Tyler Cowen's Blog, page 538

Apprenticeships v. College

In my post, College has been oversold, I discussed the 40% college dropout rate. In a piece in this week's Chronicle of Higher Education, Tuning in to the Dropping Out, I reprise some of this material but also discuss high school dropouts and the importance of alternative education paths.

In the 21st century, an astounding 25 percent of American men do not graduate from high school. A big part of the problem is that the United States has paved a single road to knowledge, the road through the classroom. "Sit down, stay quiet, and absorb. Do this for 12 to 16 years," we tell the students, "and all will be well." Lots of students, however, crash before they reach the end of the road. Who can blame them? Sit-down learning is not for everyone, perhaps not even for most people. There are many roads to an education.

Consider those offered in Europe. In Germany, 97 percent of students graduate from high school, but only a third of these students go on to college. In the United States, we graduate fewer students from high school, but nearly two-thirds of those we graduate go to college. So are German students poorly educated? Not at all.

Instead of college, German students enter training and apprenticeship programs—many of which begin during high school. By the time they finish, they have had a far better practical education than most American students—equivalent to an American technical degree—and, as a result, they have an easier time entering the work force. Similarly, in Austria, Denmark, Finland, the Netherlands, Norway, and Switzerland, between 40 to 70 percent of students opt for an educational program that combines classroom and workplace learning.

…In the United States, "vocational" programs are often thought of as programs for at-risk students, but that's because they are taught in high schools with little connection to real workplaces. European programs are typically rigorous because the training is paid for by employers who consider apprentices an important part of their current and future work force. Apprentices are therefore given high-skill technical training that combines theory with practice—and the students are paid! Moreover, instead of isolating teenagers in their own counterculture, apprentice programs introduce teenagers to the adult world and the skills, attitudes, and practices that make for a successful career.

For more see Launching the Innovation Renaissance and–showing the opportunity for consensus on this topic–a recent post on apprenticeships from the Shanker blog.

What is the ECB endgame?

Everyone is happy that bond yields are falling, but what is the next step in the resolution of the crisis?  Here is one report from the front, decide for yourself whether it is good or bad news:

Last week 800 banks requested €529.5bn of three-year funding under the European Central Bank's longer-term refinancing operation, on top of €489bn borrowed in the first tranche of the LTRO in December.

The €1.019tn total is not far shy of the €1.106tn of European bank senior debt due to mature in 2012, 2013 and 2014 combined, according to Goldman Sachs, which said the "extremely high" injection of capital means "European banks are now effectively pre-funded through to 2014".

Given that the ECB funding costs 1 per cent, compared to yields on senior debt of 3.5 per cent, some believe many banks will simply let much of their senior debt mature…

It would be an exaggeration to claim that the ECB has taken over European capital markets for three years, but you can see where my thoughts are headed.  What happens when the three years is up, or as that time approaches?  I see a few possible scenarios:

1. Banks recapitalize themselves with sound lending, and at the end of the three years they return to private capital markets by issuing debt.  What would the new cost of capital be?

2. European banks continue to hover on the precipice for three years, and as expiration approaches the ECB renews its commitment to fund.  (If the ECB funds the banks for six years running, at what point are the banks de facto nationalized?  After how many years of ECB funding at one percent is it impossible to return to private markets?)

3. As expiration approaches, no one will be quite sure whether European banks still hover on the precipice, and so the ECB will implicitly signal a willingness to run another three years credit if the private money is not there.  That will make the banks less interested in cleaning up and raising the private money.  How are banks encouraged to reveal the true state of their market?

4. By the time the three years is up, a lot of these institutions will have been nationalized, if only de facto.

The Eurozone is now in a recession, with further financial shocks likely to come (more Greek problems, Portugal falling into receivership, Irish referendum, French election, slowdown in China, etc.)  What is the probability that #1 comes to pass? I say below fifty percent.  Just how bad is #2-3?  What other options are there?  How long would it take for de facto bank nationalization to lower the economic growth rate?  How long would it take before re-privatization is an option?

By the way people, we're exploring the best case options here, they did avert disaster in December!  For now.

Addendum: Gavyn Davies expresses further reservations.  And Karl Smith comments.

I don't see the core to this game

Mr Weidmann proposed last week that Germany's Target 2 claims should be securitised. Just think about this for a second. He demands contingent access to Greek and Spanish property and other assets to a value of €500bn in case the eurozone should collapse. He might as well have suggested sending in the Luftwaffe to solve the eurozone crisis. The proposal is unbelievably extreme.

It also tells us something else: by seeking insurance against a collapse of the euro, the Bundesbank tells us it no longer regards the demise of the euro as a zero-probability event. If the Bundesbank seeks insurance, so should everybody else.

Here is more, from Wolfgang Münchau.  Here is another account, Weidmann by the way runs the Bundesbank.  As a general rule of thumb, any time you see an article about "Target 2," it is important.

The calculus of consent?

A few years ago, two researchers, both then at Carnegie Mellon, decided to calculate how much time it would take to actually read every privacy policy you should.

First, Lorrie Faith Cranor and Aleecia McDonald needed a solid estimate for the average length of a privacy policy. The median length of a privacy policy from the top 75 websites turned out to be 2,514 words. A standard reading rate in the academic literature is about 250 words a minute, so each and every privacy policy costs each person 10 minutes to read.

Next, they had to figure out how many websites, each of which has a different privacy policy, the average American visits. Surprisingly, there was no really good estimate, but working from several sources including their own monthly tallies and other survey research, they came up with a range of between 1,354 and 1,518 with their best estimate sitting at 1,462.

So, each and every Internet user, were they to read every privacy policy on every website they visit would spend 25 days out of the year just reading privacy policies! If it was your job to read privacy policies for 8 hours per day, it would take you 76 work days to complete the task. Nationalized, that's 53.8 BILLION HOURS of time required to read privacy policies.

That is Alexis Madrigal, the article is here, for the pointer I thank Jeffrey Deutsch.

Assorted links

1. Slate's new book review feature.

2. Greg Mankiw on carried interest.

3. A homage (?) to TED talks, short video.

4. The economics of the French-German border.

5. Hart and Moore on property rights and the firm (pdf); I still find this a useful paper.

6. Apple responds on job creation, I would gladly review their work.

Famous middle initials

John F. Kennedy, Michael J. Fox, Franklin D. Roosevelt, Philip K. Dick, Cecil B. DeMille, George W. Bush, George C. Scott, William F. Buckley, John D. Rockefeller, Johnny B. Goode, James Q. Wilson, and who else?

Why is it so popular with Presidents?

A whole other line of obsession is to start with J. Edgar Hoover, F. Scott Fitzgerald, and so on, and see how many others you can come up with.

Then there is J.R.R. Tolkien, H.L.A. Hart, and their successors.

I am pleased to have no middle initial.

Addendum: .

Adam Smith on Charles Murray

From Book V, chapter I:

In every civilised society, in every society where the distinction of ranks has once been completely established, there have been always two different schemes or systems of morality current at the same time; of which the one may be called the strict or austere; the other the liberal, or, if you will, the loose system. The former is generally admired and revered by the common people: the latter is commonly more esteemed and adopted by what are called people of fashion. The degree of disapprobation with which we ought to mark the vices of levity, the vices which are apt to arise from great prosperity, and from the excess of gaiety and good humour, seems to constitute the principal distinction between those two opposite schemes or systems. In the liberal or loose system, luxury, wanton and even disorderly mirth, the pursuit of pleasure to some degree of intemperance, the breach of chastity, at least in one of the two sexes, etc., provided they are not accompanied with gross indecency, and do not lead to falsehood or injustice, are generally treated with a good deal of indulgence, and are easily either excused or pardoned altogether. In the austere system, on the contrary, those excesses are regarded with the utmost abhorrence and detestation. The vices of levity are always ruinous to the common people, and a single week's thoughtlessness and dissipation is often sufficient to undo a poor workman for ever, and to drive him through despair upon committing the most enormous crimes. The wiser and better sort of the common people, therefore, have always the utmost abhorrence and detestation of such excesses, which their experience tells them are so immediately fatal to people of their condition. The disorder and extravagance of several years, on the contrary, will not always ruin a man of fashion, and people of that rank are very apt to consider the power of indulging in some degree of excess as one of the advantages of their fortune, and the liberty of doing so without censure or reproach as one of the privileges which belong to their station. In people of their own station, therefore, they regard such excesses with but a small degree of disapprobation, and censure them either very slightly or not at all.

A new paper on the economics of network neutrality

Nicholas Economides† and Benjamin E. Hermalin have a new paper (pdf), coming out in the Rand Journal of Economics, summarized here, here is the abstract:

Pricing of Internet access has been characterized by two properties: Parties are directly billed only by the Internet service provider (isp) through which they connect to the Internet. Pricing, moreover, is not contingent on the type of content being transmitted. These properties define a regime known as "network neutrality." In 2005, some large isps proposed that application and content providers directly pay them additional fees for accessing the isps' residential clients, as well as differential fees for prioritizing certain content. We analyze the private and social incentives to introduce such fees when the network is congested and more traffic implies greater delays. We derive conditions under which network neutrality would be welfare superior to any feasible scheme for prioritizing service. Extending our analysis to encompass isps' incentives to invest in more bandwidth, we show that the ability to price discriminate increases their incentives to invest. In terms of overall welfare, we show the additional investment may or may not offset any static inefficiency associated with discrimination.

This strikes me as a funny way to put the point.  Might the authors also have written?: "A strict welfare calculation is indeterminate in the theory of price discrimination, yet the standard presumption is that price discrimination is welfare-improving.  That is all the more likely to be the case when investment in new capacity, and usage, is endogenous"?

For the pointer I thank Richard Harper.

Assorted links

1. Why is the demand for Treasury securities robust?

2. If at first you do not succeed…, and here is a brief explanation of Target and Target2.

3. The value of college and university, by me.

4. Jennifer Homans remembers her husband, Tony Judt, and discusses his last book.

5. Will Wilkinson on country music, and other matters.

6. Using placebos to boost educational performance.

When do macroeconomic multiple equilibria matter most?

It seems that the Greek standard of living will take a long-term tumble from its heights in the oughties.  How much?  We won't know for a while, but maybe as much as fifty percent.

While there is clearly a significant AD channel at work, and some negative real shocks, I also see multiple equilibria.  Investors have decided that Greek institutions are not so solvent and this raises risk premia and lowers long-term investment.  In the oughties investors were guessing "Greece is a West European country after all," and these days they are guessing "Greece is more like a Balkans country."  Reality follows in step.

Are macro multiple equilibria "most fierce" for countries hovering over a dilemma of mixed identity or a cultural chasm?  No one doubts the cultural identity of Sweden and, if they have multiple equilibria, they may be quite close to each other in output space and also in cultural space.

Which other countries may incur especially high risk premia from multiple equilibria?  Brazil?  China?  Where else?