October 2007 – artdiamondblog.com

Testing Incentives

When W. became president, he had two major education initiatives: vouchers, and "no child left behind." It is unfortunate that in the face of formidable Democratic opposition, he abandoned vouchers, and stuck with "no child left behind." The latter policy’s intent is noble, but some of its unintended consequences are perverse.

Mandatory testing results in educational inefficiency: teachers teach to the tests, and as the commentary quoted below reports, tests get jiggered to show good results.

The main harm though, is that some of the most important results of good education, like resilience, self-discipline, and creativity, are not readily measured in standardized multiple choice tests. So programs, such as Montessori, that encourage such results, end up under-appreciated and under-rewarded.

What we most need is for parents to be free to choose in education. That would result in far greater innovation and improvement in education than the current "no child left behind" standardized testing.

(p. A31) If teachers, administrators, politicians and others have a stake in raising the test scores of students — as opposed to improving student learning, which is not the same thing — there are all kinds of incentives to raise those scores by any means necessary.

. . .

A study released last week by the Thomas B. Fordham Institute and the Northwest Evaluation Association found that “improvements in passing rates on state tests can largely be explained by declines in the difficulty of those tests.”

The people in charge of most school districts would rather jump from the roof of a tall building than allow an unfettered study of their test practices. But that kind of analysis is exactly what’s needed if we’re to get any real sense of how well students are doing.

For the full commentary, see:

BOB HERBERT. " High-Stakes Flimflam." The New York Times (Tues., October 9, 2007): A31.

Columnist Bob Herbert. Source of photo: online version of the NYT column quoted and cited above.

United States Cotton Subsidies Hurt Poor African Farmers

Dan Sumner did his dissertation many years ago under T.W. Schultz, a great economist, and a great human being. (Dan was a friend of mine in grad school–we were members of a club that gathered once a month to discuss the works of Bertrand Russell.)

Eliminating billions of dollars in federal subsidies to American cotton growers each year would reduce American cotton production and exports, raise world prices by about 10 percent and modestly improve the incomes of millions of poor cotton farmers in Africa, according to a new study by Oxfam, the aid group.

Agricultural economists at the University of California, Davis, who conducted the study for Oxfam, found that a typical farm family of 10 in Chad, Benin, Burkina Faso or Mali — Africa’s major cotton producers — that now earns $2,000 a year would have an extra $46 to $114 a year to spend if American subsidies were removed.

“Fifty to a hundred bucks is a lot of money to these people,” said Daniel Sumner, chairman of the Department of Agricultural and Resource Economics at the university. “It’s not right to think that changing U.S. subsidies will turn very poor people into middle-class households by our standards. That’s a generational process. But it’s money in their pocket.”

. . .

Dani Rodrik, an economist at Harvard who is skeptical of the importance of reduced agricultural subsidies, said he found Oxfam’s new estimates credible, but said the gains forecast were relatively small. . . .

. . .

But the authors of the report said that removing American subsidies would permanently shift the price of cotton upward, with prices subsequently fluctuating around a higher average.

For the full story, see:

CELIA W. DUGGER. "Oxfam Suggests Benefit in Africa if U.S. Cuts Cotton Subsidies." The New York Times (Thurs., June 21, 2007): A12.

(Note: ellipses added.)

Johnston Book to Expose More Government Subsidies to Wealthy

Source of book image: http://ecx.images-amazon.com/images/I/51Zc90x8GDL._SS500_.jpg

Several days ago, I ran an entry that quoted a revealing and upsetting article showing how a lot of tax dollars are being used to susidize golf holidays for wealthy businessmen. The author of the article was New York Times Pulitzer Prize-winning reporter David Cay Johnston.

In response to my entry, Johnston emailed me to let me know that he has a forthcoming book that will expand on the subject of his NYT piece.

If Johnston’s article is any guide, his book should be of interest. Clicking on the reference below, will take you to the the Amazon page where the book can be pre-ordered in advance to its expected December 27, 2007 release:

Johnston, David Cay. Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick You with the Bill). Portfolio, 2007.

Most New Jobs Are Good Jobs (High-Skill and High-Pay)

Stephen J. Rose, the author of the commentary quoted below, was previously an advisor to Democratic President Clinton’s former Secretary of Labor, Robert Reich. He is currently a senior economic fellow with the Progressive Policy Institute. The commentary is based on Rose’s report "The Truth About Middle Class Jobs."

Economic change is a messy process. New technologies open up many opportunities for those prepared to take advantage of them. At the same time, old firms and their workers are displaced and forced to start over. In 1900, for example, 40% of the U.S. work force was involved in agriculture. Today, that figure is less than 2%, and no serious observer would argue that we are worse off as a result of this transformation.

Yet many of today’s most prominent politicians and pundits are making an updated version of precisely this argument. They claim that the decline in the number of manufacturing jobs has led to the replacement of good middle-class jobs by low-skill, low-pay "hamburger-flipping" service jobs.

. . .

Let us look at the distribution of earnings in 1979, compared with the distribution of earnings of the net new jobs created since that year. . . .

. . .

Here’s the bottom line: For three-quarters of the workforce (women and the top half of male earners), economic growth translated into earnings gains. But for male workers in the bottom half of the earnings distribution, the decline of unionized manufacturing employment has led to the drying up of some middle-class jobs for those with no post-secondary education.

For the clear majority of the workforce, then, the job market has become more welcoming, not less so. But where are these jobs?

Using a framework that I developed in the 1990s, I find that most of the employment gains over the last 30 years have been in business-management activities (administration, sales, finance and business services) as well as in professional services such as health care and education. While the percentage of U.S. jobs derived from manual work in agriculture, mining, timber and manufacturing has declined, the share of jobs related to low-skilled retail and personal/food services has remained steady.

For the full commentary, see:

STEPHEN J. ROSE. "The Myth of Middle-Class Job Loss." The Wall Street Journal (Weds., October 24, 2007): A21.

(Note: ellipses added.)

Academic Entrepreneurs in a Toxic Wasteland

The Berkeley Pit was once a copper mine, and now holds a lake of toxic waste. Source of photo: online version of the NYT article quoted and cited below.

Here are a few paragraphs from a fascinating story about a couple of people who seem to be practicing what Taleb is preaching in The Black Swan:

BUTTE, Mont. — Death sits on the east side of this city, a 40-billion-gallon pit filled with corrosive water the color of a scab. On the opposite side sits the small laboratory of Don and Andrea Stierle, whose stacks of plastic Petri dishes are smeared with organisms pulled from the pit. Early tests indicate that some of those organisms may help produce the next generation of cancer drugs.

From death’s soup, the Stierles hope to coax life.

“I love the idea of looking at toxic waste and finding something of value,” said Ms. Stierle, 52, a chemistry researcher at Montana Tech of the University of Montana.

For decades, scientists assumed that nothing could live in the Berkeley Pit, a hole 1,780 feet deep and a mile and a half wide that was one of the world’s largest copper mines until 1982, when the Atlantic Richfield Company suspended work there. The pit filled with water that turned as acidic as vinegar, laced with high concentrations of arsenic, aluminum, cadmium and zinc.

. . .

Mr. Stierle is a tenured professor at Montana Tech, but his wife gets paid only for teaching an occasional class or if there is a grant to finance her research. From 1996 to 2001 they applied for dozens of grants, but received only rejection letters. So they financed their own research, using personal savings and $12,000 in annual patent royalty payments. In 2001, they won a six-year, $800,000 grant from the United States Geological Survey.

“Their work is considered a very high-risk approach,” said Matthew D. Kane, a program director at the National Science Foundation. “It takes a long time to get funding, and some luck to find active compounds.”

Unlike scientists at large research universities, who commonly teach only one class a year and employ graduate students to run their laboratories, Mr. Stierle teaches four classes each semester at a college with 2,000 undergraduates and no major research presence.

. . .

The couple said they were negotiating privately with a pharmaceutical company to test some of the compounds they have discovered and possibly turn them into drugs. As they wait, they open another Mason jar filled with murky pit water, draw a sample and return to work.

“The pit very easily could have been a complete waste of time,” Mr. Stierle said. “We just had luck and worked our butts off. We take that first walk into the dark.”

For the full story, see:

CHRISTOPHER MAAG. "In the Battle Against Cancer, Researchers Find Hope in a Toxic Wasteland." The New York Times (Tues., October 9, 2007): A21.

(Note: ellipses added.)

In the photo immediately above, Don and Andrea Steirle work in their lab. The map to the left shows the location of the Berkeley Pit. Source of the photo and map: online version of the NYT article quoted and cited above.

Entrepreneurial Capitalism is the Good Kind

Source of book image: http://ec1.images-amazon.com/images/I/41WVH9PAR3L._SS500_.jpg

. . . capitalism as practiced in the U.S. is different from the capitalism practiced in, say, Singapore or Saudi Arabia. "Capitalism…takes many forms, which differ substantially…in their implications for economic growth and elimination of poverty," three economists write in "Good Capitalism, Bad Capitalism." The book identifies four strains of modern capitalism and argues the U.S. version is particularly well-suited to creating and exploiting innovations that boost living standards.

. . .

The book was written by William Baumol, an eclectic New York University economist impressively energetic at 85 years old; Carl Schramm, president and research director of the Kauffman Foundation and a recovering health economist and insurance executive; and Robert Litan, an economist-lawyer who was a budget and antitrust official in the Clinton administration. (Disclosure: I recently spoke at Kauffman’s Kansas City, Mo., headquarters.)

. . .

Along the way, the economists make a point often missed in the romanticism about "small business." They aren’t talking about all small businesses — the corner dry cleaner, for instance — or all the self-employed. Their entrepreneurs are entities that provide a new product or service or develop methods to produce or deliver existing goods and services at lower cost. . . .

It all sounds great — and compelling. A capitalism that cannot spur innovation and/or display flexibility to reorganize itself cannot be a model. In their book, though, the three touch too lightly on an issue about which Mr. Litan has written previously. As he puts it in an interview: "An entrepreneurial society is going to be more of a high-risk society."

The strengths of U.S.-style capitalism are apparent. No place in the past quarter century has better mixed the ingredients of talent, imagination, education, science and capital. But the risks are apparent, too: workers who lose jobs and find new ones that pay far less and lack health insurance, widening disparities between economic winners and losers, challenges posed by stiffening competition from low-wage, increasingly skilled workers abroad, and schools that aren’t improving as fast as the economy is changing.

Preserving the strengths of American capitalism requires finding a way to reduce the anxiety and harm posed by such risks without losing the entrepreneurial vigor. That’s the hard part.

For the full commentary/review, see:

DAVID WESSEL. "CAPITAL; By Capitalism’s Vigor May Hinge On Confronting Its Risks." The Wall Street Journal (Thurs., May 10, 2007): A2.

(Note: ellipses added.)

Creative Entrepreneurship Helps U.S. Thrive in Globalization’s “Invisible Competition”

The passage below is an excerpt of a WSJ summary of an article in the Autumn 2007 issue of The Wilson Quarterly.

Tyler Cowen, an economist at George Mason University, says many U.S. accomplishments stem from Americans’ ability to thrive in competitive environments. . . .

Mr. Cowen believes that the U.S. is particularly well-suited to the type of competition fostered by globalization, which he calls "invisible competition." Rivals in business, romance and life now compete anonymously and from a distance. Programmers compete with computer professionals across the ocean. Dating Web sites pit anonymous strangers against one other. Many American qualities suit the distinct challenges posed by invisible competition, says Mr. Cowen. A tradition of creative entrepreneurship is especially useful, since invisible competitors don’t have the same motivating power as rivals in the next cubicle or on the next block.

For the full summary, see:

"Informed Reader; ECONOMICS Divergent Views on Competition in the U.S." The Wall Street Journal (Tues., October 9, 2007): B14.

(Note: ellipsis added.)

A Nuts and Bolts Example of Economies of Scale (or the Lack Thereof)

Source of graphic: online version of the WSJ article cited below.

Mr. Bair said Boeing is working closely with its primary fastener supplier, Alcoa Inc., to get enough high-quality titanium bolts to put the plane together in a logical fashion. Nevertheless, major components, such as the wings, arrived from Japan and other locations such as Italy and South Carolina held together by thousands of temporary fasteners.

The unexpected lack of fasteners marks the sort of test Boeing will face in coming years as it moves to fill a press of orders for the 787 and other aircraft amid an aerospace boom. . . .

. . .

Unlike previous airplanes, the Dreamliner is made largely of futuristic composites, which can’t be held together with traditional aluminum rivets. Instead, the major sections are bolted together with specially coated bolts that fit into brackets at each joint. Each bolt must be individually made on a lathe — a process that can’t be hurried. Because it takes time to set up the lathe, Alcoa would prefer to make thousands of one type of fastener before breaking the machine down and resetting it.

"Problem is, we don’t need thousands of bolts right now. We might need 10 of one kind," Mr. Bair said.

For the full story, see:

J. LYNN LUNSFORD and PAUL GLADER. "Boeing’s Nuts-and-Bolts Problem Shortage of Fasteners Tests Ability to Finish Dreamliners." The Wall Street Journal (Tues., June 19, 2007): A8.

(Note: ellipses added.)

Human Capital and Rule of Law Are “Largest Share of Wealth”

Two years ago the World Bank’s environmental economics department set out to assess the relative contributions of various kinds of capital to economic development. Its study, "Where is the Wealth of Nations?: Measuring Capital for the 21st Century," began by defining natural capital as the sum of nonrenewable resources (including oil, natural gas, coal and mineral resources), cropland, pasture land, forested areas and protected areas. Produced, or built, capital is what many of us think of when we think of capital: the sum of machinery, equipment, and structures (including infrastructure) and urban land.

But once the value of all these are added up, the economists found something big was still missing: the vast majority of world’s wealth! If one simply adds up the current value of a country’s natural resources and produced, or built, capital, there’s no way that can account for that country’s level of income.

The rest is the result of "intangible" factors — such as the trust among people in a society, an efficient judicial system, clear property rights and effective government. All this intangible capital also boosts the productivity of labor and results in higher total wealth. In fact, the World Bank finds, "Human capital and the value of institutions (as measured by rule of law) constitute the largest share of wealth in virtually all countries."

Once one takes into account all of the world’s natural resources and produced capital, 80% of the wealth of rich countries and 60% of the wealth of poor countries is of this intangible type. The bottom line: "Rich countries are largely rich because of the skills of their populations and the quality of the institutions supporting economic activity."

For the full commentary, see:

RONALD BAILEY. "Secrets of Intangible Wealth." The Wall Street Journal (Sat., September 29, 2007): A9.

Helping Russians Remember the Truth About Communism

Some of the crew of Gruz 200, including the director Alexei Balabanov, who is second from the left. Source of the photo: online version of the WSJ article cited below.

(p. B1) The film is named "Gruz 200" (Cargo 200) after the zinc-lined coffins in which dead Soviet soldiers were shipped home from the 1979-89 war in Afghanistan. Messrs. Balabanov and Selyanov say they made the movie as an antidote to what they describe as rising nostalgia in Russia for the Soviet period.

"I show what filth we lived in," said Mr. Balabanov, a director sometimes described as Russia’s Quentin Tarantino. "Society was sick from 1917 onwards," he added, referring to the year the Bolsheviks took power.

The film — a graphically violent story of the sexual abuse of a teenage girl at the hands of a sadistic Soviet policeman — paints a relentlessly negative picture of a time that many Russians recall with warm nostalgia. The filmmakers hope to release the movie overseas but haven’t yet signed up a foreign distributor.

Russian President Vladimir Putin, who restored Russia’s Soviet-era national anthem, has called the 1991 collapse of the Soviet Union "the greatest geopolitical catastrophe of the 20th century," and polls show a majority of Russians regard the period as one of relative prosperity, stability and national pride.

. . .

(p. B2) Mr. Balabanov says "Gruz 200" is based on his own experiences while traveling across the Soviet Union in the 1980s, as well as on stories he heard second-hand.

Mr. Selyanov says he believes it is his "duty" to remind people of what the Soviet Union was really like and combat the rising warmth for the period. "We have to fight this nostalgia," the producer says.

But the film has been dogged by controversy since even before it opened. Mr. Balabanov says three prominent actors who had played in his previous films refused parts once they read the script. "They were scared," he said. The director was forced to use largely unknown actors.

. . .

Russian TV networks, controlled by the state, have balked at even late-night showings — critical to financial success for Russian movies.

"We don’t have the courage to put something like this on the air," said Vladimir Kulistikov, head of the No. 3 NTV network, in a statement.

For the full story, see:

ANDREW OSBORN. "From Russia, Without Love: New Movie Slams Soviet Union." The Wall Street Journal By (Thurs., June 21, 2007): B1 & B2.

(Note: ellipses added.)

The sadistic police captain is portrayed by Alexei Poluyan. Source of the photo: online version of the WSJ article cited above.

Labor Unions Endorse Hillary and Edwards

Source of graphic: online version of the WSJ article excerpted and cited below.

Union endorsements could provide a big boost with next year’s early, front-loaded primary calendar. Half of all 15.4 million union members live in six states — California, New York, Illinois, Michigan, New Jersey and Pennsylvania — and all but Pennsylvania will have voted by Feb. 5.

Major unions have already split their endorsements between three Democratic candidates: Sens. Hillary Rodham Clinton and Christopher Dodd, and former Sen. John Edwards. Union leaders are loath to repeat the division of support that marred the 2004 election, where major unions endorsed Richard Gephardt and Howard Dean, wasting resources on losing candidates. Only one Republican candidate, former Arkansas Gov. Mike Huckabee, has picked up a major union endorsement.

For the full story, see:

NICK TIMIRAOS. "HOT TOPIC; U.S. Unions: Still a Political Power?" The Wall Street Journal (Sat., September 29, 2007): A7.