (Using more System 2 in Kahneman's jargon.) We're so quick to gobble up random facts throughout the day, that we don't really take time to connect what we "learn" to the broader picture.

I think blogging helps you with that process. When blogging (especially about economics) you are forced to sit down and write about what you are learning. Often times you're even connecting different articles that you've read (through linking) to make a bigger point. This is especially true when you are writing about things that you care about.

Now that's how we should be learning!

Now does that mean that everyone should start blogging? Probably not. It requires a lot of patience and time, and a lot of people have neither. But taking the time to sit down, think, and write about a few topics will make you a much smarter person than Googling 100 different things a day.

*Google Intellectual (n) - a seemingly intelligent individual who accumulates their knowledge from random internet queries

Winklevoss Twins have equity in Facebook

Thought that was a pretty funny thing to hear in this interview.

They're also getting involved in the Venture Capital frenzy, investing in early-stage cloud companies.


In all seriousness though, the idea of VC has been going around the blogosphere a lot. Peter Thiel gave a talk about how VC funds work. And showed this graph:
The basic principle is that for a VC fund, there are maybe one or two projects that actually make gains. A vast majority of the projects that are invested in tend to fail. . . I hope that this is something that VC managers (cough Winklevoss Twins cough) realize. Because it plays a big part in how the VC market works. 


Particularly, I wanted to point out Noah Smith's post about a slump in VC returns since the burst of the Dot-com bubble. He references a paper that shows this graph:
The different lines are different data sets showing how well VC funds did relative to Private Market Equivalence (or how well the U.S. public stocks did in general). A PME of greater than 1 means that the VC investment did better than public stocks. If VC's fell below 1, then investors would for sure leave the market.

As you can see, we're in kind of a VC slump. Where gains haven't reached anywhere near the levels reached in the mid-1990s. Of course, there could be a number of reasons why that is.

Maybe the VC fund's of the 1990s got all the low-hanging fruit. That doesn't really seem to surprise me. There really hasn't been any HUGE payoffs from the internet apart from what we already have. Yes, we have social networks, but are they really driving that much economic value other than advertisements? It seems to me that Venture Capital does well when there are big breakthroughs in a certain industry, and there's a vacuum with how to apply those discoveries. In fact, in 2011, less than 30% of VC funds went to software and media industries, and more are going towards energy and biotechnologies. These are trends that I'm glad to see - considering payoffs might actually improve living standards a good deal. It'd be interesting to see what Tyler Cowen thinks in relation to his Great Stagnation theory. 

But overall, I think the problem is that we haven't found some breakthrough way to apply big data or cloud computing. Hopefully these investments will help spur some of those discoveries...

Monday, April 23, 2012

Some thoughts on modern journalism

This post is going to be very different from what I'm used to writing. But it's something that I've been thinking about (but has probably been elaborated on somewhere else).

I used to intern for Charlottesville Tomorrow, which is a non-profit news organization that reports on local politics, transportation, and community design issues in the Charlottesville area. For such a small organization (now three full-time employees, and one intern), it does some very impressive things when it comes to local journalism. For one - they manage an online wiki for all things Charlottesville, that contains user-generated information on everything from candidate bios and transportation projects to local restaurants and show venues. They engage with readers through Facebook and Twitter to get more involved in local affairs. And they often invest in visualizations of big transportation projects, so that citizens understand what's happening in their community.

Towards the end of my time there, I did a bit of reflecting on organizations like Charlottesville Tomorrow and the current state of journalism. Many people are lamenting over the dwindling budgets of professional media outlets as more and more people get their news from blogs, social websites, or other "informal" news outlets. It's a product of the information age! Today we get information from everywhere! Why wouldn't you expect the information specialists to go out of business?

Well I would argue that journalists are probably as important today as they've ever been - provided that they adopt a few new skills.

While we live in the age of information, some would say that we live in information overload. A lot of people haven't developed an effective way to sort through what's important and cast away what is just hollow ramblings on the internet. One important aspect of this is in the world of data. Open Data has been growing considerably since the Obama Administration started an initiative soon after taking office. "Big data" provides us with such valuable information, and has so many untapped opportunities.

And yet, in our lifetime, most of us will not (either through lack of time or lack of ability) interact with this open data movement, or use for our benefits. How would anyone even know where to begin?

This is where modern day journalists can come in. There is still a need for specialists to decipher and find important pieces of information for wider society, but it could be that finding those conclusions are just harder to find. Journalists' research can't just be confined to interviews, they have to dive into databases and other sources of "hidden information." Journalists need to start behaving like public researchers, and less like pundits. 

And that's the basic idea. I'd love to hear other thoughts on this, though.

Saturday, April 21, 2012

Best of this Week

Don't have too much time to look back from this week. I have to give a presentation on urban density and gasoline consumption this morning.

Urbanamics - The regulation Vs subsidy debate and international trade law

Noahpinion - Greg Mankiw's touching faith in Tiebout Equilibrium

Evan Soltas - Could India implode? (My thoughts on India's urban trend.)

Angry Bear - Food, Energy and Cars and Driverless Cars (My thoughts here.)

Thursday, April 19, 2012

What if everyone had driverless cars?

I've been thinking about this question, and Angry Bear posted a little about it. I think it's particularly interesting quandary when applied to suburban/urban communities. This post is really just meant to raise questions and drive discussion - rather than offering concrete proposals.

So what if everyone had driverless cars? Would highways work like public interfaces, where cars merged on and linked into one smooth transportation system? Or would traffic coordination just develop out of the technology itself? What if you could send your car places without you even being in it! (Taxi drivers should wouldn't like it.)

Of course, the applications are endless. But let's look at some practical applications. Assuming that the sensory coordination of cars was tuned to near perfection, you would expect the number of accidents to fall, because you wouldn't have the human error of recklessness.

Likewise, public transportation systems might benefit as well. If you could send your car back home, then you wouldn't have to deal with parking costs, and people may be more inclined to use the Metro to go to and from work.

I'll probably return to this concept in the future. Just an interesting think to ponder in the field of transportation economics.


Wednesday, April 18, 2012

Kennedy's op-ed is sloppy economics

Congressman Joseph Kennedy (D-Mass.) has an op-ed in the New York Times calling for a ban on oil speculation:
Today, speculators dominate the trading of oil futures. According to Congressional testimony by the commodities specialist Michael W. Masters in 2009, the oil futures markets routinely trade more than one billion barrels of oil per day. Given that the entire world produces only around 85 million actual “wet” barrels a day, this means that more than 90 percent of trading involves speculators’ exchanging “paper” barrels with one another.
This seems to be the new trend for Democrats. Not a bad political strategy, actually. Tying rising oil prices and Wall Street speculators together is a pretty smart way to stay on message.

However, it's very sloppy economics, so we'll have to focus on that part. (James Hamilton from Econbrowser has a good post on this too.)

Kennedy makes the point that a speculative catastrophe in the oil futures market would be much more devastating than one in the orange juice market, because there is a lack of available substitutes. On a basic level, that's exactly why we have speculators in the first place.

Speculators buy futures contracts on the expectation that prices will rise in the future. They buy oil today, when the price is relatively low, and sell in the future when supply is expected to fall. For consumers, the price may be higher, but they average out over a long period of time, rather than getting stuck in a hog market. If all the oil in Saudi Arabia disappeared tomorrow, and we knew it was going to happen, speculators would help avoid a complete meltdown of the economy.

That's not to say that oil speculation doesn't play any role in price volatility. Global shifts in demand are the main culprit, but oil speculation is expected to be the next biggest factor. Indeed, it seems as if speculation increases with increase in demand:

There's no point in taking out speculators for raising prices, when speculative prices are the result of growing global demand.

If it's a speculative bubble that Kennedy is worried about, then I don't think taking out speculators is necessarily the best solutions. For one, it's hard to determine how speculative bubbles rise because of the same reasons it's difficult to predict other financial bubbles. Predictions of where demand and supply will be in the future are based off of imperfect information.


Tuesday, April 17, 2012

India should really start paying attention to urbanization

Market Urbanism tweeted a report from McKinsey & Company that talked about America's reliance on urban centers for GDP. Interestingly, about 61% of GDP is attributed to small cities and rural areas.

That's huge! India also has the largest rural population, by far. China is on the fast track to urbanization.  But why isn't India urbanizing as fast as other rapidly developing countries?

A McKinsey report briefly covers possible reasons.
In comparison with China, India is still at relatively early stages of urbanization. Only 20 percent of the population lives in large cities, of which there are only 234. MGI estimates that large cities, scattered across the nation, will generate nearly 50 percent of the nation’s GDP by 2025.In India, it appears that state borders are limiting mobility, leading to an urban economic concentration in state hubs rather than city clusters across the nation. Moreover, India’s economic development policies have traditionally favored small-scale production and discouraged larger-scale operations in cities. 
This is another factor slowing Indian urbanization that stands in contrast to both the United States and China where more mobile populations have moved in search of better jobs and other economic opportunities.
A paper from the Indian Statistical Institute says that one of the barriers to urbanization is capital utility in India's major urban centers:
Most of these cities using capital intensive technologies can not generate employment for
these distress rural poor.  So there is transfer of rural poverty to urban poverty. Poverty
induced migration of illiterate and unskilled labourer occurs in class I cities addressing urban involution and urban decay.
But is this really the case? A similar McKinsey report on the state of India read:
India spends only $17 per capita annually on urban capital investment, compared with $116 per capita in China and $391 in the United Kingdom.
In addition, India's current urban spending varies dramatically according to the size of city. Tier 1 cities spend an average of $130 per capita each year, with 45 percent of this total on capital spending. However, owing to high general and administrative costs, most Tier 3 and 4 cities support per capita capital spending of only $1 currently.
So India's urban centers aren't very capital intensive relative to other nations, and capital spending depreciates relative to the size of the city. If capital investments were really strong deterrents for unskilled rural labor, then we might see urban growth on a smaller, regional basis, rather than from highly concentrated agglomeration.

Similarly, urban centers may not be doing so hot because of height limitations imposed by the government. If you can't build density, then you sprawl out and the livelihood of the urban center decreases. Refer to Edward Glaesar on this.

All together, India has simply not geared it's policy towards urbanization the same way China has. India needs to focus on its transportation and communication networks, because it's still on the path of urbanization, and can cause major infrastructural problems in the future.

But really though, get rid of the height limits.



Looking at earnings growth by sector

This is a pretty neat infographic from Reuters.

I read this in two ways. The fact that financial earnings is still so far ahead of other sectors indicates the turbulence in Europe is pushing people towards American financial markets, and we still have a far way to go for recovery. (Both obvious points.)

It's still good to see that consumer discretionary, industrials, and technology are all doing moderately well.

Baselines for rising health costs

Cowen asks about the viability of the ACA while considering the following trends:

1. Rates of growth stay in the range of 1 to 1.5 percent, see the work of Stock and Watson, top macro econometricians.  Try redoing budget projections with those numbers. 
2. Real rates of growth are higher than that, but they take the form of non-taxable pecuniary benefits. 
3. Growth rates are acceptable, but more and more of economic growth is captured by private capital, which is difficult to tax for either mobility or political economy reasons. 
4. The United States may need to fight a major war, or prepare to do so.  (I do favor cutting the defense budget now, but we can’t be sure that cuts can last.) 
5. The political economy of revenue hikes and/or spending cuts becomes or remains intractable.  Buchanan and Wagner have been stressing this point for decades.  A decision to borrow forty cents of a dollar spent, right now, may end up as more or less permanent, at least for as long as markets allow.  Ezra’s excellent posts about how far “right” the Democratic Party has moved on taxes are along these lines. 
6. Another major recession may arrive, perhaps from abroad. 
7. Life expectancy goes up a few more years than we had thought, yet productivity for the elderly doesn’t rise in lockstep.  You don’t have to think of that as “bad news,” but it still would be a major fiscal problem.
Health care costs are determined by a couple of things: demographic changes, induced demand, and perhaps most importantly, technology. There are people inside the medical system trying to reduce costs through more efficient uses of technology. Part of the ACA is to build systems (called Affordable Care Organizations in health industry jargon)  around more efficient uses of care - which may include cutting back on expensive tests.

It'll be interesting to see how bundled payments play into this. Currently, patients pay for treatments the same way they order food off a menu (hat tip to Zeke Emanuel for the metaphor). Under a bundled payment system, patients will have access to a wide variety of treatments and procedures. Without the accountability systems, this could induce demand for more care instead of efficient care.

Monday, April 16, 2012

How much will the healthcare exchange save insurance companies?


The short answer? It's almost impossible to tell at this point. Each state is still in the planning process of setting up their exchanges, and there's still debate whether the whole law will be thrown out by the Supreme Court.

Whatever insurance companies do not spend on health costs, they use for administrative purposes and profits. One of the key aspects of the Affordable Care Act is to make insurance companies raise their Medical Loss Ratios, or how much they spend on health costs. Also, each state will create an "exchange" that allows individuals to log on and look at each insurance plan all in one place.

Now the details of how these exchanges will be run is still pretty blurry, because each state decides how they want to set them up. Part of the goal is to reduce the marketing costs for insurance companies, since they'll have smaller administrative budgets.

For smaller companies, a lot of the marketing costs go to healthcare brokers; specialists who help groups or businesses navigate through the complexities of the insurance market and find the best plan for them. The "ideal" exchange would reduce the need for brokers, since all the comparisons (price, quality, medical coverages, etc.) will be on the website.

I asked Zeke Emanuel, one of the architects of health care reform, about this issue. (He was speaking at GMU today.) He thinks that brokers will still be around in the short-run. Businesses and large groups will still want the best information about what health plans are out there, and will use brokers to find that information. Of course, I'm sure there's concern for brokers to steer groups away from the exchange, since they are a competitive public good.

But marketing costs for small companies might not go down so quickly. When patients first go onto the exchange, there could be an advantage to having name recognition (i.e. being Blue Cross/Blue Shield) when being compared to other companies. Large companies may have enough marketing funds leftover to have an advantage over smaller companies in the exchange.

Another point: each exchange is being financed by a special tax put on the insurance companies involved. I can't imagine that a tax would cost more than current marketing/broker costs. Apart from a website and maintenance, and exchange should only include administrative costs. An ideal exchange would be one that reduces as most transaction costs, and provide near perfect information. State governments need to be keeping this in mind when they set up these markets.


Of course, this will all be looked at more closely when some of the data starts to come back.




Sunday, April 15, 2012

Graph Theory and Economics

Rather than actually doing my math assignments - I thought it might be interesting to show some applications of graph theory to economic models.

First a basic overview of graph theory.

Graph Theory is a very simple way to show (visually) how different objects are related. It primarily consists of sets of edges and vertices that connect to make something like this:


Where the vertices are the numbered circles, and the edges are the lines connecting them. Of course, this example shows a very simple graph. Before you know it, they can start to look like this:


I'll be borrowing a large chunk of this post from a paper by Michael Konig and Stefano Battiston. I won't have time to cover the complex parts of the paper, but this will be a good preview of some of analysis that graph theory can help with.

The paper uses graph theory to analyze economic networks, which are just economic actors (firms, individuals, groups, etc.) that are organized to behave some way. Network economics differs from most neoclassical models, which use the perfect price competition models. The assumptions that people act individually and rationally are relaxed and analyzed more closely in economic network analysis.

In this post, we'll just look at network diffusion, and how knowledge can move from one person to another. Let's assume that vertices represent an individual, and the edges represent some sort of personal connection. (Note: Different lengths in the edges represent varying degrees of social connection. Small edges show that two people are closer than two people connected by a longer edge.)  Therefore, closer edges are better ways of diffusing information than long edges.

The following equation is the average distance of all the edges. Where d is the distance between vertices i and j.
As you could assume, the lower average of the edge distance means that a network is more efficient at diffusing information. Konig and Battison cite a paper that shows that nearly 50% of all employment is facilitated through personal social circles. Using this kind of analysis is important in understanding how networks change and the impact of various inputs. (In this case, the diffusion of knowledge among a group of people.) 


I would argue that network economics is becoming increasingly important as individuals become more interconnected through online social mediums. Similarly, this type of economic analysis could certainly be applied to urban environments, where interactions are becoming increasingly interrelated. 



Saturday, April 14, 2012

From the Lecture Hall: The History of Recessions

Part of what inspired me to write this blog is my ongoing frustrations with the GMU economics department. I'll write a more detailed post about this later, but for now I want to focus on a particular topic raised by my professor.

I'm taking Econ 306 (Intermediate Microeconomics) with Professor Walter Williams, who is a pretty well known economist and public intellectual throughout the nation. He is very intelligent and an excellent teacher. Nevertheless, I feel like I need to write about what he said to our class last week.

Here is a pretty good summary of what he told us:

"If you look at the history, from 1790 to 1920 the government did not respond to or took limited actions against recessions. These recessions would usually last from one to two years, and then naturally  resolve themselves. However, if you look at recessions following 1929, they lasted much longer when the government tried to stop them. In fact, during the depression in 1920, the Harding Administration did barely anything, and the following decade was famously known as the "roaring '20s". So according to that track record, the government has done far more harm than good when it gets involved during economic downturns."

There's a few problems that I have with this conclusion.

1. This analysis is incredibly simplistic and sounds like something a politician would say on the campaign trail, not what a professional economist would say to his students. How could you quantitatively measure the effects of government intervention on recessions by simply looking at which downturns last longer? If you think that government intervention doesn't help the economy, fine. But don't tell your students that by looking at a timeline, you're going to find out why. Economics is about empirical explanations! With proofs, numbers, and logic!

2. I could have easily said that by not acting in 1920, developments in the '20s set the foundation for the Great Depression. Did it? I don't know. But the logic is just the same.

3. The recessions of a pre-globalized, pre-industrialized, pre-Wall Street America must be different from the recessions of the 1900s. So wouldn't it make sense that government policy would have a different affect on each one? Or maybe "modern" recessions have bigger impacts?

A lot of my friends majoring in a math or science like to tell me how economics isn't a "real science." If professors teach their students like this, then they are right.

Tyler Cowen on higher education

Tyler Cowen elaborates on some of his views of higher ed:
To refer back to a distinction from the David Brooks column, we should not be trying to squeeze the entire economy into the shoebox of the dynamic but risky “Economy I.”  For public choice reasons, as well understood by Karl Polanyi (an underrated public choice theorist if there ever was one), the polity requires some respite from Economy I, whether we like that or not.  Read also this analysis by Interfluidity, which is one of my favorite blog posts of all time.  Furthermore the more “sluggish” Economy II, by operating under different principles, often serves as a useful R&D lab for Economy I.  Think MIT and Stanford, or note that Adam Smith ended up as a customs commissioner, as his father had been.  Goethe and Bach worked for governments for much of their lives.  It’s about balance and synergy, though it is perfectly fair to see contemporary Western Europe, especially in the periphery, as a region which has far too much Economy II and too little Economy I.
This is very similar to what I was saying in my previous post. Though state-run universities have their fair share of subsidies and "market inefficiencies", they're can still be stable incubators for research and innovation.

However, Cowen has additional comments on the plight of higher education:
The real problems are a few.  First, successful state programs tend to stultify and decline over time, and if nothing else the danger is that health care costs will eat up state budgets.  Second, the absolute returns to higher education (as opposed to the wage for not going) are not currently high enough to maintain the current fiscal structure of those institutions, furthermore those fiscal structures do not have so much “give,” due to tenure and various self-imposed cost inflexibilities.  Third, although most state universities have relatively little explicit debt, they are implicitly massively leveraged through reliance on ongoing tuition boosts, ongoing enrollment boosts, and timely retirements, none of which can be counted on in the future. 
Good points all around.