Thoughts on Alternative Budget 2018

So, I’ve finally sat down to read through Pakatan Harapan’s alternative budget for 2018. There are some good ideas here, and a fair share of bad ones, but no more than expected. The numbers are bonkers, but I expected that since this is more a political manifesto than a real fiscal document. I’ll give most of it a pass except the more egregious ones, and like many, I note that some of the policy objectives and prescriptions are contradictory. At least one proposal has me upset, but I’ll leave that for the very last.

Can the (overall) numbers be achieved? I’d say yes. If the government really wanted to, they could go with a balanced budget tomorrow. But I think it would involve as much cutting the provision of public goods and services, as it would be some putative “savings'” from reducing corruption and improving governance. I’m sceptical that there’s that much savings to be had from that source.

Before We Start Talking About “Free” Tertiary Education…

…we need to handle this little problem:

Question:

1. Why isn’t secondary education universal yet?
2. What’s happening with the missing boys? Malaysia’s gender ratio is tilted to more boys, yet fewer of them enter secondary education.
3. If you think this is bad, from my memory the secondary graduation numbers are even worse (I’ll post the chart if and when I find the numbers).

Coming Soon To Malaysia: It’s A Woman’s World

The Economist has an essay on one of the biggest social and demographic changes in history (excerpt):

Badly educated men in rich countries have not adapted well to trade, technology or feminism

…Tallulah may be an extreme example, but it is part of a story playing out across America and much of the rest of the rich world. In almost all societies a lot of men enjoy unwarranted advantages simply because of their sex. Much has been done over the past 50 years to put this injustice right; quite a bit still remains to be done.

The dead hand of male domination is a problem for women, for society as a whole—and for men like those of Tallulah. Their ideas of the world and their place in it are shaped by old assumptions about the special role and status due to men in the workplace and in the family, but they live in circumstances where those assumptions no longer apply. And they lack the resources of training, of imagination and of opportunity to adapt to the new demands. As a result, they miss out on a lot, both in economic terms and in personal ones.

More On The Role Of Parenting In Inequality

From The Economist magazine (excerpt):

Minding the nurture gap
Social mobility depends on what happens in the first years of life

Our Kids: The American Dream in Crisis. By Robert Putnam. Simon & Schuster; 386 pages; $28 and £18.99.

THE most important divide in America today is class, not race, and the place where it matters most is in the home. Conservatives have been banging on about family breakdown for decades. Now one of the nation’s most prominent liberal scholars has joined the chorus.

Robert Putnam is a former dean of Harvard’s Kennedy School of Government and the author of “Bowling Alone” (2000), an influential work that lamented the decline of social capital in America. In his new book, “Our Kids”, he describes the growing gulf between how the rich and the poor raise their children….

Right Conclusion; Wrong Analysis

A commentator sent me this link (excerpt):

How our Winner Take-All Market Deepen Income Inequality while Decaying Our Education System?

Are we better off than we were 10 years ago? I am sure the majority of us will answer with a resounding ‘NO’. Why is this so? There are many reasons that contributed to this, among them are the following.

• Increased in income inequality
• Rising costs of living
• Income not catching up with inflation
• Longer working hours and less recreation
• More indebted than before
• Less opportunity for self-improvement due to time constraint
• Society is getting more competitive
• Crime on the rise

Wonder what caused the above? Listed above are the consequences or the price of economic development that are caused by forces that shaped our social economic fabric. We are living in a world where resources such as land, labor and natural resources are in limited supply or scarce. To maximize the usage we not only have to limit wastages but also need to efficiently allocate these scarce resources to the most important part of the economy.

Universal Pre-school: Worth Fighting For

There’s an emerging global consensus and expanding research literature that very early education matters, and is effective in determining life outcomes (abstract):

The Impacts of Expanding Access to High-Quality Preschool Education
Elizabeth U. Cascio, Diane Whitmore Schanzenbach

President Obama’s “Preschool for All” initiative calls for dramatic increases in the number of 4 year olds enrolled in public preschool programs and in the quality of these programs nationwide. The proposed program shares many characteristics with the universal preschools that have been offered in Georgia and Oklahoma since the 1990s. This study draws together data from multiple sources to estimate the impacts of these “model” state programs on preschool enrollment and a broad set of family and child outcomes. We find that the state programs have increased the preschool enrollment rates of children from lower- and higher-income families alike. For lower-income families, our findings also suggest that the programs have increased the amount of time mothers and children spend together on activities such as reading, the chances that mothers work, and children’s test performance as late as eighth grade. For higher-income families, however, we find that the programs have shifted children from private to public preschools, resulting in less of an impact on overall enrollment but a reduction in childcare expenses, and have had no positive effect on children’s later test scores.

Speaks for itself, I think.

The important point is this: over the long term, reducing income and wealth inequality depends on education. Meritocracy is only a viable strategy when everyone starts off on the same footing. But given that higher income families have a higher tendency to put their children through pre-school, that gives those children a head start which lasts into their teens and has ramifications for secondary and tertiary education.

So unless we move towards universal pre-school education, we’re handicapping children from lower and middle income families right at the get-go, and perpetuating an aristocracy of wealth.

Technical Notes

Elizabeth U. Cascio, Diane Whitmore Schanzenbach, “The Impacts of Expanding Access to High-Quality Preschool Education”,  NBER Working Paper No. 19735, December 2013

Skewed Incentives In Academic Research

I think this will sound troublingly familiar to most Malaysian academics, and not just within the economics community (excerpt; emphasis added):

Our uneconomic methods of measuring economic research
Stan Liebowitz

Academic economists – especially in the US – are continuously evaluated, with salaries and promotions hanging on outcomes. This column argues that the methods – identified from a survey of economics department chairs – are likely to reduce the amount of research created, perpetuate inefficiently sized research teams, promote false authorship, and penalise honest researchers. They also provide departments with excessive leeway to engage in potentially capricious behaviour.

Teaching Economics: More Diversity Please

Students at Manchester University want more than dogma (excerpt):

Economics students aim to tear up free-market syllabus
Undergraduates at Manchester University propose overhaul of orthodox teachings to embrace alternative theories

Few mainstream economists predicted the global financial crash of 2008 and academics have been accused of acting as cheerleaders for the often labyrinthine financial models behind the crisis. Now a growing band of university students are plotting a quiet revolution against orthodox free-market teaching, arguing that alternative ways of thinking have been pushed to the margins.

Talking To Your Kids: Inequality And The Parenting Gap

As a follow up to my previous post, anybody interested in income inequality, social mobility and equality of opportunity needs to read this (excerpt, emphasis added):

The Parenting Gap

High-income parents talk with their school-aged children for three hours more per week than low-income parents, according to research by Meredith Phillips of UCLA.They also provide around four-and-a-half extra hours per week of time in novel or stimulating places, such as parks or churches, for their infants and toddlers.

Breaking The Poverty Trap

From my point of view, one of the biggest problems with the whole ideological debate about equal outcomes (“affirmative action”) versus equal opportunity (“meritocracy”) is that it’s really a false dichotomy.

In many ways, you can’t have one without the other. A meritocracy that truly rewards merit only works if you assume everyone starts off equally. If you want to be wonkish about it, it’s a one-generation, equal-endowment model of lifetime income.

Are Entrepreneurs Born Or Made?

A new NBER working paper explores this and many other questions (abstract; emphasis added):

Smart and Illicit: Who Becomes an Entrepreneur and Does it Pay?
Ross Levine, Yona Rubinstein

We disaggregate the self-employed into incorporated and unincorporated to distinguish between “entrepreneurs” and other business owners. The incorporated self-employed have a distinct combination of cognitive, noncognitive, and family traits. Besides coming from higher-income families with better-educated mothers, the incorporated—as teenagers—scored higher on learning aptitude tests, had greater self-esteem, and engaged in more aggressive, illicit, risk-taking activities. The combination of “smarts” and “aggressive/illicit/risk-taking” tendencies as a youth accounts for both entry into entrepreneurship and the comparative earnings of entrepreneurs. In contrast to a large literature, we also find that entrepreneurs earn much more per hour than their salaried counterparts.

Are Entrepreneurs Born Or Made?

A new NBER working paper explores this and many other questions (abstract; emphasis added):

Smart and Illicit: Who Becomes an Entrepreneur and Does it Pay?
Ross Levine, Yona Rubinstein

We disaggregate the self-employed into incorporated and unincorporated to distinguish between “entrepreneurs” and other business owners. The incorporated self-employed have a distinct combination of cognitive, noncognitive, and family traits. Besides coming from higher-income families with better-educated mothers, the incorporated—as teenagers—scored higher on learning aptitude tests, had greater self-esteem, and engaged in more aggressive, illicit, risk-taking activities. The combination of “smarts” and “aggressive/illicit/risk-taking” tendencies as a youth accounts for both entry into entrepreneurship and the comparative earnings of entrepreneurs. In contrast to a large literature, we also find that entrepreneurs earn much more per hour than their salaried counterparts.

The Changing Face Of Education

Universities are like soooo last century:

IMF Launches Online Economics Learning for Global Classroom

In the virtual classroom of tomorrow, central bank and government officials will be able to supplement what they learn in physical IMF classrooms by tapping into an online network of economics and financial training courses.

And courses that have thus far been restricted to IMF member country officials will be available to students, bankers—anyone who’s interested and has an internet connection.

Thanks to a new partnership with edX, the nonprofit online learning initiative founded by Harvard University and the Massachusetts Institute of Technology, the IMF will soon start offering economics courses online to officials from around the world to complement its traditional training delivery. Free public access, through so-called massive open online courses (MOOCs), will follow in 2014.

Piling On–Further Evidence Of The Desirability of Universal Pre-School Education

In the last round of NBER papers, Heckman and Raut find more evidence that pre-school education has a significant pay-off and worth putting public investment into (abstract; emphasis added):

Intergenerational Long Term Effects of Preschool - Structural Estimates from a Discrete Dynamic Programming Model
James J. Heckman, Lakshmi K. Raut

This paper formulates a structural dynamic programming model of preschool investment choices of altruistic parents and then empirically estimates the structural parameters of the model using the NLSY79 data. The paper finds that preschool investment significantly boosts cognitive and non-cognitive skills, which enhance earnings and school outcomes. It also finds that a standard Mincer earnings function, by omitting measures of non-cognitive skills on the right hand side, overestimates the rate of return to schooling. From the estimated equilibrium Markov process, the paper studies the nature of within generation earnings distribution and intergenerational earnings and schooling mobility. The paper finds that a tax financed free preschool program for the children of poor socioeconomic status generates positive net gains to the society in terms of average earnings and higher intergenerational earnings and schooling mobility.

It seems like I’ve been harping on this issue for the longest time, and this paper brings together a couple of threads of thought on the debates over education and inequality.

University Education Is Expensive; But The Returns Justify The Investment

It’s a fairly long paper, but it reviews the current state of knowledge about the payoff to college education (abstract):

Making College Worth It: A Review of Research on the Returns to Higher Education
Philip Oreopoulos, Uros Petronijevic

Recent stories of soaring student debt levels and under-placed college graduates have caused some to question whether a college education is still a sound investment. In this paper, we review the literature on the returns to higher education in an attempt to determine who benefits from college. Despite the tremendous heterogeneity across potential college students, we conclude that the investment appears to payoff for both the average and marginal student. During the past three decades in particular, the earnings premium associated with a college education has risen substantially. Beyond the pecuniary benefits of higher education, we suggest that there also may exist non-pecuniary benefits. Given these findings, it is perhaps surprising that among recent cohorts college completion rates have stagnated. We discuss potential explanations for this trend and conclude by succinctly interpreting the evidence on how to make the most out of college.

There’s a little something here for everyone: for current and prospective university students, there’s a discussion about how to weigh the decision to go to college; which major to pursue (if maximising lifetime earnings is your goal); and the returns to education (double-digit increases for every year completed). There’s stuff for policy-makers and educators as well, e.g. how the “framing” of student financial aid matters as much as its value in terms of encouraging enrolment, to why student debt shouldn’t matter, to the changes in the labour market that have increased the value of a college education.

All in all, a useful overall survey and summary for anyone curious about this particular topic.

Technical Notes:

Oreopoulos, Philip, and Uros Petronijevic, "Making College Worth It: A Review of Research on the Returns to Higher Education" NBER Working Paper No. 19053, May 2013

Funding Tertiary Education

From the East Asia Forum, Bruce Chapman on the future of student loans (excerpt):

Funding tertiary education in Southeast Asia and beyond

In recent decades Southeast Asian countries have simultaneously enjoyed rapid economic growth and a significant expansion of the higher education sector. But many countries in the region are finding it difficult to pay for this expansion of their universities.

This obstacle can be traced directly to problems with student loan systems, which in many countries either do not exist or have high default rates and/or major implicit interest rate subsidies...

Preschool Education: Public or Private? The Answer Is Both

We’ve started on the way to providing universal preschool education, but it’s still going to be a long road. At present, the Malaysian strategy is to incentivise private provision of pre-school education via grants and tax incentives, even though there does exist public funded pre-schools.

From last month’s round of NBER working papers, it appears that there’s a place for public pre-schools as well (abstract):

Does State Preschool Crowd-Out Private Provision? The Impact of Universal Preschool on the Childcare Sector in Oklahoma and Georgia
Daphna Bassok, Maria Fitzpatrick, Susanna Loeb

The success of any governmental subsidy depends on whether it increases or crowds out existing consumption. Yet to date there has been little empirical evidence, particularly in the education sector, on whether government intervention crowds out private provision. Universal preschool policies introduced in Georgia and Oklahoma offer an opportunity to investigate the impact of government provision and government funding on provision of childcare. Using synthetic control group difference-in-difference and interrupted time series estimation frameworks, we examine the effects of universal preschool on childcare providers. In both states there is an increase in the amount of formal childcare. In Georgia, both the private and public sectors grow, while in Oklahoma, the increase occurs in the public sector only. The differences likely stem from the states’ choices of provision versus funding. We find the largest positive effects on provision in the most rural areas, a finding that may help direct policymaking efforts aimed at expanding childcare.

The point here is that both public and private-run pre-schools can co-exist, and the former won’t necessarily push out the latter. Another key point is that the largest impact of public pre-schools is in rural areas, where the private sector will be less likely to venture.

If we’re going to achieve universal pre-school education, thereby equalising investment in education for all our children and ensuring a true level playing field for economic opportunity (and hence reducing income and wealth inequality), public funded and run pre-schools would probably have to be part of the strategy.

Technical Notes

Bassok, Daphna; and Maria Fitzpatrick & Susanna Loeb, "Does State Preschool Crowd-Out Private Provision? The Impact of Universal Preschool on the Childcare Sector in Oklahoma and Georgia", NBER Working Paper No. 18605, December 2012

The Importance Of Early Education: More Evidence

From last month’s round of NBER research (abstract, emphasis added):

The Production of Human Capital: Endowments, Investments and Fertility
Anna Aizer, Flávio Cunha

We study how endowments, investments and fertility interact to produce human capital in childhood. We begin by providing empirical support for two key features of existing models of human capital: that investments and existing human capital are complements in the production of later human capital (dynamic complementarity) and that parents invest more in children with higher endowments due to the complementarity between endowments and investments (static complementarity).

It Pays To Be Popular

This is a blow to nerds everywhere (abstract):

Popularity
Gabriella Conti, Andrea Galeotti, Gerrit Mueller, Stephen Pudney

What makes you popular at school? And what are the labor market returns to popularity? We investigate these questions using an objective measure of popularity derived from sociometric theory: the number of friendship nominations received from schoolmates, interpreted as a measure of early accumulation of personal social capital. We develop an econometric model of friendship formation and labor market outcomes allowing for partial observation of networks, and provide new evidence on the impact of early family environment on popularity. We estimate that moving from the 20th to 80th percentile of the high-school popularity distribution yields a 10% wage premium nearly 40 years later.

Teacher Quality: Compensation Or Self-Selection?

Now here’s something that ought to be used as input into the National Education Blueprint (abstract):

Teacher Quality Policy When Supply Matters
Jesse Rothstein

Recent proposals would strengthen the dependence of teacher pay and retention on performance, in order to attract those who will be effective teachers and repel those who will not. I model the teacher labor market, incorporating dynamic self-selection, noisy performance measurement, and Bayesian learning. Simulations indicate that labor market interactions are important to the evaluation of alternative teacher contracts. Typical bonus policies have very small effects on selection. Firing policies can have larger effects, if accompanied by substantial salary increases. However, misalignment between productivity and measured performance nearly eliminates the benefits while preserving most of the costs.